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An analysis of the changes since 1960 in the share of Americans' resources that are annuitized, which has declined slightly for younger Americans but has risen dramatically for the elderly, with important implications for the national saving rate and income inequality.

This paper shows how changes in generational accounts relate to the generational incidence of fiscal policy. To illustrate the relationship, it uses the Auerbach-Kotlikoff Dynamic Life-Cycle Simulation Model to compare policy-induced changes in generational accounts with actual changes in generations' utilities. The paper considers a wide range of policies in closed and small open economies as well as economies with and without capital adjustment costs. In general, changes in generational accounts appear to provide fairly good approximations to generations' actual changes in utilities. The approximations are better for living generations. They are worse for policies that involve significant changes in the degree of tax progressivity and for economies with sizable capital- adjustment costs. Finally, generational accounting needs to be adjusted in the case of small open economies to take into account the fact that the incidence of corporate taxation is on labor. The method of adjustment is simply to allocate changes in corporate tax revenues to generations in proportion to their changes in labor supply.

This paper constructs a unique cohort data set to study the changes since 1960 in the share of Americans' resources that are annuitized. Understanding these changes is important because the larger this share, the more cohorts are likely to consume and the less they are likely to bequeath. Hence, the degree of annuitization affects national saving as well as the transmission of inequality over time. Our findings are striking. Although the annuitized share of resources of younger Americans declined slightly between 1960 and 1990, it increased dramatically for older Americans. It doubled for older men and quadrupled for older women. Since the elderly have much higher mortality probabilities than do the young, their degree of annuitization is much more important for aggregate bequests and saving. According to our estimates, aggregate U.S. bequests would now be 66 percent larger had the post-1960 increase in annuitization not occurred. In addition, U.S. national saving would likely be substantially larger than is currently the case.

This paper marshals a variety of different types of evidence in considering the degree of equity in the government's treatment of children vis-a-vis adults, particularly the current elderly. The paper begins by showing that poverty rates of children have, over the past two decades, risen dramatically while those of the elderly have fallen. Next, it shows that, over this same time frame, the levels of consumption and income of the elderly have risen relative to those of other Americans, including children. The paper then turns to the role of government policy in influencing these trends. It documents the high level of transfer payments going to the elderly relative to those going to children, even if one includes educational expenditures on children as a transfer payment. But the paper argues that such point-in-time comparisons are invalid because they fail to account for the fact that, at a point in time, children and the elderly are at different stages of their life cycles, Controlling for the stage of the life cycle requires examining the government's fiscal treatment of generations over their entire lifetimes. Accordingly, the paper compares the lifetime fiscal treatment of generations. Specifically, it presents/projects lifetime net tax rates for generations born from 1900 through the present as well as for generations that will be born in the future. These lifetime tax rates indicate that today's and tomorrow's children could well end up paying as much as 50, 60, or even 70 percent of their lifetime incomes to the government while generations that are now old will end up paying only about 25 percent of their lifetime incomes to the government. While the paper cautions that generational equity is in the eye of the beholder, such disparate taxation of generations does considerable violence to standard norms of generational equity.

An examination of the generational imbalance in current Norwegian fiscal policy, showing that despite the government's net wealth, future Norwegians could be facing lifetime net tax burdens twice as large as those confronting today's children.

This paper considers the implications of the current course of Italian fiscal policy for existing and future generations of Italians. Italy has a very high debt-to-GDP ratio as well as a significant Social Security program. These aspects of fiscal policy would, by themselves, raise concerns about the size of the burden to be passed on to future generations. But the concern is compounded by the demographic transition under way in Italy. Like the United States, Japan, and most other western European nations, Italy is "aging" due to its low fertility rate. Unless this rate increases, the proportion of Italians aged 60 and over will rise during the next four decades from 20 percent to almost 30 percent. At the same time, the absolute size of the Italian population will fall by 27 percent. The implication of this aging process is that there will be relatively few young and middle-aged workers in future years to share the burden of the Italian government's massive implicit and explicit liabilities.

