[Analytical Perspectives]
[Economic Assumptions and Analyses]
[13. Stewardship]
[From the U.S. Government Printing Office, www.gpo.gov]



[[Page 175]]

 
                            13.  STEWARDSHIP

                              Introduction

  The budget is an essential tool for allocating resources within the 
Federal Government and between the public and private sectors, but 
current outlays, receipts, and the deficit give at best a partial 
picture of the Government's financial condition. Indeed, changes in the 
annual budget deficit or surplus can be misleading. For example, the 
temporary shift from annual deficits to surpluses in the late 1990s did 
nothing to correct the long-term fiscal deficiencies in the major 
entitlement programs, which are the major source of the long-run 
shortfall in Federal finances. This would have been more apparent at the 
time if greater attention had been focused on long-term measures such as 
those presented in this chapter. As important as the current budget 
surplus or deficit is, other indicators are also needed to judge the 
Government's fiscal condition.
  For the Federal Government, unfortunately, there is no single number 
that corresponds to a business's bottom line. The Government is judged 
by how its actions affect the country's security and well-being, and 
that cannot easily be summed up with a single statistic. Also, even 
though its financial condition is important, the Government is not 
expected to earn a profit. One measure of the Government's performance 
is the extent to which it collects the taxes that are owed to it, and 
another is whether it delivers value in spending the taxes that it 
collects. Both of those questions are addressed below. In general, the 
Government's financial status is best evaluated using a broad range of 
data and several complementary perspectives. This chapter presents a 
framework for such analysis. Because there are serious limitations on 
the available data and the future is uncertain, this chapter's findings 
should be interpreted as tentative; its conclusions are subject to 
future revision.
  The chapter consists of four parts:
    Part I explains how the separate pieces of analysis link 
          together. Chart 13-1 is a schematic diagram showing the 
          linkages.
    Part II presents estimates of the Government's assets and 
          liabilities, which are shown in Table 13-1. This table is 
          similar to a business balance sheet, but for that reason it 
          cannot reveal some of the Government's unique financial 
          features and needs to be supplemented by the information in 
          Parts III and IV.
    Part III shows possible long-run paths for the Federal 
          budget. These projections vary depending on alternative 
          economic and demographic assumptions. The projections are 
          summarized in Table 13-2 and in a related set of charts. Table 
          13-3 shows present value estimates of the funding shortfall in 
          Social Security and Medicare. Together, these data indicate 
          the scope of the Government's future responsibilities and the 
          resources it will have available to discharge them under 
          current law and policy. In particular, they show the looming 
          long-run fiscal challenge posed by the Federal entitlement 
          programs.
    Part IV returns the focus to the present. This part presents 
          information on national economic and social conditions. It 
          begins with an analysis of tax compliance, including what can 
          be done to improve it, and what resources might be made 
          available with new efforts to assure compliance. The private 
          economy is the ultimate source of the Government's resources. 
          Table 13-4 gives a summary of total national wealth, while 
          highlighting the Federal investments that have contributed to 
          that wealth. Table 13-5 shows trends in wealth and Table 13-6 
          presents a small sample of statistical indicators, which are 
          intended to show how the Government's efforts to improve 
          social and economic outcomes might be measured.

            PART I--A FRAMEWORK TO EVALUATE FEDERAL FINANCES

  No single framework can encompass all of the factors that affect the 
financial condition of the Federal Government, but the framework 
presented here is reasonably comprehensive and offers a useful way to 
examine the financial implications of Federal policies. This framework 
includes information about assets and liabilities such as might appear 
on a balance sheet, but it also includes long-run projections of the 
entire budget showing where future fiscal strains are most likely to 
appear. It includes an analysis of the Government's potential revenue 
and what can be done realistically through better education and more 
rigorous enforcement of the tax law to reach that potential. Measures of 
national wealth, which support future income and tax receipts, are 
presented along with an array of economic and social indicators showing 
potential pressure points that may require future policy responses.
  The Government's binding obligations--its liabilities--consist in the 
first place of Treasury debt. Other liabilities include the pensions and 
medical benefits owed to retired Federal employees and veterans. These 
employee obligations are a form of deferred compensation; they have 
counterparts in the business world, and would appear as liabilities on a 
business balance sheet.

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Accrued obligations for Government insurance policies and the estimated 
present value of failed loan guarantees and deposit insurance claims are 
also analogous to private liabilities. These Government liabilities are 
discussed further in Part II along with the Government's assets. The 
liabilities and assets are collected in Table 13-1. The liabilities 
shown in Table 13-1 are only a subset of the Government's overall 
financial responsibilities. Indeed, the full extent of the Government's 
fiscal exposure through programmatic commitments dwarfs the outstanding 
total of all acknowledged Federal liabilities. The commitments to Social 
Security and Medicare alone amount to many times the value of Federal 
debt held by the public.
  In addition to Social Security and Medicare, the Government has a 
broad range of programs that dispense cash and other benefits to 
individual recipients. A few examples of such programs are Medicaid, 
food stamps, veterans' pensions, and veterans' health care. The 
Government also provides a wide range of public services that must be 
financed through the tax system. It is true that specific programs may 
be modified or even ended at any time by the Congress and the President, 
and changes in the laws governing these programs are a regular part of 
the legislative cycle. For this reason, these programmatic commitments 
do not constitute ``liabilities'' that would appear on a balance sheet. 
Until the law is changed, they are Federal responsibilities, however, 
and will have a claim on budgetary resources for the foreseeable future. 
All of the Government's existing programs are reflected in the long-run 
budget projections in Part III. It would be misleading to leave out any 
of these programmatic commitments in projecting future claims on the 
Government or in calculating the Government's long-run fiscal balance.
  The Federal Government has many assets. These include financial 
assets, such as loans and mortgages which have been acquired through 
various credit programs. They also include the plant and equipment used 
to produce Government services. The Government also owns a substantial 
amount of land. Such assets would normally be shown on a balance sheet. 
The Government also has resources in addition to those that might be 
expected to appear on a balance sheet. These additional resources 
include most importantly the Government's sovereign power to tax.
  Because of its unique responsibilities and resources, the most 
revealing way to analyze the future strains on the Government's fiscal 
position is to make a long-run projection of the entire Federal budget. 
Part III of this chapter presents a set of such projections under 
different assumptions about policy and future economic and demographic 
conditions. Over long periods of time, the spending of the Government 
must be financed by the taxes and other receipts it collects. Although 
the Government can borrow for temporary periods, it must pay interest on 
any such borrowing, which adds to future spending. In the long run, a 
solvent Government must pay for its programmatic spending out of its 
receipts. The projections in Part III show that under an extension of 
the estimates in this Budget, long-run balance in this sense is not 
achieved, mostly because projected spending for Social Security, 
Medicare, and Medicaid grows faster than the revenue available to pay 
for them.
  The long-run budget projections and the table of assets and 
liabilities are silent on the questions of whether the Government is 
collecting the full amount of taxes owed, whether the public is 
receiving value for its taxes paid, and whether Federal resources are 
being used effectively. Information on those points requires performance 
measures for Government programs supplemented by appropriate information 
about conditions in the economy and society. Recent changes in budgeting 
practices have contributed to the goal of providing more information 
about Government programs and will permit a closer alignment of the cost 
of programs with performance measures. These changes have been described 
in detail in previous Budgets. They are reviewed in Chapter 2 of this 
volume, and in the accompanying material that describes results obtained 
with the Program Assessment Rating Tool (PART). This Stewardship chapter 
complements the detailed exploration of Government performance with an 
assessment of the overall impact of Federal policy as reflected in 
general measures of economic and social well-being, shown in Table 13-7.

                   Relationship with FASAB Objectives

   The framework presented here meets the stewardship objective for 
Federal financial reporting recommended by the Federal Accounting 
Standards Advisory Board (FASAB) and adopted for use by the Federal 
Government in September 1993. \1\
---------------------------------------------------------------------------
  \1\  Statement of Federal Financial Accounting Concepts, Number 1, 
Objectives of Federal Financial Reporting, September 2, 1993. Other 
objectives are budgetary integrity, operating performance, and systems 
and controls.
---------------------------------------------------------------------------
          Federal financial reporting should assist report users in 
     assessing the impact on the country of the government's operations 
          and investments for the period and how, as a result, the 
    government's and the Nation's financial conditions have changed and 
    may change in the future. Federal financial reporting should provide 
               information that helps the reader to determine:
         3a. Whether the government's financial position improved or 
                        deteriorated over the period.
       3b. Whether future budgetary resources will likely be sufficient 
    to sustain public services and to meet obligations as they come due.
      3c. Whether government operations have contributed to the nation's 
                       current and future well-being.
  The current presentation is an experimental approach for fulfilling 
this objective at the Federal Government-wide level. It is intended to 
meet the broad interests of economists and others in evaluating trends 
over time, including both past and future trends. The annual Financial 
Report of the United States Government presents related information, but 
from a different perspective. The Financial Report includes a balance 
sheet. The assets and liabilities on that balance sheet are all based on 
transactions and other events that have already occurred. A similar 
table can be found in Part II of this chapter, which is based on 
different data

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and methods of valuation. The Financial Report also includes a statement 
of social insurance that reviews a substantial body of information on 
the condition and sustainability of the Government's social insurance 
programs. The Report, however, does not extend that review to the 
condition or sustainability of the Government as a whole, which is a 
main focus of this chapter, and it does not try to relate the 
Government's assets and liabilities to private wealth or broader 
economic and social conditions.
  Connecting the Dots:: The presentation that follows is constructed 
around a series of tables and charts. The schematic diagram, Chart 13-1, 
shows how the different pieces fit together. The tables and charts 
should be viewed as an ensemble, the main elements of which are grouped 
in two broad categories--assets/resources and liabilities/
responsibilities.
    The left-hand side of Chart 13-1 shows the full range of 
          Federal resources, including assets the Government owns, tax 
          receipts it can expect to collect based on current and 
          proposed laws, the tax gap, and national wealth, including the 
          trained skills of the national work force, that provide the 
          base for Government revenues.
    The right-hand side reveals the full range of Federal 
          obligations and responsibilities, beginning with the 
          Government's acknowledged liabilities from past actions, such 
          as the debt held by the public, and including future budget 
          outlays needed to maintain present policies and trends. This 
          column ends with a set of indicators highlighting areas where 
          Government activity affects society or the economy.

                                     



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        QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S STEWARDSHIP
 
 
------------------------------------------------------------------------
1.  According to Table 13-1, the Government's liabilities exceed its
 assets. No business could operate in such a fashion. Why does the
 Government not manage its finances more like a business?
 
               The Federal Government has different objectives from a
                business firm. The goal of every business is to earn a
                profit, and as a general rule the Federal Government
                properly leaves activities at which a profit could be
                earned to the private sector. For the vast bulk of the
                Federal Government's operations, it would be difficult
                or impossible to charge prices that would cover
                expenses. The Government undertakes these activities not
                to improve its balance sheet, but to benefit the Nation.
 
               For example, the Government invests in education and
                research, but it earns no direct return from these
                investments. People are enriched by these investments,
                but the returns do not show up as an increase in
                Government assets but rather as an increase in the
                general state of knowledge and in the capacity of the
                country's citizens to earn a living and lead a fuller
                life. Business investment motives are quite different;
                business invests to earn a profit for itself, not
                others, and if its investments are successful, their
                value will be reflected in its balance sheet. Because
                the Federal Government's objectives are different, its
                balance sheet behaves differently, and should be
                interpreted differently.
 
2.  Table 13-1 seems to imply that the Government is insolvent. Is it?
 
               No. Just as the Federal Government's responsibilities are
                different from those of private business, so are its
                resources. Government solvency must be evaluated in
                different terms.
 
               What Table 13-1 shows is that those Federal obligations
                that are most comparable to the liabilities of a
                business corporation exceed the estimated value of the
                assets actually owned by the Federal Government. The
                Government, however, has access to other resources
                through its sovereign powers. These powers, which
                include taxation, will allow the Government to meet its
                present obligations and those that are anticipated from
                future operations even though the Government's current
                assets are less than its current liabilities. Q06
 
               Private financial markets clearly recognize this reality.
                The Federal Government's implicit credit rating is among
                the best in the world; lenders are willing to lend it
                money at interest rates substantially below those
                charged to private borrowers. This would not be true if
                the Government were really insolvent or likely to become
                so. Where governments totter on the brink of insolvency,
                lenders are either unwilling to lend them money, or do
                so only in return for a substantial interest premium.
------------------------------------------------------------------------

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------------------------------------------------------------------------

        QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT'S STEWARDSHIP
 
 
------------------------------------------------------------------------
3.  Why are Social Security and Medicare not shown as Government
 liabilities in Table 13-1?
 
               Future Social Security and Medicare benefits may be
                considered as promises or responsibilities of the
                Federal Government, but these benefits are not a
                liability in a legal or accounting sense. The Government
                has unilaterally decreased as well as increased these
                benefits in the past, and future reforms could alter
                them again. These benefits are reflected in this
                presentation of the Government's finances, but they are
                shown elsewhere than in Table 13-1. They appear in two
                ways: as part of the overall budget projections in Table
                13-2, and in the actuarial deficiency estimates in Table
                13-3.
 
