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Generational accounting


The essence of generational accounting is breaking down net taxes by generations, and projecting this, the current age-tax profile, into the future. Given a few additional assumptions (concerning growth of productivity and the discount rate), and a population forecast, one may determine how much more (or less) contributions the present net tax profile projected into the future levies on the forthcoming generations so as to meet the so called intertemporal budget constraint. The latter is simply a zero-sum constraint stating that someone, descendants if none other, must defray the possible over-expenditures of the present. To put it more precisely: the present value of the future net contributions of current and to-be-born generations has to be equal to the present value of present government debt and future government expenditures. The method involves the assumption that changing taxes and benefits apply only to future generations, currently living generations pay taxes in accordance with the present distribution of the net tax burden. Consequently, comparing the newly born cohort with the yet unborn (who are treated as a unified age group), we obtain a measure of the internal generational imbalance of the system.

Generational accounting is supposed to extend over the entire government budget, including taxes on income, consumption and property, while on the other side pensions, family assistance, education, health care, and all other government expenses. The volume edited by Alan J. Auerbach, Laurence J. Kotlikoff and Willi Leibfritz (Generational accounting around the world. Chicago and London: University of Chicago Press, 1999) contains such calculations for 17 countries. Recently TÁRKI has done such an accounting in Hungary as well, covering the complete system of redistribution for the year 1996. It is available in pdf format: » Generational accounts in Hungary.

Most of the studies published so far consider reforms in public finance or public services. It is less common to do generational accounting of specific institutional reforms. Such calculations are more complicated because the consequences of reforms are frequently not all-at-once of nature rather they go through the system over time. This is why it makes sense to do generational accounting separately for pension systems in countries such as Hungary where pension legislation sets the intended steps of institutional reforms in advance. Our generational pension accounting is also available as Gál, R. I., Simonovits, A. and Tarcali, G. (2001): Generational accounting and Hungarian pension reform. Washington DC: The World Bank Social Protection Discussion Paper Series 0127. See the paper on the homepage of the World Bank or download it from our site.

Gender Data Archive | Microsimulation | Flexibility | Generational Accounting

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