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 provide only a partial picture
of the consequences of the Government’s financial and
investment decisions. Indeed, changes in the annual
budget deficit or surplus can be misleading. For example,
the temporary shift from annual deficit to surplus
in the late 1990s did nothing to correct the long-term
deficiencies in the Nation’s major entitlement programs,
which are the major source of the long-run shortfall
in Federal finances. This would have been more apparent
if greater attention had focused on long-term measures
such as appear 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
properly.
For the Federal Government, 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 be
summed up with a single statistic. Although its financial
condition is important, the Government does not
and is not expected to earn a profit. Instead, its fiscal
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 with caution; 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 the Government’s physical and
financial assets and its legal liabilities, which are
all collected in Table 13–1. This table is similar
to a business balance sheet, but for that reason
it misses some of the Government’s unique fiscal
characteristics. That is why it needs to be supplemented
by information in Parts III and IV.
• Part III shows possible paths for the Federal
budget extending well beyond the normal budget
window, and describes how these projections vary
depending on key economic and demographic assumptions.
The projections are summarized in
Table 13–2 and in a related set of charts. This
part also provides present value estimates of the
funding shortfall in Social Security and Medicare
in Table 13–3. These data indicate the Government’s
future responsibilities and resources under
current law and policy. In particular, they show
the looming challenge that Federal entitlement
programs present in the long run.
• Part IV returns the focus to the present. It features
information on national economic and social
conditions that are affected by what the Government
does. The private economy is the ultimate
source of the Government’s resources. Table 13–4
presents summary data for total national wealth,
while highlighting the Federal investments that
have contributed to that wealth. Table 13–5 presents
a small sample of economic and social indicators.
PART I—HOW TO EVALUATE FEDERAL FINANCES
No single framework can encompass all of the factors
that affect the financial condition of the Federal Government.
Nevertheless, the framework presented here
offers a useful way to examine the financial aspects
of Federal policies that goes beyond the standard measures
of outlays, receipts and the surplus or deficit. It
includes balance-sheet information, but it goes beyond
that to include long-run projections of the budget showing
where future fiscal strains are most likely to appear.
It also includes measures that indicate some of
what society has gained economically and socially from
Federal programs funded through this and past budgets.
The Government’s legally binding obligations—its liabilities—
consist in the first place of Treasury debt.
Other liabilities include the pensions and other 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.
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. They are collected in Table 13–1. Although
they are important, the obligations shown in
Table 13–1 are only a subset of the Government’s financial
responsibilities. Indeed, the full extent of the Government’s
fiscal exposure through its various programmatic
commitments dwarfs the outstanding debt
held by the public or even the total of all acknowledged
Federal liabilities. The commitment to Social Security
200 ANALYTICAL PERSPECTIVES
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.
and Medicare alone amounts to many times the value
of outstanding Federal debt.
In addition to Social Security and Medicare, the Government
has a broad range of programs that dispense
cash and other benefits to individual recipients. These
include, to mention only a few examples: Medicaid, veterans’
pensions and health care, and food stamps. It
also provides a wide range of other public services that
must be financed through the tax system. The specific
benefits and services may be modified or even ended
at any time by the Congress and the President. Indeed,
changes in laws governing these programs are a regular
part of the legislative cycle. For these reasons, these
programmatic commitments do not constitute ‘‘liabilities’’
in a legal or accounting sense, and they would
not appear on a balance sheet. Until modified by law,
they remain Federal responsibilities and will have a
claim on budgetary resources for the foreseeable future.
All of these 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 the Government has acquired though a variety
of credit programs. They also include the physical plant
and equipment used to produce Government services.
The Government owns a substantial amount of land.
Such assets would normally be shown on a balance
sheet. The Government also has resources that go beyond
the assets that would 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 best 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 the Government does 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 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 grow 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 question of whether
the public is receiving value for its tax dollars or whether
Federal assets 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 will contribute
to the goal of providing more complete information
about Government programs and permit a closer alignment
of the cost of programs with performance measures.
These changes have been described in detail in
previous Budgets. They are described in chapter 2 of
this volume, and in the accompanying material that
describes results obtained with the Program Assessment
Rating Tool (PART). This 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, which are presented in Table 13–5.
Relationship with FASAB Objectives
The framework presented here meets the stewardship
objective1 for Federal financial reporting recommended
by the Federal Accounting Standards Advisory Board
(FASAB) and adopted for use by the Federal Government
in September 1993.
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 presentation here is an experimental approach
for meeting this objective at the 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 but based on different data and methods of
valuation. The 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. However, the Report
does not extend that review to the condition or
sustainability of the Government as a whole, which
is a main focus of this chapter.
Connecting the Dots: The presentation that follows
consists in large part of a series of tables and charts.
201 13. STEWARDSHIP
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 given current and proposed law, 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.