               Other Federal programs make similar promises to those of
                Social Security and Medicare--Medicaid, for example. Few
                have suggested counting future benefits expected under
                these programs as Federal liabilities, yet it would be
                difficult to justify a different accounting treatment
                for them if Social Security or Medicare were to be
                classified as a liability. There is no bright line
                dividing Social Security and Medicare from other
                programs that promise benefits to people, and all the
                Government programs that do so should be accounted for
                similarly.
 
               Also, if future Social Security and Medicare benefits
                were treated as liabilities, then payroll tax receipts
                earmarked to finance those benefits ought to be treated
                as assets. This treatment would be essential to gauge
                the size of the future claim. Tax receipts, however, are
                not generally considered to be Government assets, and
                for good reason: the Government does not own the wealth
                on which future taxes depend. Including taxes on the
                balance sheet would be wrong for this reason, but
                excluding taxes from the balance sheet would overstate
                the drain on net assets from Social Security and
                Medicare benefits. Furthermore, treating taxes for
                Social Security or Medicare differently from other taxes
                would be highly questionable.
 
               Finally, under Generally Accepted Accounting Principles
                (GAAP), Social Security is not considered to be a
                liability, so not counting it as such in this chapter is
                consistent with accounting standards.
 
4.  Why doesn't the Federal Government follow normal business practice
 in its bookkeeping?
 
 
               The Government is not a business, and accounting
                standards designed to illuminate how much a business
                earns and how much equity it has could provide
                misleading information if applied naively to the
                Government. The Government does not have a ``bottom
                line'' comparable to that of a business corporation, but
                the Federal Accounting Standards Advisory Board (FASAB)
                has developed, and the Government has adopted, a
                conceptual accounting framework that reflects the
                Government's distinct functions and answers many of the
                questions for which Government should be accountable.
                This framework addresses budgetary integrity, operating
                performance, stewardship, and systems and controls.
                FASAB has also developed, and the Government has
                adopted, a full set of accounting standards. Federal
                agencies now issue audited financial reports that follow
                these standards, and an audited Government-wide
                financial report is issued as well. In short, the
                Federal Government does follow generally accepted
                accounting principles (GAAP) just as businesses and
                State and local governments do, although the relevant
                principles differ depending on the circumstances. This
                chapter is intended to address the ``stewardship
                objective''--assessing the interrelated condition of the
                Federal Government and the Nation. The data in this
                chapter illuminate the trade-offs and connections
                between making the Federal Government ``better off'' and
                making the Nation ``better off.''
------------------------------------------------------------------------

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        PART II--THE FEDERAL GOVERNMENT'S ASSETS AND LIABILITIES

  Table 13-1 looks at the Government's assets and liabilities 
retrospectively, summarizing what the Government owes as a result of its 
past operations netted against the value of what it owns. The table 
gives some perspective by showing these net asset figures for a number 
of years beginning in 1960. To ensure comparability across time, the 
assets and liabilities are measured in terms of constant FY 2006 dollars 
and the balance is also shown as a ratio to GDP. Government liabilities 
have exceeded the value of assets (see chart 13-2) over this entire 
period, but in the late 1970s a speculative run-up in the prices of oil 
and other real assets temporarily boosted the value of Federal holdings. 
When those prices subsequently declined, real Federal asset values 
declined and only recently have they regained the level they had reached 
in the mid-1980s.


  Currently, the total real value of Federal assets is estimated to be 
79 percent greater than it was in 1960. Meanwhile, Federal liabilities 
have increased by 246 percent in real terms. The decline in the Federal 
net asset position has been partly due to persistent Federal budget 
deficits that have boosted debt held by the public in most years since 
1960. Other factors have also been important such as large increases in 
health benefits promised for Federal retirees and the sharp rise in 
veterans' disability compensation. The relatively slow growth in Federal 
asset values has also reduced the Government's net asset position.
  The shift from budget deficits to budget surpluses in the late 1990s 
temporarily checked the decline in Federal net assets. Currently, the 
net excess of liabilities over assets is about $6.2 trillion or about 
$20,600 per capita. As a ratio to GDP, the excess of liabilities over 
assets reached a peak of 54 percent in 1995; it declined to 41 percent 
in 2000; it rose to 48 percent in 2004; and it has declined slightly 
since then to around 46 percent of GDP at the end of 2006. The average 
since 1960 has been 38 percent (see Table 13-1).

                                                     Table 13-1.  GOVERNMENT ASSETS AND LIABILITIES*
                                             (As of the end of the fiscal year, in billions of 2006 dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                         1960     1965     1970     1975     1980     1985      1990      1995      2000      2004      2005      2006
--------------------------------------------------------------------------------------------------------------------------------------------------------
                ASSETS
Financial Assets:
  Cash and Checking Deposits.........       48       69       43       35       54        35        47        49        65        38        36        51
  Other Monetary Assets..............        2        1        1        2        2         2         2         1         7         2         2         5
  Mortgages..........................       31       30       44       46       86        88       112        77        89        79        79        81
  Other Loans........................      114      157      197      199      255       331       235       190       226       228       218       209
    less Expected Loan Losses........       -1       -3       -5      -10      -20       -19       -22       -28       -43       -50       -42       -47
  Other Treasury Financial Assets....       69       86       76       68       96       142       226       272       248       334       318       302
                                      ------------------------------------------------------------------------------------------------------------------
      Subtotal.......................      263      341      356      340      474       579       601       562       592       631       610       602
 
Nonfinancial Assets:
  Fixed Reproducible Capital:........    1,151    1,142    1,188    1,152    1,092     1,234     1,280     1,287     1,129     1,113     1,138     1,166
    Defense..........................      992      932      942      861      773       898       922       901       737       702       718       736
    Nondefense.......................      159      210      246      292      319       336       359       386       392       412       420       430
  Inventories........................      301      261      243      217      268       307       272       209       215       277       280       281
  Nonreproducible Capital:...........      487      500      480      710    1,139     1,220       964       719     1,078     1,484     1,839     1,896
    Land.............................      106      147      185      292      374       388       399       297       462       635       764       833
    Mineral Rights...................      381      354      295      418      765       832       564       422       616       849     1,076     1,062
                                      ------------------------------------------------------------------------------------------------------------------
      Subtotal.......................    1,940    1,903    1,911    2,080    2,498     2,762     2,516     2,216     2,422     2,875     3,257     3,343
                                      ------------------------------------------------------------------------------------------------------------------
 
Total Assets.........................    2,202    2,244    2,267    2,419    2,972     3,341     3,117     2,777     3,014     3,505     3,867     3,944
 
             LIABILITIES
 
Debt held by the Public..............    1,313    1,351    1,202    1,221    1,519     2,511     3,421     4,547     3,960     4,557     4,725     4,829
 
Insurance and Guarantee Liabilities:
  Deposit Insurance..................  .......  .......  .......  .......        2        10        82         6         1         1         1         1
  Pension Benefit Guarantee..........  .......  .......  .......       50       36        50        50        24        47        93        84        74
  Loan Guarantees....................  .......        1        3        7       14        12        18        34        43        46        49        48
  Other Insurance....................       36       32       25       23       31        19        23        20        19        19        42        20
                                      ------------------------------------------------------------------------------------------------------------------
      Subtotal.......................       36       33       28       80       84        92       173        84       110       160       177       143
 
Pension and Post-Employment Health
 Liabilities:
  Civilian and Military Pensions.....      992    1,247    1,490    1,689    2,077     2,061     2,014     1,953     1,990     2,128     2,196     2,211
  Retiree Health Insurance Benefits..      238      299      357      405      498       494       483       468       454     1,052     1,157     1,132
  Veterans Disability Compensation...      218      274      328      363      372       307       277       303       642       981     1,155     1,154
                                      ------------------------------------------------------------------------------------------------------------------
      Subtotal.......................    1,448    1,820    2,175    2,457    2,947     2,862     2,774     2,724     3,085     4,161     4,508     4,497
 
Environmental and Disposal                  78       96      116      131      158       187       220       287       350       264       267       305
 Liabilities.........................
 
Other Liabilities:
  Trade Payables and Miscellaneous...       31       38       49       60       94       123       169       140       121       209       217       222
  Benefits Due and Payable...........       24       28       38       40       51        57        68        79        90       109       120       129
                                      ------------------------------------------------------------------------------------------------------------------
      Subtotal.......................       55       66       87      100      145       180       237       219       212       318       337       351
                                      ------------------------------------------------------------------------------------------------------------------
 
Total Liabilities....................    2,930    3,366    3,608    3,989    4,852     5,832     6,826     7,860     7,717     9,460    10,015    10,125
 
Net Assets (Assets Minus Liabilities)     -727   -1,122   -1,341   -1,570   -1,880    -2,491    -3,709    -5,083    -4,702    -5,955    -6,147    -6,181
--------------------------------------------------------------------------------------------------------------------------------------------------------
Addenda:
Net Assets Per Capita (in 2006          -4,032   -5,783   -6,551   -7,279   -8,242   -10,432   -14,802   -19,037   -16,627   -20,234   -20,696   -20,623
 dollars)............................
Ratio to GDP (in percent)............    -24.9    -30.6    -30.6    -31.6    -31.6     -35.1     -44.7     -54.2     -41.1     -47.6     -47.5     -46.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
* This table shows assets and liabilities for the Government as a whole excluding the Federal Reserve System. Data for 2006 are extrapolated in some
  cases.

                                 Assets

  Table 13-1 offers a comprehensive list of the financial and physical 
resources owned by the Federal Government.
   Financial Assets: According to the Federal Reserve Board's Flow-of-
Funds accounts, the Federal Government's holdings of financial assets 
amounted to $600 billion at the end of 2006. Government-held mortgages 
(measured in constant dollars) reached a peak in the early 1990s as the 
Government acquired mortgages from savings and loan institutions that 
had failed. The Government subsequently liquidated most of the mortgages 
it acquired from these bankrupt savings and loans. Meanwhile, Government 
holdings of other loans have been declining in real terms since the mid-
1980s. The face value of mortgages and other loans overstates their 
economic worth. OMB estimates that the discounted present value of 
future losses and interest subsidies on these loans was around $47 
billion as of yearend 2006. These estimated losses are subtracted from 
the face value of outstanding loans to obtain a better estimate of their 
economic worth.
   Reproducible Capital: The Federal Government is a major investor in 
physical capital and computer software. Government-owned stocks of such 
capital have

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amounted to about $1.2 trillion in constant 2006 dollars for most of the 
last 45 years (OMB estimate). This capital consists of defense equipment 
and structures, including weapons systems, as well as nondefense capital 
goods. Currently, less than two-thirds of the capital is defense 
equipment or structures. In 1960, defense capital was over 90 percent of 
the total. In the 1970s, there was a substantial decline in the real 
value of U.S. defense capital and there was another large decline in the 
1990s after the end of the Cold War. Meanwhile, nondefense Federal 
capital has increased at an average annual rate of around 2.2 percent. 
The Government also holds inventories of defense goods and other items 
that in 2006 amounted to about 24 percent of the value of its fixed 
capital.
   Nonreproducible Capital: The Government owns significant amounts of 
land and mineral deposits. There are no official estimates of the market 
value of these holdings (and of course, in a realistic sense, many of 
these resources would never be sold). Researchers in the private sector 
have estimated what they are worth, however, and these estimates are 
extrapolated in Table 13-1. Private land values fell sharply in the 
early 1990s, but they have risen since 1993. It is assumed here that 
Federal land shared in the decline and the subsequent recovery. Oil 
prices have been on a roller coaster since the mid-1990s. They declined 
sharply in

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1997-1998, rebounded in 1999-2000, fell again in 2001, and rose 
substantially in 2002-2006. These fluctuations have caused the estimated 
value of Federal mineral deposits to fluctuate as well. In 2006, as 
estimated here, the combined real value of Federal land and mineral 
rights was higher than it has ever been, but only 35 percent greater 
than in 1982. These estimates omit some valuable assets owned by the 
Federal Government--such as works of art and historical artifacts--
partly because such unique assets are unlikely ever to be sold and 
partly because there is no comprehensive inventory or realistic basis 
for valuing them.
   Total Assets: The total value of Government assets measured in 
constant dollars has risen sharply in the past four years, and was at an 
all-time high in 2006. The Government's asset holdings are vast. As of 
the end of 2006, Government assets were estimated to be worth about $4 
trillion or 30 percent of GDP.