This paper examines changes over time in the degree to which the resources (human plus nonhuman wealth) of the elderly have been annuitized. Using data from the 1962 and 1983 Federal Reserve Surveys of Consumer Finances we find evidence of an increase in annuitization which is particularly pronounced among the older elderly (those over 75) and among women. The estimated 1983 flow of aggregate bequests to children and grandchildren would have been 20% larger were it not for this increase in annuitization. The change in annuitization may have contributed significantly to the recent decline of the U.S. national saving rate.

This paper examines changes over time in the degree to which the resources (human plus nonhuman wealth) of the elderly have been annuitized. Using data from the 1962 and 1983 Federal Reserve Surveys of Consumer Finances we find evidence of an increase in annuitization which is particularly pronounced among the older elderly (those over 75) and among women. The estimated 1983 flow of aggregate bequests to children and grandchildren would have been 20% larger were it not for this increase in annuitization. The change in annuitization may have contributed significantly to the recent decline of the U.S. national saving rate.

This paper examines U.S. family exchange and support, its levels and trends. The paper points out the importance of demographics and geographic mobility in affecting the amount and form of family exchange. It then considers family economic exchange in the form of shared living. financial transfers, and the provision of time. Finally, it describes recent tests of family altruism and risk sharing. The paper paints a very pessimistic picture. Demographic, geographic, and economic pressures have taken their toll on U.S. families in recent years. While many Americans are members of extended families that are intact and in touch, a growing number of Americans have few extended family members on whom to rely. Family support in the form of shared living, financial assistance, and significant provision of time is increasingly becoming the exception, rather than the rule. Family economic assistance appears still to be available for many Americans in the case of dire emergencies, but short of such emergencies Americans are increasingly left to fend for themselves.

Our previous studies (Auerbach, Gokhale, and Kotlikoff, 1991 and 1992) and Kotlikoff (1992) introduced the concept of "generational accounting," a method of determining how the burden of fiscal policy falls on different generations. It found that fiscal policy in the United States is out of balance, in terms of projected generational burdens. This means that either current generations will bear a larger share (than we project under current law) of the burden of the government's spending or that future generations will have to pay, on average, at least 21 percent more, on a growth-adjusted basis, than will those generations who have just been born. These conclusions were based on relatively optimistic assumptions about the path of social security and Medicare policies, namely that the accumulation of a social security trust fund would continue and that Medicare costs would not rise as a share of GNP. In this paper, we simulate the effects of realistic alternative paths for social security and Medicare. Our...

An examination of the generational imbalance in current Italian fiscal policy, showing that unless dramatic steps are taken soon, future generations' net tax bill will be four or more times the amount that today's newborns are slated to pay.

We consider four models of consumption that differ with respect to efficient risk-sharing and altruism. They range from complete markets with altruism to family risk-sharing. We use a matched sample of parents and independent children available from the Panel Study of Income Dynamics to discriminate between the four models. Our testing procedure is designed to deal with the set of observed independent children being endogenously selected. The combined hypothesis of complete markets and altruism can be decisively rejected, while we fail to reject altruism and hence family risk-sharing for a subset of families.

This paper studies the changes in income experienced by older women when their husbands die. The data used are the Retirement History Survey. The six waves of this survey provide information on roughly 1300 women who became widowed during the ten year period of the survey, 1960-1979. The findings indicate that about one third of new widows experience a substantial reduction (25 percent or greater) in their living standards when their husbands die. The reduction in living standard associated with the husband's death is more severe for younger widows and widows with greater income pre-widowhood. Couples could insure against severe reductions in income of widows by purchasing more life insurance. These findings lead, therefore, to the conclusion reached in previous studies by the authors and other researchers, namely that many couples fail to purchase enough life insurance to prevent a sharp drop in the wife's consumption if her husband dies. This conclusion raises the question of the role of the government in requiring the purchase of life insurance by couples, through the social security system's survivor insurance. The strong and uniform evidence on the pattern and level of life insurance purchases has implications for the scale of social security survivor benefits and the appropriate mix of total social security benefits between survivor and nonsurvivor benefits.