Federal Governmental
Assets/Resources
Federal Assets
Projected Receipts
National Assets/Resources
Liabilities/Responsibilities
Federal Liabilities
Resources/Receipts
Financial Assets
Monetary Assets
Mortgages and Other Loans
Other Financial Assets
Less Expected Loan Losses
Physical Assets
Fixed Reproducible Capital
Defense
Nondefense
Inventories
Non-reproducible Capital
Land
Mineral Rights
Guarantees and Insurance
Deposit Insurance
Pension Benefit Guarantees
Loan Guarantees
Other Insurance
Net Balance
Responsibilities/Outlays
Projected Outlays
Surplus/Deficit
75-Year Actuarial Deficiencies in
Social Security and Medicare
National Needs/Conditions
Indicators of economic, social,
educational, and environmental
conditions
Assets and Liabilities
(Table 13-1)
Long-Run Federal
Budget Projections
(Table 13-2)
Actuarial Deficiencies in
Social Security and Medicare
(Table 13-3)
National Wealth
(Table 13-4)
Social Indicators
(Table 13-5)
Chart 13-1. A Presentation of the Federal Government's
and the Nation's Financial Condition
Debt Held by the Public
Federal Retiree Pension
and Health Insurance Liabilities
Federally Owned Physical Assets
State & Local Physical Assets
Federal Contribution
Privately Owned Physical Assets
Education Capital
Federal Contribution
R&D Capital
Federal Contribution
Financial
Liabilities
Miscellaneous
202 ANALYTICAL PERSPECTIVES
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—let alone prices that
would cover expenses. The Government undertakes these activities not to improve its balance
sheet, but to benefit the Nation.
For example, the Federal Government invests in education and research. The Government earns
no direct return from these investments; but people are made richer if they are successful. The
returns on these investments show up not as an increase in Government assets, but 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 the table 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, 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.
The financial markets clearly recognize this reality. The Federal Government’s implicit credit
rating is 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.
203 13. STEWARDSHIP
QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT’S STEWARDSHIP—Continued
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 not ignored in this presentation of the
Government’s finances, but they are shown elsewhere than in Table 13–1. They appear in two
ways: budget projections as a percent of GDP in Table 13–2, and 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 the 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.
Furthermore, if future Social Security or Medicare benefits were to be treated as a liability, then
future payroll tax receipts earmarked to finance those benefits ought to be treated as a Government
asset. This treatment would be essential to gauge the future claim. Tax receipts, however,
are not generally considered Government assets, and for good reason: the Government does not
own the wealth on which future taxes depends. Including taxes on the balance sheet would be
wrong for this reason, but without counting taxes the balance sheet would overstate the drain
on net assets from Social Security and Medicare. 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 the 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.’’
204 ANALYTICAL PERSPECTIVES
QUESTIONS AND ANSWERS ABOUT THE GOVERNMENT’S STEWARDSHIP—Continued
5. When the baby boom generation begins to retire in large numbers beginning within the
next ten years, the deficit could become much larger than it ever was before. Should this not
be reflected in evaluating the Government’s financial condition?
The aging of the population will become dramatically evident when the baby boomers begin to
retire, and this demographic transition poses serious long-term problems for Federal entitlement
programs and the budget. Both the long-range budget projections shown in this chapter and the
actuarial projections prepared for Social Security and Medicare indicate how serious the problem
is. It is clear from this information that reforms are needed in these programs to meet the longterm
challenges.
6. Would it make sense for the Government to borrow to finance needed capital—permitting
a deficit in the budget—so long as the borrowing did not exceed the amount spent on investments?
This rule might not actually permit much extra borrowing. If the Government were to finance
new capital by borrowing, it should plan to pay off the debt incurred to finance old capital as the
capital is used up. The net new borrowing permitted by this rule would not then exceed the
amount of net investment the government does after adjusting for capital consumption. But, as
discussed in Chapter 6, Federal net investment in physical capital is usually not very large and
has even been negative, so little if any deficit spending would have been justified by this borrowing-
for-investment criterion, at least in recent years.
The Federal Government also funds substantial amounts of physical capital that it does not
own, such as highways and research facilities, and it funds investment in intangible ‘‘capital’’
such as education and training and the conduct of research and development. A private business
would never borrow to spend on assets that would be owned by someone else. However, such
spending is today a principal function of the Federal Government. It is not clear whether this
type of capital investment would fall under the borrowing-for-investment criterion. Certainly,
these investments do not create assets owned by the Federal Government, which suggests they
would not be included for this purpose, even though they are an important part of national
wealth.
There is another difficulty with the logic of borrowing to invest. Businesses expect investments
to earn a return large enough to cover their cost. In contrast, the Federal Government does not
generally expect to receive a direct payoff from its investments, whether or not it owns them. In
this sense, investments are no different from other Government expenditures, and the fact that
they provide services over a longer period of time is no justification for excluding them when calculating
the surplus or deficit.
Finally, the Federal Government pursues policies that support the overall economic well-being of
the Nation and its security interests. For such reasons, the Government may deem it desirable
to run a budget surplus, even if this means paying for its own investments from current receipts,
and there will be other times when it is necessary to run a deficit, even one that exceeds
Government net investment. Considerations in addition to the size of Federal investment must
be weighed in choosing the right level of the surplus or deficit.
205 13. STEWARDSHIP
PART II—THE FEDERAL GOVERNMENT’S ASSETS AND LIABILITIES
Table 13–1 takes a backward look at the Government’s
assets and liabilities 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 2004 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,
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 62 percent greater than it was in 1960.
Meanwhile, Federal liabilities have increased by 234
percent in real terms. The decline in the Federal net
asset position has been due partly to persistent Federal
budget deficits that have boosted debt held by the public
most years since 1960. Other factors have also been
important such as the large increases in health benefits
for Federal retirees and the sharp rise in veterans’
disability compensation. The relatively slow growth in
Federal asset values also helped reduce the net asset
position.