                               Liabilities

  Table 13-1 includes all Federal liabilities that would normally be 
listed on a balance sheet. All the various forms of publicly held 
Federal debt are counted, as are Federal pension and health insurance 
obligations to civilian and military retirees including the disability 
compensation that is owed the Nation's veterans, which can be thought of 
as a form of deferred compensation. The estimated liabilities stemming 
from Federal insurance programs and loan guarantees are shown. The 
benefits that are due and payable under various Federal programs are 
also included, but these liabilities reflect only binding short-term 
obligations, not the Government's full commitment under these programs. 
The Government also has a responsibility to repair environmental damage 
that resulted from nuclear weapons production, and that cost has been 
included in the Table as well.
  Future benefit payments that are promised through Social Security and 
other Federal income transfer programs are not Federal liabilities in a 
legal or accounting sense. They are Federal responsibilities, and it is 
important to gauge their size, but they are not binding in the same way 
as a legally enforceable claim would be. The budget projections and 
other data in Part III are designed to provide a sense of these broader 
responsibilities and their claim on future budgets.
   Debt Held by the Public: The Federal Government's largest single 
financial liability is the debt owed to the public. It amounted to about 
$4.8 trillion at the end of 2006. Publicly held debt declined for 
several years in the late 1990s because of the unified budget surpluses 
at that time, but as deficits returned, publicly held debt began to 
increase again.
   Insurance and Guarantee Liabilities: The Federal Government has 
contingent liabilities arising from the loan guarantees it has made and 
from its insurance programs. When the Government guarantees a loan or 
offers insurance, cash disbursements are often small initially, and if a 
fee is charged the Government may even collect money; but the risk of 
future cash payments associated with such commitments can be large. The 
figures reported in Table 13-1 are estimates of the current discounted 
value of prospective future losses on outstanding guarantees and 
insurance contracts. The present value of all such losses taken together 
is about $140 billion. As is true elsewhere in this chapter, this 
estimate does not incorporate the market value of the risk associated 
with these contingent liabilities; it merely reflects the present value 
of expected losses. Although individually many of these programs are 
large and potential losses can be a serious concern, these insurance and 
guarantee liabilities are fairly small relative to total Federal 
liabilities or even the total debt held by the public. They were less 
than 2 percent of total liabilities in 2006.
   Pension and Post-Employment Health Liabilities: The Federal 
Government owes pension benefits as a form of deferred compensation to 
retired workers and to current employees who will eventually retire. It 
also provides civilian retirees with subsidized health insurance through 
the Federal Employees Health Benefits program and military retirees 
receive similar benefits. Veterans are owed compensation for their 
service-related disabilities. While the Government's employee pension 
obligations have risen slowly, there has been a sharp increase in the 
liability for future health benefits and veterans compensation. The 
discounted present value of all these benefits was estimated to be 
around $4.5 trillion at the end of 2006 up from $3.1 trillion in 2000. 
\2\ There was a large expansion in Federal military retiree health 
benefits legislated in 2001.
---------------------------------------------------------------------------
  \2\ Estimates of these liabilities were derived from the Financial 
Report of the United States Government for 2006 and earlier years. 
Values for years prior to 1997 were extrapolated.
---------------------------------------------------------------------------
   Environmental and Disposal Liabilities: During World War II and the 
Cold War, the Federal Government constructed a vast industrial complex 
to study, produce and test nuclear weapons. Environmental contamination 
occurred at these sites. The estimated liability shown here is based on 
the cleanup costs required by Federal, State and local laws and 
regulations. The Department of Energy is responsible for managing this 
cleanup. The Department of Defense is also charged with cleaning up 
contamination from its waste disposal practices, leaks, spills and other 
risky activities. Together the cleanup costs are estimated to amount to 
around 300 billion dollars in present value. \3\
---------------------------------------------------------------------------
  \3\ Estimates of these liabilities were also derived from the 
Financial Report of the United States Government for 2006 and earlier 
years. Values for years prior to 1997 were extrapolated.
---------------------------------------------------------------------------

                     The Balance of Net Liabilities

  The Government need not maintain a positive balance of net assets to 
assure its fiscal solvency, and the buildup in net liabilities since 
1960 has not significantly affected Federal creditworthiness. Long-term 
Government interest rates in 2003 reached their lowest levels in 45 
years, and in 2004-2006 they remained lower than at any time from 1965 
through 2002. Despite the historically low interest rates, there are 
limits to how much debt the Government can assume without putting its 
finances in jeopardy. Over an extended time

[[Page 183]]

horizon, the Federal Government must take in enough revenue to cover all 
of its spending including debt service. The Government's ability to 
service its debt in the long run cannot be gauged from a balance sheet 
alone. It is necessary to project the budget into the future to judge 
the prospects for long-run solvency. That is the subject of the next 
section.

                  PART III--THE LONG-RUN BUDGET OUTLOOK

  A balance sheet, with its focus on obligations arising from past 
transactions, can only show so much information. For the Government, it 
is also important to anticipate what future budgetary requirements might 
flow from current laws and policies. Despite the uncertainty surrounding 
the assumptions needed for such estimates, very long-run budget 
projections can be useful in sounding warnings about potential problems. 
Federal responsibilities extend well beyond the next five or ten years, 
and problems that may be small in that time frame can become much larger 
if allowed to grow.
  Programs like Social Security and Medicare are expected to continue 
indefinitely, and so long-range projections for Social Security and 
Medicare have been prepared for decades. Budget projections for 
individual programs, even important ones such as Social Security and 
Medicare, cannot reveal the Government's overall budgetary position. 
Only by projecting the entire budget is it possible to anticipate 
whether sufficient resources will be available to meet all the 
anticipated requirements for individual programs. It is also necessary 
to estimate how the budget's future growth compares with that of the 
economy to judge how well the economy might be able to support future 
budgetary needs.
  To assess the overall financial condition of the Government, it is 
necessary to examine the future prospects for all Government programs 
including the revenue sources that support Government spending. Such an 
assessment reveals that the key drivers of the long-range deficit are, 
not surprisingly, Social Security and Medicare, along with Medicaid--the 
entitlement program that provides medical assistance, including acute 
and long-term care to low-income persons including families with 
dependent children, as well as aged, blind or disabled individuals. 
Medicaid, like Medicare and Social Security, is projected to grow more 
rapidly than the economy over the next several decades and to add 
substantially to the overall budget deficit. Under current law, there is 
no offset anywhere in the budget large enough to cover all the demands 
that will eventually be imposed by Social Security, Medicare, and 
Medicaid.
  Future budget outcomes depend on a host of unknowns--constantly 
changing economic conditions, unforeseen international developments, 
unexpected demographic shifts, the unpredictable forces of technological 
advance, and evolving political preferences to name a few. These 
uncertainties make even short-run budget forecasting quite difficult, 
and the uncertainties increase the further into the future projections 
are extended. While uncertainty makes forecast accuracy difficult to 
achieve, it enhances the importance of long-run budget projections 
because future problems are often best addressed in the present. It is 
not possible to assess the likelihood of future risks without 
projections. A full treatment of all the relevant risks is beyond the 
scope of this chapter, but the chapter does show how long-run budget 
projections respond to changes in some of the key economic and 
demographic parameters. Given the uncertainties, a useful first step is 
to work out the implications of expected developments on a ``what if'' 
basis.

                  The Impending Demographic Transition

  In 2008, the first members of the huge generation born after World War 
II, the so-called baby boomers, will reach age 62 and become eligible 
for early retirement under Social Security. Three years later, they will 
turn 65 and become eligible for Medicare. In the years that follow, the 
elderly population will steadily increase, putting serious strains on 
the budget.
  The pressures are expected to persist even after the baby boomers are 
gone. The Social Security actuaries project that the ratio of workers to 
Social Security beneficiaries will fall from around 3.3 currently to a 
little over 2 by the time most of the baby boomers have retired. From 
that point forward, because of lower fertility and improved mortality, 
the ratio is expected to continue to decline slowly. With fewer workers 
to pay the taxes needed to support the retired population, budgetary 
pressures will continue to grow. The problem posed by the demographic 
transition is a permanent one.
  Currently, the three major entitlement programs--Social Security, 
Medicare, and Medicaid--account for 43 percent of non-interest Federal 
spending, up from 30 percent in 1980. By 2035, when the remaining baby 
boomers will be in their 70s and 80s, these three programs could account 
for about two-thirds of non-interest Federal spending even with the 
reforms proposed in this Budget. At the end of the projection period, in 
2080, the figure could rise to around three-quarters of non-interest 
spending. In other words, almost all of the budget, aside from interest, 
would go to these three programs alone. To say the least, that would 
severely reduce the flexibility of the budget, and the Government's 
ability to respond to new challenges.

                          An Unsustainable Path

  These long-run budget projections show clearly that the budget is on 
an unsustainable path, although the expansion of the entitlement 
programs and the rise in the deficit unfold gradually. The budget 
deficit is projected to decline as the economy expands over the next 
several years until it reaches balance in 2012, while most of the baby 
boomers are still in the work force.

[[Page 184]]

The budget is projected to remain in surplus for some years after 2012, 
but the deficit eventually returns and then begins a steady increase. 
Without further reforms, by the end of this chapter's projection period 
in 2080, rising deficits would have driven publicly held Federal debt to 
levels well above the previous peak level relative to GDP reached at the 
end of World War II. There is likely to be a crisis before that point is 
reached that will force budgetary changes, but the timing of the crisis 
and its resolution are impossible to predict, and timely, comprehensive 
entitlement reforms could avoid such a crisis.
   The revenue projections start with the budget's estimate of receipts 
under the Administration's proposals for the next five years. In the 
long run, receipts are assumed to return gradually to their average as a 
share of GDP over the last 40 years--18.3 percent.
  The projection of discretionary spending is essentially arbitrary, 
because discretionary spending is determined annually through the 
legislative process, and no formula can dictate future spending in the 
absence of legislation. Alternative assumptions have been made for 
discretionary spending in past budgets. Holding discretionary spending 
unchanged in real terms is the ``current services'' assumption used for 
baseline budget projections when there is no legislative guidance on 
future spending levels. Extending this assumption over many decades, 
however, is not realistic. When the population and economy grow, as 
assumed in these projections, the demand for public services is very 
likely to expand as well. The current base projection assumes that 
discretionary spending keeps pace with the growth in GDP in the long 
run, so that spending increases in real terms whenever there is real 
economic growth.
  In past budgets, these long-run budget projections have jumped off 
from the end point for the current budget. This year's Budget includes 
the effects of adding personal retirement accounts to Social Security. 
Personal accounts are one element within a set of larger reforms that 
would restore solvency to Social Security. The Administration has not 
yet specified a complete set of reforms to achieve solvency. Within the 
current budget horizon, these other reforms would not have significant 
budget effects. In the long run, however, their effects would be 
significant. Because these other reforms are not yet specified, the 
long-range projections shown here do not incorporate any Social Security 
reforms. Showing the personal account proposal in isolation would give a 
distorted picture of the budget effects of comprehensive Social Security 
reform. An alternative projection, however, that incorporates the impact 
of personal accounts is shown later in this presentation.
  The long-run budget outlook is highly uncertain. With pessimistic 
assumptions, the fiscal picture deteriorates even sooner than in the 
base projection. More optimistic assumptions imply a longer period 
before the pressures of rising entitlement spending overwhelm the 
budget. But despite the uncertainty, these projections clearly show that 
under a wide range of forecasting assumptions, the resources generated 
by the programs themselves will be insufficient to cover the long-run 
costs of Social Security and Medicare. (For a further discussion of the 
forecasting assumptions used to make these

[[Page 185]]

budget projections, see the technical note at the end of this chapter.)

                                                        Table 13-2.  LONG-RUN BUDGET PROJECTIONS
                                          (receipts, outlays, surplus or deficit, and debt as a percent of GDP)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                  1980      1990      2000      2010      2020      2030      2040      2060      2080
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
  Receipts....................................................      19.0      18.0      20.9      18.3      18.3      18.3      18.3      18.3      18.3
  Outlays:
    Discretionary.............................................      10.1       8.7       6.3       6.6       4.8       4.8       4.8       4.8       4.8
    Mandatory:
      Social Security.........................................       4.3       4.3       4.2       4.2       4.9       5.8       6.0       6.1       6.3
      Medicare................................................       1.1       1.7       2.0       2.7       3.4       4.5       5.3       5.9       6.1
      Medicaid................................................       0.5       0.7       1.2       1.4       1.9       2.2       2.5       3.0       3.6
      Other...................................................       3.7       3.2       2.4       2.3       1.8       1.5       1.3       1.0       0.9
                                                               -----------------------------------------------------------------------------------------
        Subtotal, mandatory...................................       9.6       9.9       9.8      10.6      12.0      14.0      15.1      16.0      16.9
    Net Interest..............................................       1.9       3.2       2.3       1.7       1.0       0.8       1.6       4.1       8.0
                                                               -----------------------------------------------------------------------------------------
        Total outlays.........................................      21.7      21.8      18.4      18.9      17.8      19.7      21.4      24.9      29.7
  Surplus or Deficit (-)......................................      -2.7      -3.9       2.4      -0.6       0.5      -1.4      -3.1      -6.6     -11.4
  Primary Surplus or Deficit (-)..............................      -0.8      -0.6       4.7       1.2       1.5      -0.5      -1.6      -2.5      -3.4
  Federal Debt Held by the Public.............................      26.1      42.0      35.1      35.2      18.7      17.1      31.5      82.0     160.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
  Addendum, without the Budget's Mandatory Proposals:
    Mandatory Outlays.........................................       9.6       9.9       9.8      10.7      12.3      14.6      16.1      17.8      19.6
    Surplus or Deficit (-)....................................      -2.7      -3.9       2.4      -0.7       0.1      -2.3      -4.9     -10.7     -19.0
    Primary Surplus or Deficit (-)............................      -0.8      -0.6       4.7       1.0       1.2      -1.1      -2.6      -4.3      -6.1
    Federal Debt Held by the Public...........................      26.1      42.0      35.1      35.5      21.1      24.4      47.6     130.3     262.1
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: The figures shown in this table for 2020 and beyond are the product of a long-range forecasting model maintained by the Office of Management and
  Budget. This model
is separate from the models and capabilities that produce detailed programmatic estimates in the Budget. It was designed to produce long-range forecasts
  based on additional
assumptions regarding growth of the economy, the long-range evolution of specific programs, and the demographic and economic forces affecting those
  programs. The model,
its assumptions, and sensitivity testing of those assumptions are presented in this chapter.