This paper has considered an issue which only a few considered in the literature on harmonization of regional fiscal policies. The lack of attention paid to location distortions may reflect the sense that few individuals actually move to different states or countries because of differences in fiscal policies. This study confirms this view for the U.S.; for the U.S. economy as a whole the distortion of location choice appears to be small. However, for the four percent or so of Americans induced, by regional differences in fiscal policy, to relocate, the location distortion may range from .5 to 1.5 percent of the present value of their lifetime consumption which is not small. In addition, the results suggest that location distortions rise geometrically with the size of regional fiscal differences.

An application of generational accounting to fiscal policies that feature intergenerational redistribution. The authors consider different policies, only some of which show up as a change in the deficit, and explore their impact on the net national saving rate.

A discussion of why budget deficits are inadequate measures of the long-run effect of fiscal policy on intergenerational redistributi- on, and an assertion that policy evaluation would be better served by looking at generational accounts.

In hiring new workers, risk-neutral employers equate the present expected value of each worker's compensation to the present expected value of his/her productivity, Data detailing how present expected compensation varies with the age of hire embed, therefore, information about how productivity varies with age. This paper infers age-productivity profiles using data on the present expected value of earnings of new hires of a Fortune 1000 firm. For each of the five occupation/sex groups considered, productivity falls with age, with productivity exceeding earnings for young workers and vice versa for older workers.

This paper uses the Auerbach-Kotlikoff Dynamic Simulation Model to compare the projected demographic transitions in Canada and the United States. The simulation model determines the perfect foresight transition path of an economy in which individuals live to age 75. The model's preferences are life cycle augmented to include utility from bequests. In addition to handling changes in demographics and fiscal policies, the model can be run for closed or open economies. In comparing Canada with the U.S., we first simulate the U.S. demographic transition, treating the U.S. as a closed economy. The time path of interest rates obtained from the U.S. simulations are then used in the Canadian simulations. In the Canada simulations, Canada is assumed to be an open economy which takes the U.S. interest rate as given. The simulations indicate that demographics are likely to have significant effects on rates of saving and taxation in both the U.S. and Canada. However, the more abrupt demographic transition in Canada combined with the projected maturation of Canadian social security system leads to a more severe predicted long term decline in Canadian saving rates. Despite the predicted lower saving rates, capital deepening is likely to occur in both countries, and the associated increase in real wages is likely to more than offset projected higher tax rates, leaving the growth-adjusted welfare of future generations higher than that of current generations.

This paper uses matched data on the elderly and their children to study the provision of time by children to the elderly. It develops a Tobit model as well as a structural model to analyze the determinants of this decision. The main determinants of the amount of time given to parents appear to be the parent's age, reported health, and institutionalization status, and the children's age, health, and sex. Older parents, less healthy parents, and non-institutionalized parents receive more time from their children, while younger children, healthier children, and female children provide more time. In contrast to these demographic determinants, economic variables, such as children's wage rate and income levels, appear to play a rather insignificant role in the provision of time. In addition, the evidence does not support the hypothesis that parents purchase time from their children.

This paper uses matched data on the elderly and their children to study the provision of time by children to the elderly. It develops a Tobit model as well as a structural model to analyze the determinants of this decision. The main determinants of the amount of time given to parents appear to be the parent's age, reported health, and institutionalization status, and the children's age, health, and sex. Older parents, less healthy parents, and non-institutionalized parents receive more time from their children, while younger children, healthier children, and female children provide more time. In contrast to these demographic determinants, economic variables, such as children's wage rate and income levels, appear to play a rather insignificant role in the provision of time. In addition, the evidence does not support the hypothesis that parents purchase time from their children.

This paper develops a general multiperiod-multinomial probit model for panel data to estimate the living arrangements of the elderly. The model has the following features: (a) In each period choices do not necessarily obey the assumption of independence of irrelevant alternatives. (b) Unobserved person-specific attributes are treated as random effects. These random effects may also be correlated across alternatives. (c) In addition, unobserved choice-specific utility components may persist over some time, creating an autoregressive and/or heteroscedastic error structure. The model is estimated by simulating the choice probabilities in the likelihood function. We examine several variants of the specification of the correlation structure and investigate the extent the biases created by ignoring intertemporal correlations.