The shift from budget deficits to budget surpluses
in the late 1990s temporarily checked the decline in
Federal net assets, but only for a few years. Currently,
the net excess of liabilities over assets is about $5.3
trillion or about $18,000 per capita. As a ratio to GDP,
the excess of liabilities over assets reached a peak of
51 percent in 1993; it declined to 38 percent in 2000;
it rose above 45 percent in 2003; and it fell below
45 percent in 2004. The average since 1960 has been
34 percent (see Table 13–1).
1960 1965 1970 1975 1980 1985 1990 1995 2000
10
20
30
40
50
60
Percent of GDP
Chart 13-2. Net Federal Liabilities
2004
206 ANALYTICAL PERSPECTIVES
Table 13–1. GOVERNMENT ASSETS AND LIABILITIES*
(As of the end of the fiscal year, in billions of 2004 dollars)
1960 1965 1970 1975 1980 1985 1990 1995 2000 2002 2003 2004
ASSETS
Financial Assets:
Cash and Checking Deposits .................................. 45 65 40 33 50 33 44 46 60 81 54 54
Other Monetary Assets ............................................ 1 1 1 1 2 2 2 1 7 19 9 2
Mortgages ................................................................. 29 28 41 43 80 82 105 72 83 78 75 74
Other Loans ............................................................. 107 147 184 184 238 309 219 167 140 124 120 118
less Expected Loan Losses ................................ –1 –3 –5 –10 –18 –18 –21 –26 –40 –47 –48 –47
Other Treasury Financial Assets ............................. 65 81 71 64 90 132 211 254 232 263 315 311
Subtotal ............................................................ 245 318 332 315 442 540 560 524 552 616 624 606
Nonfinancial Assets:
Fixed Reproducible Capital ...................................... 1,074 1,065 1,108 1,075 1,018 1,151 1,194 1,200 1,053 1,032 1,037 1,061
Defense ................................................................ 925 869 879 803 720 838 860 840 687 652 653 667
Nondefense .......................................................... 148 196 229 272 297 313 334 360 365 379 384 394
Inventories ................................................................ 281 243 226 202 250 286 254 195 201 200 247 249
Nonreproducible Capital ........................................... 454 466 447 662 1,062 1,138 898 675 1,000 1,018 1,179 1,401
Land ..................................................................... 99 137 172 273 348 362 372 282 426 487 517 601
Mineral Rights ...................................................... 356 330 275 390 713 776 526 393 574 532 663 801
Subtotal ............................................................ 1,809 1,775 1,781 1,939 2,330 2,575 2,346 2,071 2,254 2,250 2,463 2,711
Total Assets ................................................................ 2,054 2,093 2,114 2,254 2,772 3,115 2,906 2,594 2,806 2,866 3,087 3,318
LIABILITIES
Debt held by the Public ............................................... 1,225 1,259 1,120 1,139 1,416 2,341 3,190 4,240 3,692 3,685 4,002 4,296
Insurance and Guarantee Liabilities:
Deposit Insurance .................................................... ............ ............ ............ ............ 2 10 77 5 1 2 1 1
Pension Benefit Guarantee Corporation ................. ............ ............ ............ 46 34 47 46 22 44 84 73 88
Loan Guarantees ..................................................... ............ 1 2 7 13 11 17 32 40 39 37 43
Other Insurance ....................................................... 33 30 23 21 29 18 21 19 17 17 16 16
Subtotal ............................................................ 33 31 26 74 78 85 161 78 102 142 127 148
Pension and Post-Employment Health Liabilities:
Civilian and Military Pensions .................................. 857 1,077 1,288 1,459 1,937 1,921 1,878 1,821 1,856 1,905 1,989 2,022
Retiree Health Insurance Benefits ........................... 205 258 309 350 464 461 450 437 416 839 943 1,009
Veterans Disability Compensation ........................... 203 256 305 338 347 287 258 282 598 884 976 925
Subtotal ............................................................ 1,266 1,591 1,902 2,148 2,748 2,669 2,587 2,540 2,871 3,628 3,909 3,956
Other Liabilities:
Trade Payables and Miscellaneous ........................ 29 36 46 57 88 115 158 131 107 108 110 106
Benefits Due and Payable ....................................... 22 26 35 37 48 53 63 74 84 99 102 105
Subtotal ............................................................ 51 62 81 94 135 168 221 204 191 207 212 211
Total Liabilities ........................................................... 2,575 2,943 3,129 3,455 4,377 5,263 6,159 7,062 6,857 7,663 8,249 8,611
Net Assets (Assets Minus Liabilities) ..................... –521 –850 –1,015 –1,201 –1,606 –2,148 –3,253 –4,468 –4,051 –4,796 –5,162 –5,293
Addenda:
Net Assets Per Capita (in 2004 dollars) .................. –2,890 –4,382 –4,959 –5,569 –7,041 –8,997 –12,982 –16,733 –14,324 –16,620 –17,711 –17,988
Ratio to GDP (in percent) ......................................... –19.2 –24.9 –24.8 –25.9 –29.0 –32.5 –42.0 –51.1 –37.9 –43.7 –45.4 –44.8
* This table shows assets and liabilites for the Government as a whole excluding the Federal Reserve System. Data for 2004 are extrapolated in some cases.
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 $0.6
trillion at the end of FY 2004. 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 $50 billion
as of 2004. 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
amounted to about $1.0 trillion in constant dollars for
most of the last 40 years (OMB estimate). This capital
consists of defense equipment and structures, including
weapons systems, as well as nondefense capital goods.