         Alternative Policy, Economic, and Technical Assumptions

  The quantitative results discussed above are sensitive to changes in 
underlying policy, economic, and technical assumptions. Some of the most 
important of these alternative assumptions and their effects on the 
budget outlook are discussed below. They generally show that there are 
mounting deficits under most reasonable projections of the budget.
  1. Health Spending: The projections for Medicare over the next 75 
years are based on an extension of the Administration's policy proposals 
to control costs in the Medicare program. These reforms are expected to 
reduce Medicare expenditures relative to the actuarial projections in 
the 2006 Medicare Trustees' Report. Following the recommendations of its 
Technical Review Panel, the Medicare trustees assume that over the long 
run ``age-and gender-adjusted, per-beneficiary spending growth exceeds 
the growth of per-capita GDP by 1 percentage point per year.'' This 
implies that total Medicare spending rises faster than GDP throughout 
the projection period given that the Medicare population is expanding as 
the population ages, and that Medicare faces a substantial shortfall in 
earmarked income compared with projected outgo. Although rising faster 
than GDP, under these assumptions, Medicare grows less rapidly than it 
has historically, so that even without reform the program's growth is 
constrained. The effect of the Administration's proposals is to reduce 
the imbalance in Medicare by about $8 trillion over the 75-year 
forecasting horizon according to actuarial estimates. Instead of facing 
a $32 trillion shortfall the program would face a $24 trillion 
shortfall, if the Administration's proposals were adopted in full. The 
proposals would not eliminate the shortfall completely, but they would 
reduce it substantially.
  Eventually, the rising trend in health care costs for both Government 
and the private sector will have to end, but it is hard to know when and 
how that will happen. Improved health and increased longevity are highly 
valued, and society has shown that it is willing to spend a larger share 
of income on them than it did in the past. Whether society will be 
willing to devote the large share of resources to health care implied by 
these projections, even with the Administration's proposals, is an open 
question. The alternatives highlight the effect of raising or lowering 
the projected growth rate in per capita health care costs by \1/4\ 
percentage point. 


  2. Entitlement Savings: The Administration has proposed a number of 
savings measures in entitlement programs in addition to the Medicare 
savings discussed above. These proposals, if adopted, would have ongoing 
budgetary effects. The chart below shows the long-run deficit with and 
without these reforms.

[[Page 186]]





  3. Alternative Revenue Shares: In the base projection, tax receipts 
are held constant relative to GDP at their average over the last 40 
years--18.3 percent of GDP. Tax receipts have risen above this ratio 
from time to time, most recently at the end of the 1990s, but periods of 
high taxes have always been followed by tax changes that have restored 
the long-term average tax ratio. The chart below shows the effects of 
alternative receipts assumptions. Allowing receipts to rise to 18.6 
percent of GDP would reduce the long-run budget deficit, while holding 
receipts to 18.0 percent of GDP would have the opposite effect. 


  4. Productivity: The rate of future productivity growth has a major 
effect on the long-run budget outlook. It is also highly uncertain. Over 
the next few decades an increase in productivity growth would reduce 
projected budget deficits appreciably. Higher productivity growth adds 
directly to the growth of the major tax bases, while it has a smaller 
immediate effect on outlay growth even assuming that in the long-run 
discretionary spending rises with GDP. In the latter half of the 1990s, 
after two decades of much slower growth, the rate of productivity growth 
increased unexpectedly and it increased again in the period 2000-2003. 
The underlying trend of productivity growth has clearly increased since 
the mid 1990s, and that increase is projected to persist in these long-
run projections. This increase in productivity growth is one of the most 
wel

[[Page 187]]

come developments of the last several years. Although the long-run 
growth rate of productivity is inherently uncertain, growth in real GDP 
per hour averaged 2.2 percent per year from 1948 through 1973; it has 
grown 2.3 percent per year since 2000, and the projections here assume 
that real GDP per hour will continue to grow at a 2.3 percent annual 
rate. The alternatives highlight the effect of raising the projected 
productivity growth rate by \1/4\ percentage point and the effect of 
lowering it by the same amount. 


  5. Population: The key assumptions for projecting long-run demographic 
developments are fertility, immigration, and mortality.
    The demographic projections assume that fertility will 
          average between 1.9 and 2.0 births per woman in the future, 
          just slightly below the replacement rate needed to maintain a 
          constant population--2.1 births.
          
          

    The rate of immigration is assumed to average around 900,000 
          per year in these projections. Higher immigration relieves 
          some of the downward pressure on population growth from low 
          fertility and allows total population to expand

[[Page 188]]

          throughout the projection period, although at a much slower 
          rate than has prevailed historically.
          
          
    Mortality is projected to decline, i.e., people are expected 
          to live longer. The average female lifespan is projected to 
          rise from 79.6 years in 2004 to 85.1 years by 2080, and the 
          average male lifespan is projected to increase from 74.7 years 
          in 2004 to 81.8 years by 2080. A technical panel to the Social 
          Security Trustees recently reported that the improvement in 
          longevity might even be greater. 
          
          
         Actuarial Projections for Social Security and Medicare

  Social Security and Medicare are the Government's two largest 
entitlement programs. Both rely on payroll tax receipts from current 
workers and employers for at least part of their financing, while the 
programs' benefits largely go to those who are retired. The importance 
of these programs for the retirement security of current and future 
generations makes it essential to understand their long-range financial 
prospects. Both programs' actuaries have calculated that they face per

[[Page 189]]

sistent long-run deficits. How best to measure the long-run imbalance in 
Social Security is a challenging analytical question; the imbalance may 
be even more difficult to measure in Medicare, which includes both 
Hospital Insurance (HI), funded through the payroll tax, and 
Supplementary Medical Insurance (SMI), financed through premiums and 
general revenues. Under reasonable assumptions, however, each program 
embodies a huge financial deficiency, and it will be very difficult for 
the Government as a whole to maintain control of the budget without 
addressing these programs' financial problems.

                                     

------------------------------------------------------------------------

                                    Social Security: The Long-Range Challenge
 
 
 
Social Security provides financial security for the elderly, the disabled, and survivors. The Social Security
 system is intended to be self-financing over time. The principle of self-financing is important, because it
 compels corrections in the event that projected benefits consistently exceed dedicated receipts.
 
While Social Security is running surpluses today, it will begin running cash deficits 10 years from now. Social
 Security's spending path is unsustainable under current law. The retirement of the baby-boom generation, born
 following World War II, will begin to increase greatly the number of Social Security beneficiaries within five
 years. Demographic trends toward lower fertility rates and longer life spans mean that the ratio of retirees to
 the working population will remain permanently higher following the baby boomers' passage through the system.
 The number of workers available to support each beneficiary is projected to decline from 3.3 today to 2.2 in
 2030, and to continue to decline slowly from there. This decline in the workforce available to support retiree
 benefits means that the Government will not be able to meet current-law benefit obligations at current payroll
 tax rates.
 
The size of Social Security's future shortfall cannot be known with precision, but a gap between Social Security
 receipts and outlays emerges under a wide range of reasonable forecasting assumptions. Long-range uncertainty
 underscores the importance of creating a system that is financially stable and self-contained. Otherwise, the
 demands created by Social Security could compromise the rest of the budget and the Nation's economic health.
 The actuarial shortfall between future benefits and income is estimated to be $6.4 trillion over the next 75
 years. Extending the horizon to perpetuity increases the imbalance to $15.3 trillion, excluding trust fund
 assets as these do not represent a source of funds from a unified budget perspective.
 
The current structure of Social Security leads to substantial generational differences in the average rate of
 return people can expect from the program. While previous generations have fared extremely well, people born
 today can expect to receive less than a two percent annual real rate of return on their total payroll taxes
 (including the employer's portion, which most economists believe is ultimately borne by labor). Moreover, such
 estimates in a sense overstate the expected rate of return for future retirees, because they assume no changes
 in current-law taxes or benefits, even though such changes are needed to meet Social Security's financing
 shortfall. As an example, a 1995 analysis found that after adjusting revenues to keep the system solvent, a
 typical worker born in 2000 would receive a 1.5 percent rate of return instead of a 1.7 percent rate of return.
 
One way to address the issues of uncertainty and declining rates of return, while protecting national savings,
 would be to allow individuals to invest some of their payroll taxes in personal retirement accounts. The budget
 includes the estimated impact from the creation of personal accounts, funded through the Social Security
 payroll tax. The Administration has also embraced the concept of progressive indexing, which would
 significantly contribute to the solvency of the system by partially indexing the growth of benefits for higher-
 wage workers to inflation rather than wage growth.
 

------------------------------------------------------------------------

[[Page 190]]



                                     

------------------------------------------------------------------------

                                        Medicare: The Long-Range Challenge
 
 
 
Medicare finances health insurance for tens of millions of Americans, including most of the nation's seniors and
 many individuals with disabilities. It is composed of two programs: Hospital Insurance (HI) or Part A, which
 covers medical expenses relating to hospitalization and other institutional care, and Supplementary Medical
 Insurance (SMI) or Part B, which pays for physicians' services and other related expenditures. Starting in
 2006, Medicare began to offer a voluntary prescription drug benefit, Medicare Part D, which is funded out of
 the SMI Trust Fund.
 
Like Social Security, HI is intended to be self-financing through dedicated taxes. According to the Medicare
 trustees' most recent report, the Trust Fund is projected to be depleted in 2018. Looking at the long run, the
 Medicare actuaries project a 75-year unfunded promise of Medicare's HI trust fund of around $11.0 trillion (net
 present value). However, this measure tells less than half the story, because it does not include the
 deficiency in Medicare's Part B and Part D programs. The main source of dedicated revenues to the SMI Trust
 Fund is beneficiary premiums, which generally cover about one-quarter of its expenses. SMI's funding structure
 creates an enormous financing gap for the program and is the largest contributor to the total Medicare program
 shortfall over the next 75 years of $32.3 trillion. Extending the horizon to perpetuity increases the total
 shortfall to $70.8 trillion. SMI's financing gap is covered by an unlimited tap on general revenues. According
 to the Medicare Trustees' 2006 report, ``Soon after the Part D program becomes fully implemented in 2006,
 general revenue transfers are expected to constitute the largest single source of income to the Medicare
 program as a whole--and would add significantly to the Federal Budget pressures.''
 
This bifurcated trust fund structure finances Medicare as if the program offers two separate, unrelated
 benefits, instead of recognizing that Medicare provides related and complementary health care services to its
 beneficiaries. The Medicare Prescription Drug, Improvement, and Modernization Act (MMA), which established Part
 D, also took an important first step toward improving Medicare sustainability by requiring the Medicare
 Trustees' Report to include a new, comprehensive fiscal analysis of the program's financing that highlights the
 amount of general revenue transfers used to fund Medicare. If the percent of Medicare funding that is from
 general fund transfers reaches 45 percent within the current or next six years of the projection (2006-2012),
 the Trustees issue a finding of ``excess general revenue Medicare funding''. In their 2006 report, the Trustees
 found that general revenue funding would first reach 45 percent level in fiscal year 2012, within the seven-
 year window. If a finding is present in two consecutive Trustees' reports, then a ``Medicare funding warning''
 is triggered. This warning requires the President to propose legislation to restore Medicare spending to
 sustainable levels, but it does not mandate Congressional action.
 
The Budget proposes to strengthen the MMA provision by modestly slowing the rate of Medicare growth if the MMA
 threshold is exceeded. The lower growth would be achieved through a four-tenths of a percent reduction to all
 payments beginning the year the threshold is exceeded. The change would only take effect if the President and
 Congress fail to agree on legislation to bring Medicare spending back into line with the threshold established
 by the MMA. The reduction would grow by four-tenths of a percent every year the shortfall continues to occur.
 This proposal would improve Medicare's sustainability by slowing the rate of growth in spending.
 