L’empire americain pourrait imploser economiquement bien avant que son sur-deploiement exterieur ne signe son epuisement. La « dette implicite » de l’Etat americain, c’est-a-dire les retraites et les depenses de sante des futurs retraites du baby boom, constitue un deficit abyssal, et l’Amerique de Bush ne semble pas prendre le bon chemin. Comme la monarchie francaise, l’empire americain croulera-t-il sous le poids de ses finances publiques ?

The population of the United States is aging. We review a variety of the implications this has for U.S. national saving rates and discuss the policy issues that they raise. After reviewing what different models would predict for household saving over the next several decades we consider how the demographic transition may also affect national saving through changes in government behavior. Ways in which the composition of household saving might change as individuals age are also analyzed along with the implications of changes in government fiscal policy for asset composition. (EXCERPT)

Working Pa~er 9107 GENERATIONAL ACCOUNTING: A NEW APPROACH FOR UNDERSTANDING THE EFFECTS OF FISCAL POLICY ON SAVING by Alan J. Auerbach, Jagadeesh Gokhale, and Laurence J. Kotlikoff Alan J. Auerbach is a professor of economics at the University of Pennsylvania and an associate of the National Bureau of Economic Research; Jagadeesh Gokhale is an economist at the Federal Reserve Bank of Cleveland; and Laurence J. Kotlikoff is a professor of economics at Boston University and an asso- ciate of the National Bureau of Economic Research. Working papers of the Federal Reserve Bank of Cleveland are preliminary materials circu- lated to stimulate discussion and critical comment. The views stated herein are those of the authors and not necessarily those of the Federal Reserve Bank of Cleveland or of the Board of Governors of the Federal Reserve Sys tem. May 1991

A new empirical study of the relation between money, nominal income, prices, and real output in postwar quarterly U.S. data rejects virtually all of the conclusions reached by Families provide individuals with risk sharing opportunities which may not otherwise be available. Within the family there is a degree of trust and a level of information which alleviates three key problems in the provision of insurance by markets open to the general public, namely, moral hazard, adverse selection, and deception. The informational advantages of pooling risk within families must be set against the inability of families to provide complete insurance because of the small size of the risk pooling group. This paper demonstrates how families can provide insurance against uncertain dates of death. Death risk sharing family arrangements effectively constitute an incomplete annuities market. Our analysis indicates that these arrangements even in small families can substitute by more than70% for complete annuities. Given the adverse selection problem and transactions costs in public annuity markets, risk pooling in families may well be preferred to purchasing market annuities. In the absence of organized public markets in annuities, these risk sharing arrangements provide powerful economic incentives for marriage and family formation. The paper suggests that inter-family transfers need have nothing to do with altruistic feelings; rather, they may simply reflect risk sharing behavior of completely selfish family members.

This paper analyzes the structure of slave prices in New Orleans from 1804 to 1862 in an attempt to shed light on such issues as the competitive nature and economic “rationality” of the slave system, the impact of the slave trade on the separation of the slave family, the extent of slave skill formation and its importance to the Southern economy, and the personal relationships between owners and slaves. The analysis is based on the Rogert Fogel and Stanley Engerman (1974) sample of New Orleans slave invoices representing over 5700 slaves sold during the years 1804 to 1862. These invoices contain a rich assortment of information detailing the characteristics and attributes of slaves sold in the market as well as the particulars of slave transactions. The data are investigated within a regression model that relates the price of slaves sold in the market to their characteristics and to other aspects of the slave sale. After discussing the data and the regression model, the paper presents general results; subsequent sections of the paper focus on questions of more particular interest.

Notwithstanding its widespread use, the government's deficit is not a well-defined measure of fiscal policy from the perspective of neoclassical economics; the equations of neoclassical models do not define the deficit. Rather than being a fundamental economic concept, the deficit is an arbitrary cash flow accounting construct with no necessary relation to the true stance of fiscal policy. Although the deficit is supposed to indicate how the burden of paying for the government's consumption is spread across different generations, actual changes in the measured deficit in the United States have had little if any relation to changes in the burden imposed by the government on different generations. The deficit's lack of definition is illustrated with a simple model, and the potential for misreading fiscal policy is discussed with U.S. fiscal policy in the 1980s as an example. In this article, creation of present value generational accounts are called for that would properly measure the intergenerational stance of fiscal policy.