Currently, slightly less than two-thirds of the capital
is defense equipment or structures. In 1960, defense
capital was about 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 2-1/4 percent. The Gov207
13. STEWARDSHIP
2 The pension liability is the actuarial present value of benefits accrued-to-date based
on past and projected salaries. The 2004 liability was extrapolated. The retiree health
insurance liability is based on actuarial calculations of the present value of benefits promised
under existing programs. Estimates are only available since 1997. For earlier years the
liability was assumed to grow in line with the pension liability, and for that reason may
differ significantly from what the actuaries would have calculated for this period. Veterans’
disability compensation was taken from the 2004 Financial Report of the United States
Government and Reports from earlier years.
ernment also holds inventories of defense goods and
other items that in 2004 amounted to about 25 percent
of the value of its fixed capital.
Non-reproducible 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
1997-1998, rebounded in 1999-2000, fell again in 2001,
and rose in 2002-2004. These fluctuations have caused
the estimated value of Federal mineral deposits to fluctuate
as well. In 2004 as estimated here, the combined
real value of Federal land and mineral rights was higher
than it has ever been, but only 3 percent greater
than in 1982. These estimates are limited to land and
mineral rights. They, thus, omit some valuable assets
owned by the Federal Government, such as works of
art and historical artifacts partly because there is no
available inventory or realistic basis for valuing such
unique assets.
Total Assets: The total value of Government assets
measured in constant dollars has risen sharply in the
past three years, and was higher in 2004 than ever
before. The Government’s asset holdings are vast. As
of the end of FY 2004, Government assets were estimated
to be worth about $3.3 trillion or 28 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 and 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 also 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.
Future benefit payments that are likely to be made
through Social Security and other Federal income
transfer programs are not Federal liabilities in a legal
or accounting sense. They are Federal responsibilities,
however, and it is important to gauge their size, but
they are not binding in the same way as a legally
enforceable claim would be. That is why a balance sheet
can give a misleading impression of the Federal financial
position. 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 liability is the debt owed to the public.
It amounted to about $4.3 trillion at the end of 2004.
Publicly held debt declined for several years in the
late 1990s because of the unified budget surplus that
had emerged at that time, but as the deficit has returned,
publicly held debt has begun 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 $0.1 trillion. 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, relative to total Federal liabilities or even the
total debt held by the public, these insurance and guarantee
liabilities are fairly small. They were less than
2 percent of total liabilities in 2004.
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 $4.0
trillion at the end of FY 2004 up from $2.9 trillion
in 2000.2 There was a large expansion in Federal military
retiree health benefits legislated in 2001.
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
208 ANALYTICAL PERSPECTIVES
levels in 45 years, and in 2004 they remained lower
than at any time from 1965 through 2002. Despite the
continued good performance of interest rates, there are
limits to how much debt the Government can assume
without putting its finances in jeopardy. Over an extended
time 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. To judge the prospects for longrun
solvency it is necessary to project the budget into
the future. 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 important to anticipate
what future budgetary requirements might flow from
future transactions as implied by current law. Despite
the uncertainty surrounding the necessary underlying
assumptions, 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 intended
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, however, do not 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 longrange
deficit are, not surprisingly, Social Security and
Medicare along with Medicaid, the Federal program
that helps States provide health coverage for low-income
people and nursing home care for the elderly.
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 that is 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. The uncertainty increases the further into the future
projections are extended. Such uncertainty, while
making accuracy more difficult, actually enhances the
importance of long-term projections. People are generally
averse to risk, but it is not possible to assess
the likelihood of future risks without projections. Although
a full treatment of risks is beyond the scope
of this chapter, the chapter is able to show how the
budget projections respond to changes in some of the
key economic and demographic parameters. Given the
uncertainties, the best that can be done 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. In the years that follow,
the elderly population will skyrocket, putting serious
strains on the budget because of increased expenditures
for Social Security and for the Government’s health
programs serving this population.
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. Because of lower fertility and improved mortality,
that ratio is expected to continue to decline slowly
from there. With fewer workers to pay the taxes
needed to support the retired population, the budgetary
pressures will continue to grow. The problem posed by
the demographic transition is a permanent one; indeed,
it is a growing one.
Currently, the three major entitlement programs—
Social Security, Medicare and Medicaid—account for 44
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 easily account for nearly two-thirds of noninterest
Federal spending. At the end of the projection
period, the figure rises to around three-quarters of noninterest
spending. In other words, under an extension
of current-law formulas and the policies in the budget,
almost all of the budget, aside from interest, would
go to these three programs alone. 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
rise in the deficit unfolds gradually. The budget deficit
is projected to decline as the economy expands over
209 13. STEWARDSHIP
the next several years, while most of the baby boomers
are still in the work force. As the baby boomers begin
to reach retirement age in large numbers, the deficit
begins to rise. In about 10 years, the deficit as a share
of GDP is projected to reach a low point and then
begin an inexorable increase. By the end of this chapter’s
projection period, rising deficits would drive publicly
held Federal debt to levels 2–1/2 times the size
of GDP.
The revenue projections in this section start with the
budget’s estimate of receipts under the Administration’s
proposals. They assume that individual income tax receipts
will rise somewhat relative to GDP. This increase
reflects the higher marginal tax rates that people will
face as their real incomes rise in the future (the tax
code is indexed for inflation, but not for real economic
growth). In terms of total receipts collected relative to
GDP, those income tax increases are partly offset by
declines in Federal excise tax receipts, which are generally
not indexed for inflation. Payroll taxes also are
projected to decline relative to GDP because the base
for these taxes—cash wages and salaries—has shown
a tendency to decline relative to total compensation,
which again partly offsets the increase in income tax
receipts. Even so, the overall share of Federal receipts
in GDP is projected to rise above the average of 17
to 19 percent that prevailed from 1960 through the
mid-1990s and to eventually reach around 22 percent
of GDP.
