What is Generational Accounting? Generational Accounting tracks the use of government funding of social benefits for each generation. Balanced Generational Accounting (or Generaltion Equity) is an accounting perspective where each generation generally pays its own way through life and does not pass on debts to future generations. Generational Equity has been a largely ignored principle in our government budgeting and tax code. Indeed, one can have a balanced budget that is not generationally balanced.
Our Social Security system is the prime example of an abuse of generational accounting principles. There are trillions in future liabilities to fund this program and other federal employee pension programs. The typical IRA/pension is perhaps another source of concern.
Recently, the principle of generational accounting was introduced into the federal budget process by President Clinton and Kotlikoff. He was using it to show how changing /natinalizing the health care system would reduce the generational problem. In the following year, this part of his budget proposal was cut from the budget documents submitted to Congress. This is largely due to the fact that his budget proposal and direction of government take our nation future generations into a reality where our children would be paying 81% of their income as taxes. The GOP response to this would have reduced this future tax load all of 10% to 70%. Still unacceptable for our future generations, but clearly to radical according to the PRESSident.
This points to the need for any true balanced budget and fair tax code to include a generational perspective. Does this mean that occasionally, there will be deficit spending? Yes. Some generations and society as a whole may incur debt during various phases. They should be expected to pay that debt back later on so that subsequent generations will not be saddled with either the debt or interest payments from previous generational debts.
This is a matter for much future economic debate and discussion. Much of it is a new perspective for all but the most astute economic observers.