 

------------------------------------------------------------------------
   The Social Security and Medicare Trustees' Projections: In their 
annual reports and related documents, the Social Security and Medicare 
trustees typically present calculations of the 75-year actuarial 
imbalance or deficiency for Social Security and Medicare under current-
law. The calculation covers current workers and retirees, as well as 
those projected to join the program within the next 75 years (this is 
the so-called ``open-group''; the ``closed-group'' covers only current 
workers and retirees). These estimates measure the present value of each 
program's future benefits net of future income. They are complementary 
to the flow projections described in the preceding section, but unlike 
those projections they do not reflect the Administration's proposals to 
reform the Medicare program and the effects those proposals would have. 
More recently, the trustees' reports have also included a projection of 
the deficiency in perpetuity. This is the clearest way to see the total 
imbalance in both programs.
  The present value of the Social Security imbalance over the next 75 
years was estimated to be $6.4 trillion as of January 1, 2006. The 
comparable estimate for Medicare was $32.3 trillion. These estimates 
exclude the trust fund balances because the balances do not represent a 
source of funds from a unified budget perspective. (The estimates in 
Table 13-3 were prepared by the Social Security and Medicare actuaries, 
and they are based on the intermediate economic and demographic 
assumptions used for the 2006 trustees' reports. These differ in some 
respects from the assumptions

[[Page 191]]

used for the long-run budget projections described in the preceding 
section. Table 13-3 would show a smaller imbalance if the economic 
assumptions used for the budget had been used for the calculations. In 
addition, because the estimates are on the basis of current law, they do 
not reflect the Administration's proposals to reform Medicare. Under the 
Adminstration's proposals, the Medicare actuaries estimate that the 
imbalance would be reduced to about $24 trillion.
   Doing the calculations for a 75-year horizon understates the 
deficiencies, because the 75-year actuarial calculations omit the large 
deficits that continue to occur beyond the 75th year. The understatement 
is significant, even though values in the distant future are discounted 
by a large amount. Since 2004, the Social Security and Medicare 
actuaries have also presented the actuarial imbalances calculated in 
perpetuity without assuming a fixed horizon. Table 13-3 shows how much 
these distant benefits add to the programs' imbalances. For Social 
Security, the imbalance in perpetuity is $15.3 trillion and for Medicare 
it is $70.8 trillion as of January 1, 2006. (Again, the Medicare 
estimate would be smaller if the effects of the Administration's policy 
proposals had been included in the calculation.)
  The imbalance estimated on a perpetuity basis is the amount that the 
Government would have to raise in the private capital markets to resolve 
the program's imbalance permanently (given current assumptions). If 
nothing else changes, the estimated imbalance will grow every year at 
approximately the rate of interest, just as an unpaid debt grows with 
interest each year it remains outstanding. For Social Security this 
implies an increase of approximately $600 billion in 2006 and growing 
amounts with every year that the imbalance remains unaddressed. The 
comparable imbalance in Medicare is much larger than the Social Security 
imbalance. The exact size of the imbalance is harder to estimate for 
Medicare because of greater uncertainty regarding the future growth of 
medical costs.
   Social Security: The current deficiency in Social Security is 
essentially due to the fact that past and current participants will 
receive more benefits than they have paid for with taxes (calculated in 
terms of present values). By contrast, future participants--those who 
are now under age 15 or not yet born--are projected to pay in present 
value about $0.3 trillion more than they will collect in benefits. This 
can be seen by comparing the total deficiency in perpetuity, $15.3 
trillion, with the excess of benefits over taxes for current program 
participants, $15.0 trillion, from Table 13-3. In other words, the taxes 
that future participants are expected to pay will be almost large enough 
to cover the benefits due them under current law, but not large enough 
to cover those benefits plus the benefits promised to current program 
participants in excess of the taxes paid by current program 
participants.
   Medicare: Extending the horizon to perpetuity shows that the benefits 
due future participants will eventually exceed projected payroll tax 
receipts and premiums by a huge margin. The projections into perpetuity 
shown at the top of Table 13-3 reveal that total Medicare benefits 
exceed future taxes and premiums by $70.8 trillion in present value. 
This is due to an expected excess of benefits over taxes for current 
participants over their lifetimes, but also for future generations. 
Unlike Social Security, the imbalance is not simply the inherited result 
of a pay-as-you-go program that was never fully funded, and which faces 
a demographic crunch. That is part of the problem, but even more 
fundamental is the assumption that medical costs continue to rise in 
excess of general inflation so that medical spending increases relative 
to total output in the economy.

             Table 13-3.  BENEFITS IN EXCESS OF FUTURE TAXES AND PREMIUMS--ACTUARIAL PRESENT VALUES
----------------------------------------------------------------------------------------------------------------
    In Perpetuity as of January 1, in Trillions of
                      Dollars                                                       2004       2005       2006
----------------------------------------------------------------------------------------------------------------
Social Security......................................  ...........  ...........       11.9       12.8       15.3
Medicare.............................................  ...........  ...........       61.9       68.4       70.8
                                                      ----------------------------------------------------------
Social Security and Medicare.........................  ...........  ...........       73.8       81.2       86.0
----------------------------------------------------------------------------------------------------------------
 
Over a 75-Year Projection Period as of January 1, in         2002         2003        2004       2005       2006
 Trillions of Dollars
----------------------------------------------------------------------------------------------------------------
Social Security
  Future benefits less future taxes for those age 62          4.1          4.3         4.5        4.9        5.3
   and over..........................................
  Future benefits less future taxes for those age 15          7.2          7.4         8.0        8.7        9.6
   to 61.............................................
  Future benefits less taxes for those age 14 and            -6.7         -6.8        -7.3       -7.9       -8.5
   under and those not yet born......................
                                                      ----------------------------------------------------------
    Net present value for present and future                  4.6          4.9         5.2        5.7        6.4
     participants....................................
 
                                                      ----------------------------------------------------------
Medicare
  Future benefits less future taxes for those age 65          2.5          2.8         3.8        4.0        4.2
   and over..........................................
  Future benefits less future taxes for those age 15         10.4         12.2        20.9       22.4       24.9
   to 64.............................................
  Future benefits less taxes for those age 14 and             0.4          0.8         3.4        3.6        3.3
   under and those not yet born......................
                                                      ----------------------------------------------------------
    Net present value for present and future                 13.3         15.8        28.1       29.9       32.3
     participants....................................
 
                                                      ----------------------------------------------------------
Social Security and Medicare
  Future benefits less future taxes for those who             6.6          7.1         8.3        8.9        9.5
   have attained eligibility.........................
  Future benefits less future taxes for those over           17.6         19.7        28.9       31.0       34.5
   age 15 who have not yet attained eligibility......
  Future benefits less taxes for those age 14 and            -6.3         -6.0        -3.9       -4.3       -5.3
   under and those not yet born......................
                                                      ----------------------------------------------------------
    Net present value for present and future                 17.8         20.7        33.3       35.6       38.8
     participants....................................
 
----------------------------------------------------------------------------------------------------------------
Addendum:
Actuarial deficiency as a percent of the discounted
 payroll tax base:
  Social Security....................................       -1.87        -1.92       -1.89      -1.92      -2.02
  Medicare HI........................................       -2.02        -2.40       -3.12      -3.09      -3.51
----------------------------------------------------------------------------------------------------------------

  General revenues have covered about 75 percent of SMI program costs 
for many years, with the rest being covered by premiums paid by the 
beneficiaries. In Table 13-3, only the receipts explicitly earmarked for 
financing these programs have been included. The intragovernmental 
transfer is not financed by dedicated tax revenues, and the share of 
general revenues that would have to be devoted to SMI to close the gap 
increases substantially under current law. Other Government programs 
also have a claim on these general revenues. From the standpoint of the 
Government as a whole, only receipts from the public can finance 
expenditures.
  A significant portion of Medicare's actuarial deficiency is caused by 
the rapid expected increase in future benefits due to rising health care 
costs. Some, perhaps most, of the projected increase in relative health 
care costs reflects improvements in the quality of care, although there 
is also evidence that medical errors, waste, and excessive medical 
liability claims add needlessly to costs. But even though the projected 
increases in Medicare spending are likely to contribute to longer life-
spans and safer treatments, the financial implications remain the same. 
As long as medical costs continue to outpace the growth of GDP and other 
expenditures, as assumed in these projections, the financial pressure on 
the budget will mount, and that is reflected in the estimates shown in 
Tables 13-2 and 13-3.
   The Trust Funds and the Actuarial Deficiency: The fact that a special 
account or trust fund exists does not necessarily mean that the 
Government saved the money recorded there. The trust fund surpluses 
could have added to national saving if overall government borrowing from 
the public had actually been reduced because of the trust fund 
accumulations. But it is impossible to know for sure whether this 
happened or not.
  At the time Social Security or Medicare redeems the debt instruments 
in the trust funds to pay benefits not covered by income, the Treasury 
will have to turn to the public capital markets to raise the funds to 
finance the benefits, just as if the trust funds had never existed. From 
the standpoint of overall Government finances, the trust funds do not 
reduce the future burden of financing Social Security or Medicare 
benefits, and for that reason, the trust funds are not netted against

[[Page 192]]

future benefits in Table 13-3. The eventual claim on the Treasury is 
better revealed by the difference between future benefits and future 
taxes or premiums.
  In any case, trust fund assets remain small in size compared with the 
programs' future obligations and well short of what would be needed to 
pre-fund future benefits as indicated by the programs' actuarial 
deficiencies. Historically, Social Security and Medicare's HI program 
were financed mostly on a pay-as-you-go basis, whereby workers' payroll 
taxes were immediately used to pay retiree benefits. For the most part, 
workers' taxes have not been used to pre-fund their own future benefits, 
and taxes were not set at a level sufficient to pre-fund future benefits 
had they been saved.
   The Importance of Long-Run Measures in Evaluating Policy Changes: 
Consider a proposed policy change in which payroll taxes paid by younger 
workers were reduced by $100 this year while the expected present value 
of these workers' future retirement benefits were also reduced by $100. 
The present value of future benefit payments would decrease by the same 
amount as the reduction in revenue. On a cash flow basis, however, the 
lost revenue occurs now, while the decrease in future outlays is in the 
distant future beyond the budget window, and the Federal Government must 
increase its borrowing to make up for the lost revenue in the meantime. 
If policymakers only focus on the Government's near-term borrowing 
needs, a reform such as this would appear to worsen the Government's 
finances, whereas the policy actually has a neutral impact in the long 
run.
  Now suppose that future outlays were instead reduced by a little more 
than $100 in present value. In this case, the actuarial deficiency would 
actually decline, even though the Government's borrowing needs would 
again increase if the savings occurred outside the budget window. 
Focusing on the Government's near-term borrowing alone, therefore, can 
lead to a bias against policies that could improve the Federal 
Government's overall long-run fiscal condition. Taking a longer view of 
policy changes and considering measures of the Government's fiscal 
condition other than the unified budget surplus or deficit can correct 
for such mistakes.

     PART IV--TAX COMPLIANCE, NATIONAL WEALTH, AND SOCIAL INDICATORS

  To obtain a full picture of the Government's financial condition it is 
necessary to examine a broad range of additional information beyond the 
narrow list of Government-owned assets and liabilities. It is even nec

[[Page 193]]

essary to consider more information than is contained in the long-term 
projections of the budget. This final section presents a sample of such 
additional information. It is intended to provide insight into the full 
range of resources the Government can draw upon to meet its long-term 
obligations and also to indicate in a summary way what the Nation 
obtains in exchange for the resources it provides the Government.
  The first piece of additional information is analysis of compliance 
with the nation's tax laws, the so-called ``tax gap.'' The Government 
does not collect in a timely manner all of the taxes it is legally owed, 
as explained in detail below (along with some proposals to narrow the 
gap). That discussion is followed by an investigation of national wealth 
and the contributions the Federal Government has made to the wealth of 
private persons and other levels of government. The final section 
discusses a range of economic and social indicators which provide 
information about the outcomes of Government policies.

     Improving Tax Fairness and Federal Finances through Better Tax 
                               Compliance

  The Internal Revenue Service (IRS) collects over 95 percent of total 
Federal receipts, $2.4 trillion in 2006. However, not every dollar of 
tax legally owed is actually paid. In general, taxpayers comply with the 
law by filing returns and paying their taxes on time, but some do not 
comply either because they do not understand their obligations due to 
the complexity of the tax law or because they seek to avoid those 
obligations.
   Tax Compliance: In 2006, the IRS released updated results of its 
first large study in two decades of the difference between taxes owed 
and taxes actually paid--the ``tax gap.'' The IRS estimated that 
taxpayers initially underpaid by $345 billion in 2001. This equates to a 
voluntary compliance rate of 84 percent. Late payments and IRS 
enforcement action reduced this to a net tax gap of $290 billion, 
raising the net compliance rate to 86 percent. The Department of the 
Treasury does not have estimates of the tax gap for the years after 
2001. It is possible, however, that lower tax rates, more aggressive 
enforcement by the IRS, and an improved economic environment have tended 
to decrease the gap, although inflation and the overall growth of the 
economy have tended to increase compliance rates over the past six 
years.
  Due to changes in methodologies, comparisons between the 2001 
estimates and those from earlier studies should be made cautiously. 
However, it does appear that the voluntary compliance rate has not 
changed much since the 1980s. The IRS previously reported voluntary 
compliance rates of 87 percent in 1988, 86 percent in 1985, and 84 
percent in 1983. While the overall rate seems to have moved relatively 
little over time, each one percentage point change significantly impacts 
revenue. A one percentage point improvement would increase revenue by 
$21 billion per year based on 2001 numbers.
  The IRS's compliance estimates, primarily based on random audits of 
individuals and businesses, are not precise, but give a good general 
sense of the size of the tax gap and patterns in compliance. This sort 
of information is critical for effectively targeting IRS enforcement 
programs to yield the greatest improvement with the smallest cost and 
burden on taxpayers. The IRS' estimates are most accurate for 
underpayments of known taxes as recorded in IRS financial systems, and 
for individual income tax compliance studied through the recent random 
National Research Program (NRP) study. Non-filing estimates come from 
studies of census data and are somewhat less precise. The weakest 
portions of the IRS' estimates are in areas where no recent studies have 
been completed and the IRS is relying on older data (e.g., for 
partnerships and corporations).
  The gross tax gap results from a variety of honest taxpayer errors and 
intentional noncompliance. Of the total, 82 percent comes from 
underreporting of tax liability (see chart). A significant portion of 
the gap also comes from underpayment of known tax debts and people who 
fail to file returns. Individual income taxes, the largest source of 
Federal receipts, account for 71 percent of the tax gap.