The long-run budget outlook is highly uncertain (see
the technical note at the end of this chapter for a discussion
of the forecasting assumptions used to make
these budget projections). 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 unavoidable uncertainty, these projections
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.
Table 13–2. LONG-RANGE MODEL RESULTS
(As a percent of GDP)
1995 2005 2015 2025 2035 2045 2055 2065 2075
Receipts ........................................................................................... 18.5 16.8 18.5 19.1 19.6 20.2 20.9 21.5 22.0
Outlays:
Discretionary ................................................................................ 7.4 7.9 5.9 5.9 5.9 5.9 5.9 5.9 5.9
Mandatory:
Social Security ........................................................................ 4.5 4.2 4.4 5.4 6.0 6.0 6.1 6.2 6.4
Medicare .................................................................................. 2.1 2.4 3.3 4.6 6.0 7.0 7.9 9.1 10.4
Medicaid .................................................................................. 1.2 1.5 1.9 2.1 2.3 2.6 2.8 3.0 3.3
Other ........................................................................................ 2.2 2.8 2.0 1.7 1.5 1.3 1.2 1.1 1.0
Subtotal, mandatory ............................................................ 10.1 10.9 11.6 13.8 15.8 16.9 18.0 19.5 21.2
Net Interest .................................................................................. 3.2 1.5 1.9 2.0 3.1 4.8 6.9 9.7 13.3
Total outlays ....................................................................... 20.7 20.3 19.4 21.8 24.8 27.6 30.8 35.1 40.4
Surplus or Deficit (–) ....................................................................... –2.2 –3.5 –0.9 –2.7 –5.2 –7.4 –10.0 –13.6 –18.4
Federal Debt Held by the Public .................................................... 49.2 38.6 35.6 38.1 58.7 90.4 130.0 181.3 249.0
Note: The figures shown in this table for 2015 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 the detailed programmatic estimates in the Budget. It was designed to produce long-range forecasts based on additional
assumptions regarding the 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 Economic and Technical
Assumptions
The quantitative results discussed above are sensitive
to changes in underlying economic and technical assumptions.
Some of the most important of these alternative
economic and technical assumptions and their
effects on the budget outlook are discussed below. All
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 the actuarial projections
in the 2004 Medicare Trustees’ Report, that include
the effects of the Medicare Prescription Drug and Modernization
bill enacted in 2003. 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
will rise faster than GDP throughout the projection
period.
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 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.
210 ANALYTICAL PERSPECTIVES
2000 2010 2020 2030 2040 2050 2060 2070 2080
-15
-10
-5
0
5
Lower Growth
Higher Growth
Chart 13-3. Health Care Cost Alternatives
Surplus(+)/Deficit(-) as a percent of GDP
FY 2006 Budget
Policy Extended
2. Discretionary Spending: The assumption used to
project 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. An alternative
assumption would be to limit the percentage increase
in discretionary spending to the increase in population
plus inflation, in other words, to hold the real per capita
inflation-adjusted level of discretionary spending
constant. This alternative moderates the long-run rise
in the deficit because the shrinkage in discretionary
spending as a share of GDP partially offsets the rise
in entitlement outlays.
211 13. STEWARDSHIP
2000 2010 2020 2030 2040 2050 2060 2070 2080
-15
-10
-5
0
5
Growth with Inflation and
Population
Growth with Nominal GDP
Chart 13-4. Alternative Discretionary
Spending Assumptions
Surplus(+)/Deficit(-) as a percent of GDP
3. Productivity: The rate of future productivity growth
has an important 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 only a delayed effect on outlay
growth even assuming that in the long-run discretionary
outlays rise 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 has increased again since 2000. This increase
in productivity growth is one of the most welcome developments
of the last several years. Although the longrun
growth rate of productivity is inherently uncertain,
it has averaged 2.3 percent since 1948, and the longrun
budget projections assume that real GDP per hour
will also grow at a 2.3 percent annual rate. This is
a cautious assumption. If the recent increase in trend
productivity growth is sustained, it might continue
growing faster than the historical average for some
time to come. 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.
212 ANALYTICAL PERSPECTIVES
2000 2010 2020 2030 2040 2050 2060 2070 2080
-15
-10
-5
0
5
Surplus(+)/Deficit(-) as a percent of GDP
Chart 13-5. Alternative Productivity
Assumptions
FY 2006 Budget
Policy Extended
Higher
Productivity Growth
Lower
Productivity Growth
4. Population: The key assumptions for projecting
long-run demographic developments are fertility, immigration,
and mortality.
• The demographic projections assume that fertility
will average around 1.9 births per woman in the
future, just slightly below the replacement rate
needed to maintain a constant population—2.1
births.
2000 2010 2020 2030 2040 2050 2060 2070 2080
-15
-10
-5
0
5
FY 2006 Budget
Policy Extended
Lower
Fertility
Chart 13-6. Alternative Fertility
Assumptions
Surplus(+)/Deficit(-) as a percent of GDP
Higher
Fertility
213 13. STEWARDSHIP
• 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
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 79.5 years in 2003
to 85.3 years by 2080, and the average male lifespan
is projected to increase from 74.4 years in
2003 to 81.6 years by 2080. A technical panel to
the Social Security Trustees recently reported that
the improvement in longevity might even be greater.