This paper presents a new simulation methodology for determining the pure efficiency gains from tax reform along the general. equilibrium rational expectations growth path of life cycle economies. The principal findings concern the effects of switching from a proportional income tax with rates similar to those in the U.S. to either a proportional tax on consumption or a proportional tax on labor income. A switch to consumption taxation generates a sustainable welfare gain of almost 2 percent of lifetime resources. In contrast, a transition to wage taxation generates a loss of greater than ? percent of lifetime re- sources. A second general result is that even a mild degree of progressivity in the income tax system imposes a very large efficiency cost.

This paper uses historicaI U.S. data to directly estimate the contribution of intergenerational transfers to aggregate capital accumulation. The evidence presented indicates that intergenerational transfers account for the vast majority of aggregate U .S. capital formation; only a negligible fraction of actual capital accumulation can be traced u, life-cycle or "hump" savings. A major difference between this study and previous investigations of this issue is the use of more accurate longitudinal age-earnings and age-consumption profiles. These profiles are simply too flat to generate substantial lifecycle savings. This paper suggests the importance of and need for substantially greater research and data collection on intergenerational transfers. fife-cycle models of savings that emphasize savings for retirement as the dominant form of apical accumulation should give way to models that illuminate the determinants of intergenerational transfers.

This paper examines the amount of precautionary savings and wealth inequality arising from life-span uncertainty by comparing saving behavior under perfect insurance arrangements with that arising under imperfect arrangements, namely, when longevity risk can be pooled only with members of one's own family. The central findings of the paper are that (1) perfecting insurance arrangements can sharply lower savings in both intergenerationally altruistic and life-cycle economies and that (2) in altruistic economies perfecting annuity insurance can greatly influence inequality; indeed, in the long run in our model, switching from imperfect family insurance to perfect insurance can mean the difference between absolute inequality and absolute equality.

The Old South's economic stake in western land expansion and slave migration is examined in a two-region, general equilibrium model of slave mobility. The model separates the effect on the Old South's assets and slave population of more western land from that of slave sales per se. The authors conclude that the Old South had no economic stake in the New South. The most conservative estimate reveals that a doubling of western lands in 1850 would have increased Old South wealth by less than two percent.

In a recent and stimulating article, Martin Feldstein (1977) reconsiders the Ricardian proposition that a tax on pure rent is fully capitalized in the price of land. As Feldstein points out, the classical proposition that a tax on pure rent is unshifted requires that the supplies of nonland factors of production are unaltered by the introduction of the tax on land rents. This static assumption of fixed factor supplies is inappropriate to the analysis of tax incidence in a dynamic economy in which the supply of capital reflects the economic choice between consumption and saving. In Feldstein's analysis the introduction of a tax on land rents leads to an increased supply of capital. Assuming a fixed supply of labor and land, the increased supply of capital raises the marginal productivity of land and lowers the marginal productivity of capital, thus shifting the tax from land onto capital. Indeed, Feldstein shows that both the net rental and the price of land may actually rise in response to the tax on rents. His framework is a two-period overlapping generations life-cycle model; each period the savings of the young finance the purchase of claims to land and capital assets. The initial reduction in the value of land arising from the tax on rent permits more savings to be funneled into capital