[[Page 194]]




  The highest compliance rates come in areas where the IRS has good 
information about income, because it is reported by third parties (e.g., 
Form W-2, reporting wage income from employers and Form 1099, reporting 
various third party payments, including interest from banks). The IRS 
estimates that 95 percent of income with third-party reporting but no 
withholding (e.g., interest income, dividends) is declared on taxpayer 
returns. Where there is tax withholding, as in the case of most wages, 
nearly 99 percent of the amounts reported by payers is declared on 
taxpayer returns.

  Conversely, error rates are high for income with little or no third-
party reporting. For example, an estimated 43 percent of the tax gap 
comes from business income that should be reported on individual returns 
(Forms 1040) but goes unreported to the IRS (see chart). .
   Improving Tax Compliance: While the tax gap can never be entirely 
eliminated, reducing the gap by improving compliance is important 
because non-compliant taxpayers impose unacceptable burdens on other 
taxpayers and on Federal finances.

     Table 13-4.  SOURCES OF THE TAX GAP FROM INCOME UNDERREPORTING
------------------------------------------------------------------------
                                                                Percent
                                                Contribution   Share  of
                                                  to the Tax      the
                                                   Gap  in      Overall
                                                   Dollars      Tax Gap
------------------------------------------------------------------------
 
Business income underreported by individuals           148           43
Non-business income underreporting and                  88           26
 improper deductions and credits..............
Corporate income underreporting...............          30            9
Other underreporting..........................          19            6
 
Total Underreporting..........................         285           84
------------------------------------------------------------------------

  The challenge is to find ways to improve compliance without unduly 
burdening compliant taxpayers or the economy. For example, as noted 
above, income reported to the IRS by third parties is claimed on tax 
returns at a far higher rate than other income. Requiring third-party 
reporting of all income would likely raise compliance levels. However, 
this is not possible in all cases and even where it is possible it might 
require burdensome new reporting requirements for individuals and 
businesses. For example, individuals paying a contractor or purchasing a 
car might be required to file reports to the IRS reporting these 
transactions. Such broad expansions of reporting requirements would be 
excessively burdensome, and that this consideration outweighs the gains 
they might bring in increased compliance.
  Similarly, requiring much more detailed documentation, such as 
evidence supporting claims for deductions and credits or providing 
accounting records supporting business income claims, would quite 
possibly improve compliance. In some cases more detailed documentation 
may be appropriate. However, unless carefully targeted, this is likely 
to impose an unacceptable increase in cost on both taxpayers and the IRS 
and to decrease privacy.
  Another approach to improving compliance would be to change the tax 
code to remove tax benefits wherever there is the potential for abuse. 
For example, deductions for non-cash giving could be prohibited. This 
would prevent the overstatement of charitable deductions by some 
taxpayers. However, it would also impose a tax increase on the millions 
of taxpayers who currently take legitimate deductions for non-cash 
giving. Compliant taxpayers are likely to regard this approach as overly 
broad. Finally, much higher audit rates might improve compliance, but 
would be extremely expensive

[[Page 195]]

and unless properly targeted could be unduly burdensome to honest 
taxpayers.
  The Administration has developed a carefully targeted plan for 
reducing the tax gap, which is described in the Department of the 
Treasury's ``A Comprehensive Strategy for Reducing the Tax Gap'' (see 
www.ustreas.gov/press/releases/hp111.htm). This document lays out a 
multi-year, seven-part strategy to improve compliance without imposing 
undue burdens on taxpayers. The Budget provides a $410 million 
initiative in the IRS to begin implementing this strategy. Components of 
the strategy include:
  Reduce Opportunities for Evasion: The Administration will pursue 
carefully targeted tax law changes to promote compliance while causing 
minimal taxpayer burden and IRS cost increases. The Budget includes 16 
legislative proposals, such as expanding third party information 
reporting where it can be done with acceptable levels of taxpayer burden 
(e.g., including payments to corporations in existing third-party 
reporting requirements and requiring brokers to report the cost basis 
for certain securities' sales). (See chapter 17, ``Federal Receipts'' 
for a full description of these legislative proposals.)
  Multi-Year Commitment to Research: Improved research on tax gap causes 
and potential remedies will help the IRS target its enforcement and 
service programs to achieve the greatest possible impact at the lowest 
cost.
  Investments in Information Technology: Modernized computer systems 
will give IRS staff the tools they need to improve efficiency, service 
and compliance.
  Improve Compliance Activities: Through reengineering and selected 
funding increases the IRS will improve the effectiveness of its 
enforcement efforts to increase the fairness of the tax system by 
ensuring that everyone pays their share.
  Taxpayer Service: Improved service will help taxpayers avoid 
unintentional errors and will make filing easier. Improved telephone 
service, new internet tools, and increases in electronic filing have 
already helped taxpayers file more accurate returns with less effort.
  Reform and Simplify the Tax Law: Simplifying the tax law will reduce 
unintentional errors caused by a lack of understanding. Simplification 
will also reduce the opportunities for intentional evasion and make it 
easier for the IRS to administer the tax laws.
  Coordinate with Partners and Stakeholders: Closer coordination is 
needed between the IRS and state and foreign governments to share 
information and compliance strategies. Closer coordination is also 
needed with practitioner organizations, including bar and accounting 
associations, to maintain and improve mechanisms to ensure that advisors 
provide appropriate tax advice.
  Collectively these efforts will reduce the tax gap and improve the 
fiscal situation of the Government. Equally important, better compliance 
will improve the fairness of the tax system. Implementation depends on 
effective IRS leadership, to improve factors such as technology 
investments and reengineering processes, as well as the active support 
of the Congress to implement tax law changes and provide funding for 
these improvements.

               The Federal Contribution to National Wealth

  The Government relies on private wealth to support its activities. It 
also contributes to that wealth. Unlike a private corporation, the 
Federal Government routinely invests in ways that do not add directly to 
its assets. For example, Federal grants are frequently used to fund 
capital projects by State or local governments for highways and other 
purposes. Such investments are valuable, but they are not owned by the 
Federal Government and would not show up on a balance sheet for the 
Federal Government. It is true, of course, that by encouraging economic 
growth, these investments augment future tax receipts. The return on 
investment that comes back to the Government in the form of higher 
taxes, however, is far less than what a private investor would require 
before undertaking a similar investment.
  The Federal Government also supports education and research and 
development (R&D). These outlays contribute to future productivity and 
are analogous to investments in physical capital. Indeed, economists 
have computed stocks of human and knowledge capital to reflect the 
accumulation of such investments. Nonetheless, such hypothetical capital 
stocks are obviously not owned by the Federal Government, nor would they 
appear on a balance sheet.
  To show the importance of these kinds of issues, Table 13-5 presents a 
national balance sheet. It includes estimates of national wealth 
classified into three categories: physical assets, education capital, 
and R&D capital. The Federal Government has made contributions to each 
of these types of capital, and these contributions are shown separately 
in the table. At the same time, the private wealth shown in Table 13-5 
generates future income and tax receipts, which finance future public 
activities. The Nation's wealth sets the ultimate limit on the resources 
available to the Government. 

                                                              Table 13-5.  NATIONAL WEALTH
                                            (As of the end of the fiscal year, in trillions of 2006 dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                1960     1965     1970     1975     1980     1985     1990     1995     2000     2004     2005     2006
--------------------------------------------------------------------------------------------------------------------------------------------------------
                   ASSETS
Publicly Owned Physical Assets:
  Structures and Equipment..................      2.3      2.6      3.2      3.9      4.2      4.4      4.8      5.3      6.0      6.9      7.4      7.6
    Federally Owned or Financed.............      1.3      1.4      1.5      1.7      1.8      2.0      2.2      2.3      2.3      2.4      2.5      2.6
      Federally Owned.......................      1.2      1.1      1.2      1.2      1.1      1.2      1.3      1.3      1.1      1.1      1.1      1.2
      Grants to State and Local Governments.      0.2      0.2      0.4      0.6      0.7      0.8      0.9      1.0      1.2      1.3      1.4      1.4
    Funded by State and Local Governments...      1.0      1.2      1.6      2.2      2.4      2.4      2.6      3.0      3.7      4.5      4.9      5.0
  Other Federal Assets......................      0.8      0.8      0.7      0.9      1.4      1.5      1.2      0.9      1.3      1.8      2.1      2.2
                                             -----------------------------------------------------------------------------------------------------------
        Subtotal............................      3.1      3.3      3.9      4.8      5.6      5.9      6.0      6.2      7.3      8.7      9.5      9.7
 
Privately Owned Physical Assets:
  Reproducible Assets.......................      7.7      8.8     10.8     13.9     18.1     19.2     21.9     24.2     29.4     33.8     35.3     35.5
    Residential Structures..................      3.0      3.5      4.2      5.3      7.3      7.5      8.6      9.8     12.2     15.2     16.0     16.1
    Nonresidential Plant & Equipment........      3.0      3.4      4.3      5.7      7.4      8.1      9.1      9.9     12.0     13.1     13.7     13.6
    Inventories.............................      0.8      0.8      1.0      1.3      1.6      1.4      1.5      1.6      1.8      1.8      1.8      1.9
    Consumer Durables.......................      0.9      1.1      1.3      1.6      1.9      2.1      2.7      3.0      3.4      3.7      3.8      3.9
  Land......................................      2.3      2.7      3.1      4.1      6.3      7.1      7.3      5.5      8.5     11.7     14.0     15.3
                                             -----------------------------------------------------------------------------------------------------------
        Subtotal............................     10.0     11.6     14.0     18.0     24.3     26.3     29.2     29.7     37.9     45.4     49.3     50.8
 
Education Capital:
  Federally Financed........................      0.1      0.1      0.3      0.4      0.5      0.7      0.8      1.0      1.3      1.5      1.6      1.7
  Financed from Other Sources...............      6.4      8.6     11.5     14.6     18.7     21.8     27.1     31.8     40.6     45.8     46.9     48.4
                                             -----------------------------------------------------------------------------------------------------------
        Subtotal............................      6.4      8.7     11.8     15.0     19.2     22.5     27.9     32.9     41.9     47.3     48.5     50.0
 
Research and Development Capital:
    Federally Financed R&D..................      0.2      0.4      0.5      0.6      0.7      0.8      0.9      1.0      1.1      1.2      1.3      1.3
    R&D Financed from Other Sources.........      0.1      0.2      0.3      0.4      0.5      0.7      1.0      1.2      1.7      2.0      2.1      2.1
                                             -----------------------------------------------------------------------------------------------------------
        Subtotal............................      0.3      0.6      0.9      1.0      1.2      1.5      1.9      2.3      2.8      3.2      3.3      3.5
 
                                             -----------------------------------------------------------------------------------------------------------
Total Assets................................     19.8     24.2     30.5     38.9     50.3     56.2     65.1     71.0     89.9    104.7    110.6    114.0
 
Net Claims of Foreigners on U.S.............     -0.1     -0.2     -0.2     -0.1     -0.4      0.1      0.9      1.6      3.2      4.7      5.8      6.1
 
Net Wealth..................................     19.9     24.4     30.7     39.0     50.7     56.1     64.2     69.4     86.7     99.9    104.9    108.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
                  ADDENDA:
  Per Capita Wealth (thousands of 2006 $)...    110.5    125.7    150.0    180.7    222.4    235.1    256.2    259.9    306.7    339.5    353.0    360.3
  Ratio of Wealth to GDP (in percent).......    682.9    665.2    700.3    784.4    853.2    790.8    773.8    740.2    757.3    798.3    810.5    810.2
  Total Federally Funded Capital (trils 2006      2.4      2.6      3.1      3.6      4.4      5.0      5.2      5.3      6.0      7.0      7.5      7.8
   $).......................................
        Percent of National Wealth..........     11.9     10.8     10.0      9.3      8.7      8.9      8.1      7.6      7.0      7.0      7.2      7.2
--------------------------------------------------------------------------------------------------------------------------------------------------------

  The table shows that Federal investments are responsible for about 7 
percent of total national wealth including education and research and 
development. This may seem like a small fraction, but it represents a 
large volume of capital: $7.8 trillion. The Federal contribution is down 
from 9 percent in the early 1980s and from 12 percent in 1960. Much of 
this decline reflects the relative shrinkage in the stock of defense 
capital, which has fallen from around 34 percent of GDP in 1960 to under 
6 percent in 2006.
   Physical Assets: The physical assets in the table include stocks of 
plant and equipment, office buildings, residential structures, land, and 
the Government's physical assets such as military hardware and highways. 
Automobiles and consumer appliances are also included in this category. 
The total amount of such capital is vast, $60.5 trillion in 2006, 
consisting of $50.8 trillion in private physical capital and $9.7 
trillion in public physical capital (including capital funded by