2000 2010 2020 2030 2040 2050 2060 2070 2080
-15
-10
-5
0
5
Longer Life
Expectancy
Surplus(+)/Deficit(-) as a percent of GDP
Chart 13-7. Alternative Mortality
Assumptions
Shorter Life
Expectancy
FY 2006 Budget
Policy Extended
214 ANALYTICAL PERSPECTIVES
2000 2010 2020 2030 2040 2050 2060 2070 2080
-15
-10
-5
0
5
10
Higher Net
Immigration
Surplus(+)/Deficit(-) as a percent of GDP
Chart 13-8. Alternative Immigration
Assumptions
FY 2006 Budget
Policy Extended
Lower Net
Immigration
Zero Net
Immigration
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 persistent
long-run deficits. How best to measure the longrun
imbalance in Social Security is a challenging analytical
question. The imbalance is 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
such a huge financial deficiency that it will be very
difficult for the Government as a whole to maintain
control of the budget without addressing both of these
programs’ financial problems.
215 13. STEWARDSHIP
Social Security: The Long-Range Challenge
Social Security provides retirement security and disability insurance for tens of millions of Americans.
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 within 20 years.
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 over 3 today to just around 2 in 2030, and remain there indefinitely.
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 is estimated to be $11.9 trillion over
an infinite horizon.
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, the average individual born today can expect to receive less than a two percent annual real rate
of return on their payroll taxes (including the employer’s portion, which most economists believe is
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 for
an average worker born in 2000 a 1.7 percent rate of return would turn into a 1.5 percent rate of return
after adjusting revenues to keep the system solvent.
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 President’s Commission to Strengthen Social Security presented various options that
would include personal accounts within the Social Security framework.
216 ANALYTICAL PERSPECTIVES
Medicare: The Long-Range Challenge
Medicare provides health insurance for tens of millions of Americans, including most of the nation’s
seniors. It is composed of two programs: Hospital Insurance (HI) or Part A, which covers medical expenses
relating to hospitalization, and Supplemental Medical Insurance (SMI) or Part B, which pays
for physicians’ services and other related expenditures. Starting in 2006, Medicare will offer a voluntary
prescription drug benefit, Medicare Part D, which is part 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 2019. Looking at
the long run, the Medicare actuaries project a 75-year unfunded promise to Medicare’s HI trust fund of
around $8.5 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 of $28.1 trillion. SMI’s financing gap is
covered by an unlimited tap on general revenues. According to the Medicare Trustees 2004 report,
‘‘When 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 integrated, comprehensive health insurance
coverage. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 took initial
steps to address this problem and to monitor Medicare’s use of general revenues. The Trustees are
now required to include a new, comprehensive fiscal analysis, the Combined Medicare Trust Fund
Analysis. This analysis examines the program as a whole, and signals whether Medicare’s reliance on
general revenue funding is projected to exceed 45 percent of total Medicare expenditures at any point
in the following six years. Current projections indicate that Medicare’s reliance on general revenues
may exceed this threshold as early as 2012. The Administration supports efforts to integrate Medicare’s
financing structure and monitor the program’s reliance on general revenue funding, such as a
unified Medicare trust fund.
217 13. STEWARDSHIP
Table 13–3. ACTUARIAL PRESENT VALUES OF BENEFITS IN EXCESS OF FUTURE TAXES AND PREMIUMS
Over a 75–Year Projection Period as of January 1, in Trillions of Dollars
2000 2001 2002 2003 2004
Social Security
Future benefits less future taxes for those age 15 and over ............................................................. 9.6 10.5 11.2 11.7 12.6
Future benefits less taxes for those age 14 and under and those not yet born .............................. –5.8 –6.3 –6.7 –6.8 –7.3
Net present value for past, present and future participants ........................................................... 3.8 4.2 4.6 4.9 5.2
Medicare
Future benefits less future taxes and premiums for those age 15 and over .................................... 9.9 12.5 12.9 15.0 24.6
Future benefits less taxes and premiums for those age 14 and under and those not yet born ..... –0.7 0.3 0.4 0.8 3.4
Net present value for past, present and future participants ........................................................... 9.2 12.8 13.3 15.8 28.1
Social Security and Medicare
Future benefits less future taxes and premiums for those age 15 and over .................................... ............ 23.0 24.1 26.7 37.2
Future benefits less taxes and premiums for those age 14 and under and not yet born ................ ............ –6.0 –6.3 –6.0 –3.9
Net present value for past, present and future participants ............................................................... ............ 17.0 17.8 20.7 33.3
Addendum:
Actuarial deficiency as a percent of the discounted payroll tax base:
Social Security ..................................................................................................................................... –1.89 –1.86 –1.87 –1.92 –1.89
Medicare HI .......................................................................................................................................... –1.21 –1.97 –2.02 –2.40 –3.12
In Perpetuity as of January 1
2004
Social Security ........................................................................................................................................ ............ ............ ............ ............ 11.9
Medicare .................................................................................................................................................. ............ ............ ............ ............ 61.9
Social Security and Medicare ................................................................................................................ ............ ............ ............ ............ 73.8
The 75-Year Horizon: 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. 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 ‘‘opengroup’’
calculation; 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.