This year marks the twenty-fifth anniversary of Arnold Harberger's celebrated model of the corporation income tax. While the model has been enormously useful as an analytical device for studying two sector economies, its usefulness for understanding the incidence and excess burden of the corporate income tax remains in question. One difficulty confronting all empirical analyses of the Harberger Model is how to treat noncorporate production in primarily corporate sectors and corporate production in primarily noncorporate sectors. The Harberger Model provides no real guide to this question since it assumes that one good is produced only by corporations and the other good is produced only by noncorporate firms. Stated differently, Harberger models the differential taxation of capital used in the production of different goods, rather than the taxation of capital used by corporations per se. This paper presents a two good model with corporate and noncorporate production of both goods. The incidence of the corporate tax in our Mutual Production Model (MPM) can differ markedly from that in the Harberger model. A hallmark of Harberger's corporate tax incidence formula is its dependence on differences across sectors in elasticities of substitution between capital and labor. In contrast, the incidence of the corporate tax in the MPM may fall 100 percent on capital regardless of sector differences in substitution elasticities. The difference between the two models in the deadweight loss from corporate taxation is also striking. Using the Harberger - Shoven data and assuming unitary substitution and demand elasticities, the deadweight loss is over ten times larger in the CES version of the MPM than in the Harberger Model. Part of the explanation for this difference is that in the Harberger Model only the difference in the average corporate tax in the two sectors is distortionary, while the entire tax is distortionary in the MPM. A second reason for the larger excess burden in the MPM is that the MPM has a very large, indeed infinite, substitution elasticity in demand between corporate and noncorporate goods; in contrast, applications of the Harberger Model assume this elasticity is quite small.

In recent years the role of intergenerational transfers in the process of wealth accumulation has been the subject of substantial empirical and theoretical analysis. The key question stimulating this research is what is the main explanation for savings? Is it primarily accumulation for retirement as claimed by Albert Ando, Richard Brumberg, and Franco Modigliani in their celebrated Life Cycle Model of Savings? Is it primarily intentional accumulation for intergenerational transfers? Or is it primarily precautionary savings, much of which may be bequeathed because of imperfections in annuity markets? This paper examines a range of findings on the importance of intergenerational transfers. The strong conclusion that emerges from this evidence is that intergenerational transfers play a very important, if not a key, role in aggregate wealth accumulation. While intergenerational transfers figure very large in savings, the precise motivation for such transfers is unclear. Intergenerational altruism might appear the most likely candidate, but at least sane stylized facts, such as the equal allocation of bequests among children, are strongly at adds with the altruism model. Other explanations involving imperfect insurance arrangements or payments for child services do not appear capable of explaining the substantial amounts of transfers actually observed. Sorting cut the relative contributions of different models to intergenerational transfers and the precise role of intergenerational transfers in the process of wealth accumulation remains an intriguing and exciting enterprise.

The U.S. and other western economies are experiencing dramatic changes in growth and age structure of their populations. Fluctuations in birth rates are the most important determinants of these changes in the post war period. This paper examines the dynamic effects of baby "booms" and baby"busts" on a range of economic variables using a perfect foresight life cycle simulation model. In addition to describing general transition (as opposed to simply long run) affects of fertility change, the paper considers alter-native Social Security policies for avoiding sharp increases in long run payroll tax rates. These include reductions in benefit replacement rates,advances in Social Security's retirement age, taxation of social security benefits, and the accumulation of a significant Social Security trust fund. According to the simulated demographic transitions, the savings inthe U.S. fertility currently underway can have very major impacts on long run factor returns and produce percipitous short term changes in saving rates. While Social Security policy has important effects on the simulated demographic transitions, these effects are of secondary importance to the long run level of economic welfare. Even if payroll tax rates rise dramatically, long run welfare (measured in terms of levels of adult consumption and leisure) is, nonetheless, substantially higher in the case of a sustained dropin the fertility rate. This reflects, in part, the decline in the number of dependent children per adult; while a sustained decline in the fertility rate eventually means a much larger ratio of elderly per capita, the decline in children per capita means an overall decline in the long run ratio of dependents to prime age workers in the economy. A second explanation for the simulated long run welfare gains is capital deepening associated with lower population growth rates.

In neoclassical models of consumption choice under earnings uncertainty changes in consumption programs from one period to the next are determined by new information received about future earnings over the period. This proposition suggests that actual consumption choices imbed extractable information about the extent and time resolution of earnings uncertainty. The primary goal of this paper is to demonstrate how one can infer the extent of earnings uncertainty from information on consumption choices. We obtain a theoretical relationship between the revision in the present expected value of consumption (noise) and the revision in the expectation of lifetime earnings (news) that can be used to measure subjective earnings uncertainty.