[[Page 196]]

State and local governments); by comparison, GDP was around $13 trillion 
in 2006. The Federal Government's contribution to this stock of capital 
includes its own physical assets of $3.3 trillion plus $1.4 trillion in 
accumulated grants to State and local governments for capital projects. 
The Federal Government has financed over 20 percent of all the physical 
capital held by other levels of government.
   Education Capital: Economists have developed the concept of human 
capital to reflect the notion that individuals and society invest in 
people as well as in physical assets. Investment in education is a good 
example of how human capital is accumulated. Table 13-5 includes an 
estimate of the stock of capital represented by the Nation's investment 
in formal education and training. The estimate is based on the cost of 
replacing the years of schooling embodied in the U.S. population aged 15 
and over; in other words, the goal is to measure how much it would cost 
to reeducate the U.S. workforce at today's prices (rather than at the 
original cost). This is more meaningful economically than the historical 
cost of schooling, and is comparable to the methods used to estimate the 
physical capital stocks presented earlier.
  Although this is a relatively crude measure, it does provide a rough 
order of magnitude for the current value of the investment in education. 
According to this measure, the stock of education capital amounted to 
$50 trillion in 2006, of which about 3 percent was financed by the 
Federal Government. It was approximately equal in value to the Nation's 
private stock of physical capital. The main investors in education 
capital have been State and local governments, parents, and students 
themselves.
  Even broader concepts of human capital have been proposed. Not all 
useful training occurs in a schoolroom or in formal training programs at 
work. Much informal learning occurs within families or on the job, but 
measuring its value is very difficult. Labor compensation, however, 
amounts to about two-thirds of national income with the other third 
attributed to capital, and thinking of total labor income as the product 
of human capital suggests that the total value of human capital would be 
two times the estimated value of physical capital if human capital 
earned a similar rate of return to other forms of capital. Thus, the 
estimates offered here are in a sense conservative, because they reflect 
only the costs of acquiring formal education and train

[[Page 197]]

ing, which is why they are referred to as education capital rather than 
human capital. They constitute that part of total human capital that can 
be attributed to formal education and training.
   Research and Development Capital: Research and development can also 
be thought of as an investment, because R&D represents a current 
expenditure that is made in the expectation of earning a future return. 
After adjusting for depreciation, the flow of R&D investment can be 
added up to provide an estimate of the current R&D stock. \5\ That stock 
is estimated to have been $3.5 trillion in 2006. Although this 
represents a large amount of research, it is a relatively small portion 
of total National wealth. Of this stock, 38 percent was funded by the 
Federal Government.
---------------------------------------------------------------------------
  \5\ R&D depreciates in the sense that the economic value of applied 
research and development tends to decline with the passage of time, as 
still newer ideas move the technological frontier.
---------------------------------------------------------------------------
   Liabilities: When considering how much the United States owes as a 
Nation, the debts that Americans owe to one another cancel out. Table 
13-5 only shows National totals. Gross debt is important even though it 
does not appear in Table 13-5. The amount of debt owed by Americans to 
other Americans can exert both positive and negative effects on the 
economy. Americans' willingness and ability to borrow have helped fuel 
the current expansion by supporting consumption and housing purchases. 
On the other hand, growing debt could be a risk to future growth, if the 
ability to service the higher level of debt were to become impaired.

                                     Table 13-6.  TRENDS IN NATIONAL WEALTH
                                        (Average Annual Rates in Percent)
----------------------------------------------------------------------------------------------------------------
                                                                    1960-06    1960-1973   1973-1995   1995-2006
----------------------------------------------------------------------------------------------------------------
Real GDP........................................................        3.4         4.3         2.8         3.3
National Wealth.................................................        3.7         4.5         3.1         4.1
Private Physical Wealth.........................................        3.6         3.9         2.7         5.0
  Nonresidential Plant and Equipment............................        3.3         4.1         3.1         2.9
  Residential Structures........................................        3.7         4.0         3.1         4.6
  Consumer Durables.............................................        3.1         3.6         3.2         2.5
Public Physical Wealth..........................................        2.6         2.8         1.6         4.2
Net Education...................................................        4.6         5.9         4.1         3.9
Net R&D.........................................................        5.2         8.6         3.9         3.9
----------------------------------------------------------------------------------------------------------------

  The only debts that show up in Table 13-5 are the debts Americans owe 
to foreigners for the investments that foreigners have made in the 
United States. America's net foreign debt has been increasing rapidly in 
recent years because of the rising imbalance in the U.S. current 
account. Although the current account deficit is at record levels, the 
size of the net foreign debt remains relatively small compared with the 
total stock of U.S. assets. In 2006, it amounted to 5 percent of total 
assets including education and R&D capital.
  Federal debt does not appear explicitly in Table 13-5 because much of 
it consists of claims held by Americans; only that portion of the 
Federal debt which is held by foreigners is included along with the 
other debts to foreigners. Comparing the Federal Government's net 
liabilities with total national wealth does, however, provide another 
indication of the relative magnitude of the imbalance in the 
Government's accounts. Federal net liabilities, as reported in Table 13-
1, amounted to 5.7 percent of net U.S. wealth as shown in Table 13-5. 
Prospectively, however, Federal liabilities are a much larger share of 
national wealth, as indicated by the long-run projections described in 
Part III.

                        Trends in National Wealth

  The net stock of wealth in the United States at the end of 2006 was 
$108 trillion, about eight times the size of GDP. Since 1960, it has 
increased in real terms at an average annual rate of 3.7 percent per 
year. It grew very rapidly from 1960 to 1973, at an average annual rate 
of 4.5 percent per year, slightly faster than real GDP grew over the 
same period. Between 1973 and 1995 growth slowed, as real net wealth 
grew at an average rate of just 3.1 percent per year, which paralleled 
the slowdown in real GDP over this period. Since 1995 the rate of growth 
in U.S. real wealth has picked up. Net wealth has been growing at an 
average rate of 4.1 percent since 1995. Productivity growth has also 
accelerated since 1995, following a similar slowdown from 1973 to 1995.

                                                       TABLE 13-7.  ECONOMIC AND SOCIAL INDICATORS
--------------------------------------------------------------------------------------------------------------------------------------------------------
                    Calendar Years                        1960       1970       1980       1990       1995       2000       2004       2005       2006
--------------------------------------------------------------------------------------------------------------------------------------------------------
Economic:
Living Standards:
  Real GDP per person (2000 dollars) (a).............     13,840     18,392     22,666     28,429     30,128     34,759     36,415     37,241     38,136
    average annual percent change (5-year trend).....        0.6        2.3        2.6        2.3        1.2        2.9        1.4        1.4        1.9
  Real Disposable Personal Income Per Capita.........      9,735     13,563     16,940     21,281     22,153     25,472     27,254     27,318     27,761
    average annual percent change (5-year trend).....        1.2        3.2        2.1        1.8        0.8        2.8        2.1        1.4        1.6
  Median Income: All Households (2005 dollars).......        N/A     38,026     39,739     43,366     43,346     47,599     45,817     46,326        N/A
    average annual percent change (5-year trend).....        N/A        N/A        1.0        1.2        0.0        1.9       -0.8       -0.5        N/A
  Income Share of Lower 60% of All Households........       31.8       32.3       31.2       29.3       28.0       27.3       26.8       26.6        N/A
  Poverty Rate (%) (b)...............................       22.2       12.6       13.0       13.5       13.8       11.3       12.7       12.6        N/A
 
Economic Security:
  Civilian Unemployment (%)..........................        5.5        4.9        7.1        5.5        5.6        4.0        5.5        5.1        4.6
  CPI-U (% Change)...................................        1.7        5.7       13.5        5.4        2.8        3.4        2.7        3.4        3.2
  Payroll Employment Increase (millions) (c).........       -0.4       -0.4        0.3        0.3        2.2        1.9        2.1        2.6        2.0
  Managerial or Professional Jobs (% of civilian             N/A        N/A        N/A       29.2       32.0       33.8       34.9       34.7       34.9
   employment).......................................
 
Wealth Creation:
  Net National Saving Rate (% of GDP) (d)............       10.6        8.3        7.4        4.4        4.1        5.9        0.9        0.1        2.0
 
Innovation:
  Patents Issued to U.S. Residents (thousands) (e)...       42.3       50.6       41.7       56.1       64.5       97.0       94.1       82.6        N/A
  Multifactor Productivity (average 5 year percent           0.8        0.8        0.8        0.6        0.6        1.2        1.7        N/A        N/A
   change)...........................................
  Nonfarm Output per Hour (average 5 year percent            1.8        2.1        1.1        1.6        1.5        2.5        3.2        3.1        3.0
   change)...........................................
 
Environment:
  Air Quality:
    Nitrogen Oxide Emissions (millions of tons)......         18         27         27         26         25         23         20         19        N/A
    Sulfur Dioxide Emissions (millions of tons)......         22         31         26         23         19         16         15         15        N/A
    Carbon Monoxide (millions of tons)...............        N/A        197        178        144        120        102        N/A         89        N/A
    Lead Emissions (thousands of tons)...............        N/A        221         74          5          4          3          3          3        N/A
  Water Quality:
    Population Served by Secondary Treatment or              N/A         85        N/A        162        174        179        N/A        N/A        N/A
     Better (mils)...................................
 
Social:
  Families:
    Children Living with Mother Only (% of all               9.2       11.6       18.6       21.6       24.0       22.3       23.7       23.4        N/A
     children).......................................
  Safe Communities:
    Violent Crime Rate (per 100,000 population) (f)..      160.0      364.0      597.0      729.6      684.5      506.5      463.2      469.2      482.2
    Murder Rate (per 100,000 population) (g).........        5.1        7.8       10.2        9.4        8.2        5.5        5.5        5.6        5.6
    Murders (per 100,000 Persons Age 14 to 17).......        N/A        N/A        5.9        9.8       11.0        4.8        4.6        N/A        N/A
  Health:
    Infant Mortality (per 1000 Live Births) (g)......       26.0       20.0       12.6        9.2        7.6        6.9        6.8        6.8        6.7
    Low Birthweight [<2,500 gms] Babies (%) (g)......        7.7        7.9        6.8        7.0        7.3        7.6        8.1        8.2        N/A
    Life Expectancy at birth (years).................       69.7       70.8       73.7       75.4       75.8       77.0       77.9        N/A        N/A
    Cigarette Smokers (% population 18 and older)....        N/A       39.2       33.0       25.3       24.6       23.1       20.8       20.9        N/A
    Overweight (% population 20-74 with Body-Mass           44.5       47.5       47.2       54.6       60.7       65.0       66.2        N/A        N/A
     Index)2.5)......................................
  Learning:
    High School Graduates (% of population 25 and           44.6       55.2       68.6       77.6       81.7       84.1       85.2       85.2        N/A
     older)..........................................
    College Graduates (% of population 25 and older).        8.4       11.0       17.0       21.3       23.0       25.6       27.7       27.6        N/A
    National Assessment of Educational Progress (h)
      Reading 17-year olds...........................        N/A        N/A      285.0      290.0      288.0      287.4      285.0        N/A        N/A
      Mathematics 17-year olds.......................        N/A        N/A      299.0      305.0      306.5      307.8      307.0        N/A        N/A
  Participation:
    Individual Charitable Giving per Capita (2000            281        381        373        465        449        692        639        N/A        N/A
     dollars)........................................
 
(by election year)...................................     (1960)     (1972)     (1980)     (1984)     (1988)     (1992)     (1996)     (2000)     (2004)
    Voting for President (% eligible population).....       62.8       55.1       52.8       53.3       50.3       55.2       49.0       50.3       55.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
(a) Forecast data are used for the fourth quarter of 2006.
(b) The poverty rate does not reflect noncash government transfers such as Medicaid or food stamps.
(c) The data for 2005-2006 reflect the expected 810,000 benchmark revision scheduled for February 2007.
(d) 2006 through Q3 only.
(e) Preliminary data for 2005.
(f ) Not all crimes are reported, and the fraction that go unreported may have varied over time, preliminary data for 2006.
(g) Provisional data for 2005-2006; data for 2006 through April.
(h) Data for some years are interpoated.

  The net stock of privately owned nonresidential plant and equipment 
accounts for about 27 percent of all privately owned physical assets. In 
real terms, it grew 3.3 percent per year on average from 1960 to 2006. 
It grew especially rapidly from 1960 to 1973, at an average rate of 4.1 
percent per year. Since 1973 it has grown more slowly, averaging around 
3.0 percent per year. Plant and equipment did not experience a more 
rapid rate of growth over the last ten years compared with 1973-1995. 
Privately owned residential structures and land have all grown much more 
rapidly in real value since 1995 than from 1973 to 1995, while the stock 
of consumer durables has grown less rapidly.
  The accumulation of education capital has averaged 4.6 percent per 
year since 1960. It also slowed down between 1973 and 1995. It grew at 
an average rate of 5.9 percent per year in the 1960s, 2.0 percentage 
points faster than the average rate of growth in private physical 
capital during the same period. Since 1995, education capital has grown 
at a 3.9 percent annual rate. This reflects both the extra resources 
devoted to schooling in this period, and the fact that such resources 
have been increasing in economic value. R&D

[[Page 198]]

stocks have also grown at an average rate of 3.9 percent per year since 
1995.