The present value of the Social Security imbalance
over the next 75 years was estimated to be $5.2 trillion
as of January 1, 2004. The comparable estimate for
Medicare was $28.1 trillion. (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
2004 trustees’ reports. These differ in some respects
from the assumptions used for the long-run budget projections
described in the preceding section, but Table
13–3 would still show large imbalances if the budget
assumptions had been used for the calculations.)
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. For example, merely
adding an additional year to the estimating period
would widen the imbalance for Social Security from
$5.2 trillion to $5.3 trillion. For the latest Social Security
and Medicare trustees’ reports, the programs’ actuaries
have also calculated the actuarial imbalances in
perpetuity. See Table 13–3, which shows how much
these distant benefits add to the programs’ imbalances.
The imbalance for Social Security, when estimated
on a perpetuity basis, was $11.9 trillion at the beginning
of 2004. This was the amount that the Government
would have had to raise in the private capital
markets to resolve the program’s imbalance. It was entirely
accounted for by the benefits due to current workers
and beneficiaries. Future participants do not add
to the total, but their contributions do not significantly
reduce it either. If nothing else were to change, the
estimated imbalance would 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 would imply an increase of
approximately $600 billion in 2004 and by growing
amounts with every year that the imbalance remains
unaddressed. The comparable imbalance in Medicare
is even more staggering at $61.9 trillion. Unlike Social
Security, future participants do add significantly to the
Medicare imbalance, but the exact size of the imbalance
is harder to estimate for Medicare because of greater
uncertainty regarding the future growth of medical
costs. If these costs continue to rise faster than GDP,
218 ANALYTICAL PERSPECTIVES
then inevitably the Medicare program will place an
unsustainable burden on the budget.
Social Security: The current deficiency in Social Security
is essentially due to paying past and current participants
more benefits than they have paid or will
pay into the program in 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 $7.3 trillion more
over the next 75 years than they will collect in benefits
over that period. Limiting the horizon at 75 years, however,
prevents a full accounting of the expected benefits
for these future participants, since many future participants
will pay all of their lifetime taxes within the
75-year period, while continuing to receive benefits
after the 75th year, while others will pay some taxes
within the 75-year horizon without receiving any benefits
until much later.
Extending the estimates to perpetuity avoids this distortion
because everyone’s taxes and benefits are fully
included in the calculation and discounted to the
present. Altogether, the far distant benefits, estimated
in perpetuity, add about $6.7 trillion to the imbalance,
which nearly offsets the expected net contribution of
$7.3 trillion from future participants over the next 75
years. In other words, the taxes that future participants
are expected to pay will be 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: Over the next 75 years, benefits due to
current program participants exceed payroll taxes and
premiums by $24.6 trillion in present value. This is
twice as large as the Social Security gap for the same
group. Future participants are also projected to collect
more in benefits than they pay in taxes and premiums,
but over the same time span the gap is much smaller
for them, $3.4 trillion. Even so, this pattern is different
from that for Social Security, where future participants
are net contributors over a 75-year horizon. Extending
the horizon to infinity shows that the benefits due future
participants will eventually exceed projected payroll
tax receipts and premiums by a much larger margin.
The infinite horizon projections shown at the bottom
of Table 13–3 reveal that total Medicare benefits
exceed future taxes and premiums by $61.9 trillion in
present value.
Passage of the Medicare Prescription Drug, Improvement
and Modernization Act added substantially to
Medicare’s actuarial deficiency, as can be seen in the
75-year projections in Table 13–3 comparing 2003 with
2004. The legislation also increased private sector participation
and added new fiscal safeguards which may
help address Medicare’s financial shortfall, but how
large the impact of these changes will be is uncertain
and their effects are not captured in the figures reported
here.
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 projections. 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 the many of the costs associated
with 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
simple fact that a trust fund exists does not mean
that the Government necessarily saved the money recorded
there. The trust fund surpluses could have
added to national saving if debt held by 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
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 even had they been saved.
The Importance of Long-Run Measures in Evaluating
Policy Changes: Consider a proposed policy change in
219 13. STEWARDSHIP
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.
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—NATIONAL WEALTH AND WELFARE
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 to the public, which pays for them
with its taxes, 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 in the private sector,
the Government augments future Federal tax receipts.
However, the fraction of the return on investment that
comes back to the Government in higher taxes is far
less than what a private investor would require before
undertaking a similar investment.
The Federal Government also invests in education
and research and development (R&D). These outlays
contribute to future productivity and are analogous to
an investment 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 typical balance sheet as a Government
asset, even though these investments may also contribute
to future tax receipts.
To show the importance of these kinds of issues,
Table 13–4 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 13–4
can be drawn on by Government to finance future public
activities. The Nation’s wealth sets the ultimate
limit on the resources currently available to the Government.
Data in this table are especially uncertain,
because of the strong assumptions needed to prepare
the estimates.
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—$6.6 trillion. The Federal contribution
is down from 8.8 percent in the mid-1980s and
from 11.5 percent in 1960. Much of this reflects the
relative decline in the stock of defense capital, which
has fallen from around 13 percent of GDP in the mid-
1980s to under 6 percent in 2004.