               Other Federal Influences on Economic Growth

  Federal investment decisions, as reflected in Table 13-5, obviously 
are important, but the Federal Government also affects wealth in ways 
that cannot be easily

[[Page 199]]

captured in a formal presentation. The Federal Reserve's monetary policy 
affects the rate and direction of capital formation in the short run, 
and Federal regulatory and tax policies also affect how capital is 
invested, as do the Federal Government's credit and insurance policies.

                            Social Indicators

  There are certain broad responsibilities that are unique to the 
Federal Government. Especially important are preserving national 
security, fostering healthy economic conditions including sound economic 
growth, promoting health and social welfare, and protecting the 
environment. Table 13-7 offers a rough cut of information that can be 
useful in assessing how well the Federal Government has been doing in 
promoting the domestic portion of these general objectives.
  The indicators shown in Table 13-7 are only a subset drawn from the 
vast array of available data on conditions in the United States. In 
choosing indicators for this table, priority was given to measures that 
were consistently available over an extended period. Such indicators 
make it easier to draw valid comparisons and evaluate trends. In some 
cases, however, this meant choosing indicators with significant 
limitations.
  The individual measures in this table are influenced to varying 
degrees by many Government policies and programs, as well as by external 
factors beyond the Government's control. They do not measure the 
outcomes of Government policies, because they generally do not show the 
direct results of Government activities, but they do provide a 
quantitative measure of the progress or lack of progress toward some of 
the ultimate values that Government policy is intended to promote.
  Such a table can serve two functions. First, it highlights areas where 
the Federal Government might need to modify its current practices or 
consider new approaches. Where there are clear signs of deteriorating 
conditions, corrective action might be appropriate. Second, the table 
provides a context for evaluating other data on Government activities. 
For example, Government actions that weaken its own financial position 
may be appropriate when they promote a broader social objective. The 
Government cannot avoid making such trade-offs because of its size and 
the broad ranging effects of its actions. Monitoring these effects and 
incorporating them in the Government's policy making is a major 
challenge.
  Some of the trends in these indicators turned around in the 1990s. The 
improvement in economic conditions beginning around 1995 has been widely 
noted, and there have also been some social improvements. Perhaps, most 
notable has been the turnaround in the crime rate. After reaching a peak 
in the early 1990s, violent crime fell by a third. The turnaround has 
been especially dramatic in the murder rate, which has been lower since 
1998 than at any time since the 1960s, although the last two years have 
seen an uptick in murders. The 2001 recession had a negative effect on 
some of these indicators: unemployment rose and real GDP growth 
declined, but as the economy recovered much of the improvement shown in 
Table 13-7 was preserved. Indeed, productivity growth, the best 
indicator of future changes in the standard of living, accelerated and 
has grown at a faster average rate since 2001 than at any comparable 
period since the 1960s.

        TECHNICAL NOTE: SOURCES OF DATA AND METHODS OF ESTIMATING

                      Long-Range Budget Projections

  The long-range budget projections are based on demographic and 
economic assumptions. A simplified model of the Federal budget, 
developed at OMB, is used to compute the budgetary implications of these 
assumptions.
   Demographic and Economic Assumptions: For the years 2007-2017, the 
assumptions are drawn from the Administration's economic projections 
used for the budget. These budget assumptions reflect the President's 
policy proposals. The economic assumptions are extended beyond this 
interval by holding constant inflation, interest rates, and unemployment 
at the levels assumed in the final year of the budget forecast. 
Population growth and labor force growth are extended using the 
intermediate assumptions from the 2006 Social Security trustees' report. 
The projected rate of growth for real GDP is built up from the labor 
force assumptions and an assumed rate of productivity growth. 
Productivity growth is held constant at the average rate of growth in 
the budget's economic assumptions.
    CPI inflation holds stable at 2.3 percent per year; the 
          unemployment rate is constant at 4.8 percent; and the yield on 
          10-year Treasury notes is steady at 5.3 percent.
    Real GDP per hour, a measure of productivity, grows at the 
          same average rate as in the Administration's medium-term 
          projections--2.3 percent per year.
    Consistent with the demographic assumptions in the trustees' 
          reports, U.S. population growth slows from around 1 percent 
          per year to about half that rate by 2030, and slower rates of 
          growth beyond that point. Annual population growth is only 0.3 
          percent at the end of the projection period in 2080.
    Real GDP growth declines over time because of the slowdown 
          in population growth and the increase in the population over 
          age 65, who supply less work effort than younger people do. 
          Historically, real GDP has grown at an average yearly rate of 
          3.4 percent. In these projections, average real GDP growth 
          eventually declines to around 2.6 percent per year.

[[Page 200]]

  The economic and demographic projections described above are set by 
assumption and do not automatically change in response to changes in the 
budget outlook. This is unrealistic, but it simplifies comparisons of 
alternative policies.
   Budget Projections: For the period through 2012, receipts follow the 
budget's policy projections. After 2012, receipts are assumed to return 
gradually to their share of GDP over the last 40 years, 18.3 percent, 
and to remain at that lower share over the long run. Discretionary 
spending follows the growth policies in the Budget over the next ten 
years and grows at the rate of growth in nominal GDP afterwards. Other 
spending also aligns with the Budget through the budget horizon, except 
that the Social Security program does not include the proposal to 
incorporate personal accounts in the program. Long-run Social Security 
spending is projected by the Social Security actuaries using this 
Chapter's long-range assumptions. Medicare benefits are projected based 
on the estimates in the 2006 Medicare trustees' report, adjusted for 
differences in the assumed inflation rate and the growth rate in real 
GDP per capita, and further adjusted for the estimated long-run effects 
of the Administration's policy proposals. Federal pensions are derived 
from the most recent actuarial forecasts available at the time the 
budget is prepared, repriced using Adminstration inflation assumptions. 
Medicaid outlays are based on the economic and demographic projections 
in the model. Other entitlement programs are projected based on rules of 
thumb linking program spending to elements of the economic and 
demographic projections such as the poverty rate.

                 Federally Owned Assets and Liabilities

   Financial Assets: The principal source of data is the Federal Reserve 
Board's Flow-of-Funds Accounts.
   Fixed Reproducible Capital: Estimates were developed from the OMB 
historical data base for physical capital outlays and software 
purchases. The data base extends back to 1940 and was supplemented by 
data from other selected sources for 1915-1939. The source data are in 
current dollars. To estimate investment flows in constant dollars, it 
was necessary to deflate the nominal investment series. This was done 
using chained price indexes for Federal investment from the National 
Income and Product Accounts. The resulting capital stocks were 
aggregated into nine categories and depreciated using geometric rates 
roughly following those used by the Bureau of Economic Analysis in its 
estimates of physical capital stocks.
   Fixed Nonreproducible Capital: Historical estimates for 1960-1985 
were based on estimates in Michael J. Boskin, Marc S. Robinson, and Alan 
M. Huber, ``Government Saving, Capital Formation and Wealth in the 
United States, 1947-1985,'' published in The Measurement of Saving, 
Investment, and Wealth , edited by Robert E. Lipsey and Helen Stone Tice 
(The University of Chicago Press, 1989). Estimates were updated using 
changes in the value of private land from the Flow-of-Funds Balance 
Sheets and from the Agriculture Department for farm land; the value of 
Federal oil deposits was extrapolated using the Producer Price Index for 
Crude Energy Materials.
   Debt Held by the Public: Treasury data.
   Insurance and Guarantee Liabilities: Sources of data are the OMB 
Pension Guarantee Model and OMB estimates based on program data. 
Historical data on liabilities for deposit insurance were also drawn 
from CBO's study, The Economic Effects of the Savings and Loan Crisis, 
issued January 1992.
   Pension and Post-Employment Health Liabilities: The accrued 
liabilities for Federal retiree pensions and retiree health insurance 
along with the liability for Veterans disability compensation were 
derived from the Financial Report of the United States Government (and 
the Consolidated Financial Statement for some earlier years). Prior to 
1976, the values were extrapolated.
   Other Liabilities: The source of data for trade payables and 
miscellaneous liabilities is the Federal Reserve's Flow-of-Funds 
Accounts. The Financial Report of the United States Government was the 
source for benefits due and payable.
   Environmental Liabilities: The source of data for environmental 
liabilities was the Financial Report of the United States Government for 
2006 and previous years. Prior to 1994, the estimates were extrapolated 
assuming a constant ratio to GDP.

                         National Balance Sheet

   Publicly Owned Physical Assets: Basic sources of data for the 
federally owned or financed stocks of capital are the Federal investment 
flows described in Chapter 6. Federal grants for State and local 
government capital are added, together with adjustments for inflation 
and depreciation in the same way as described above for direct Federal 
investment. Data for total State and local government capital come from 
the revised capital stock data prepared by the Bureau of Economic 
Analysis extrapolated for 2006.
   Privately Owned Physical Assets: Data are from the Flow-of-Funds 
national balance sheets and from the private net capital stock estimates 
prepared by the Bureau of Economic Analysis extrapolated for 2006 using 
investment data from the National Income and Product Accounts.
   Education Capital: The stock of education capital is computed by 
valuing the cost of replacing the total years of education embodied in 
the U.S. population 15 years of age and older at the current cost of 
providing schooling. The estimated cost includes both direct 
expenditures in the private and public sectors and an estimate of 
students' forgone earnings, i.e., it reflects the opportunity cost of 
education. Estimates of students' forgone earnings are based on the 
minimum wage for high-school students and year-round, full-time earnings 
of 18-24 year olds for college students. These year-round earnings are 
reduced by 25 percent because students are usually out of school three 
months of the year. Yearly earnings by age and educational attainment 
are from the Bureau of the Census.

[[Page 201]]

  For this presentation, Federal investment in education capital is a 
portion of the Federal outlays included in the conduct of education and 
training. This portion includes direct Federal outlays and grants for 
elementary, secondary, and vocational education and for higher 
education. The data exclude Federal outlays for physical capital at 
educational institutions because these outlays are classified elsewhere 
as investment in physical capital. The data also exclude outlays under 
the GI Bill; outlays for graduate and post-graduate education spending 
in HHS, Defense and Agriculture; and most outlays for vocational 
training. The Federal share of the total education stock in each year is 
estimated by averaging the prior years' shares of Federal education 
outlays in total education costs.
  Data on investment in education financed from other sources come from 
educational institution reports on the sources of their funds, published 
in U.S. Department of Education, Digest of Education Statistics. Nominal 
expenditures were deflated by the implicit price deflator for GDP to 
convert them to constant dollar values. Education capital is assumed not 
to depreciate, but to be retired when a person dies. An education 
capital stock computed using this method with different source data can 
be found in Walter McMahon, ``Relative Returns to Human and Physical 
Capital in the U.S. and Efficient Investment Strategies,'' Economics of 
Education Review, Vol. 10, No. 4, 1991. The method is described in 
detail in Walter McMahon, Investment in Higher Education, Lexington 
Books , 1974.
   Research and Development Capital: The stock of R&D capital financed 
by the Federal Government was developed from a data base that measures 
the conduct of R&D. The data exclude Federal outlays for physical 
capital used in R&D because such outlays are classified elsewhere as 
investment in federally financed physical capital. Nominal outlays were 
deflated using the GDP deflator to convert them to constant dollar 
values.
  Federally funded capital stock estimates were prepared using the 
perpetual inventory method in which annual investment flows are 
cumulated to arrive at a capital stock. This stock was adjusted for 
depreciation by assuming an annual rate of depreciation of 10 percent on 
the estimated stock of applied research and development. Basic research 
is assumed not to depreciate. These are the same assumptions used in a 
study published by the Bureau of Labor Statistics estimating the R&D 
stocks financed by private industry (U.S. Department of Labor, Bureau of 
Labor Statistics, ``The Impact of Research and Development on 
Productivity Growth,'' Bulletin 2331, September 1989). Chapter 6 of this 
volume contains additional details on the estimates of the total 
federally financed R&D stock, as well as its national defense and 
nondefense components.
  A similar method was used to estimate the stock of R&D capital 
financed from sources other than the Federal Government. The component 
financed by universities, colleges, and other nonprofit organizations is 
estimated based on data from the National Science Foundation, Surveys of 
Science Resources. The industry-financed R&D stock component is 
estimated from that source and from the U.S. Department of Labor, ``The 
Impact of Research and Development on Productivity Growth,'' Bulletin 
2331, September 1989.
  Experimental estimates of R&D capital stocks have been prepared by 
BEA. The results are described in ``A Satellite Account for Research and 
Development,'' Survey of Current Business, November 1994. These BEA 
estimates are lower than those presented here primarily because BEA 
assumes that the stock of basic research depreciates, while the 
estimates in Table 13-4 assume that basic research does not depreciate. 
BEA also assumed a slightly higher rate of depreciation for applied 
research and development, 11 percent, compared with the 10 percent rate 
used here.

    Sources of Data and Assumptions for Estimating Social Indicators

  The main sources for the data in this table are the Government 
statistical agencies. The data are all publicly available, and can be 
found in such general sources as the annual Economic Report of the 
President and the Statistical Abstract of the United States, or from the 
respective agencies' web sites.