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, $49.3 trillion in 2004, consisting of $41.6
trillion in private physical capital and $7.8 trillion in
public physical capital (including capital funded by
State and local governments); by comparison, GDP was
around $11.7 trillion in 2004. The Federal Government’s
contribution to this stock of capital includes its
own physical assets of $2.7 trillion plus $1.3 trillion
in accumulated grants to State and local governments
for capital projects. The Federal Government has financed
about one-fourth of 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 13–4 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 16 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 its original cost). This
is more meaningful economically than the historical
cost, and is comparable to the measures of physical
capital 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
220 ANALYTICAL PERSPECTIVES
Table 13–4. NATIONAL WEALTH
(As of the end of the fiscal year, in trillions of 2004 dollars)
1960 1965 1970 1975 1980 1985 1990 1995 2000 2002 2003 2004
ASSETS
Publicly Owned Physical Assets:
Structures and Equipment ..................................................................................... 2.1 2.4 3.0 3.7 3.9 4.1 4.5 4.9 5.6 5.9 6.1 6.1
Federally Owned or Financed ........................................................................... 1.2 1.3 1.4 1.6 1.7 1.9 2.0 2.1 2.1 2.2 2.2 2.3
Federally Owned ........................................................................................... 1.1 1.1 1.1 1.1 1.0 1.2 1.2 1.2 1.1 1.0 1.0 1.1
Grants to State and Local Governments ..................................................... 0.1 0.2 0.3 0.5 0.7 0.8 0.8 0.9 1.1 1.2 1.2 1.2
Funded by State and Local Governments ....................................................... 0.9 1.1 1.5 2.1 2.2 2.2 2.5 2.8 3.5 3.7 3.8 3.8
Other Federal Assets ............................................................................................. 0.7 0.7 0.7 0.9 1.3 1.4 1.2 0.9 1.2 1.2 1.4 1.7
Subtotal ..................................................................................................... 2.8 3.1 3.6 4.5 5.2 5.5 5.6 5.8 6.8 7.2 7.5 7.8
Privately Owned Physical Assets:
Reproducible Assets .............................................................................................. 7.3 8.3 10.2 13.0 16.1 17.5 20.0 22.1 26.7 28.6 29.5 30.5
Residential Structures ........................................................................................ 2.8 3.3 3.9 5.0 6.4 6.8 7.9 8.9 11.0 12.1 12.7 13.3
Nonresidential Plant & Equipment .................................................................... 2.9 3.3 4.1 5.4 6.5 7.4 8.3 9.0 10.9 11.6 11.7 12.0
Inventories .......................................................................................................... 0.7 0.8 0.9 1.2 1.4 1.3 1.4 1.5 1.6 1.5 1.6 1.7
Consumer Durables ........................................................................................... 0.9 1.0 1.3 1.5 1.8 1.9 2.4 2.7 3.1 3.4 3.4 3.6
Land ........................................................................................................................ 2.1 2.5 2.9 3.8 5.8 6.6 6.8 5.2 7.8 8.9 9.5 11.0
Subtotal ..................................................................................................... 9.4 10.9 13.1 16.8 21.9 24.1 26.8 27.3 34.5 37.6 38.9 41.6
Education Capital:
Federally Financed ................................................................................................. 0.1 0.1 0.2 0.3 0.5 0.6 0.8 0.9 1.2 1.3 1.4 1.4
Financed from Other Sources ............................................................................... 6.4 8.2 11.0 13.6 17.8 21.4 27.6 30.9 40.1 42.8 44.1 45.0
Subtotal ..................................................................................................... 6.5 8.3 11.3 14.0 18.3 22.0 28.4 31.8 41.3 44.1 45.5 46.4
Research and Development Capital:
Federally Financed R&D ................................................................................... 0.2 0.4 0.5 0.6 0.6 0.7 0.8 1.0 1.0 1.1 1.1 1.2
R&D Financed from Other Sources .................................................................. 0.1 0.2 0.3 0.4 0.5 0.7 0.9 1.2 1.5 1.7 1.8 1.9
Subtotal ..................................................................................................... 0.3 0.6 0.8 1.0 1.1 1.4 1.7 2.1 2.6 2.8 2.9 3.0
Total Assets .............................................................................................................. 19.0 22.8 28.8 36.3 46.5 53.0 62.6 67.0 85.2 91.7 94.9 98.8
Net Claims of Foreigners on U.S. (+) ....................................................................... –0.1 –0.2 –0.2 –0.1 –0.4 0.1 0.8 1.6 3.0 3.5 4.1 4.5
Net Wealth ................................................................................................................. 19.1 23.0 29.0 36.4 46.9 52.9 61.7 65.4 82.1 88.2 90.8 94.3
ADDENDA:
Per Capita Wealth (thousands of 2004 $) ............................................................ 106.1 118.5 141.5 168.7 205.6 221.7 246.4 244.9 290.4 305.6 311.5 320.5
Ratio of Wealth to GDP (in percent) .................................................................... 703.4 672.4 708.7 785.5 845.8 799.8 797.9 747.9 769.1 803.4 798.7 798.2
Total Federally Funded Capital (trillions 2004 $) ................................................. 2.2 2.5 2.9 3.4 4.1 4.7 4.8 4.9 5.6 5.8 6.2 6.6
Percent of National Wealth ...................................................................... 11.5 10.7 9.9 9.3 8.7 8.8 7.8 7.5 6.8 6.6 6.8 7.0
3 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.
$46.4 trillion in 2004, of which about 3 percent was
financed by the Federal Government. It was almost
equal to the total value of the Nation’s 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
might be two times the estimated value of physical
capital assuming human capital earns 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
training, which is why they are referred to as education
capital rather than human capital. They constitute the
part of 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.3 That stock is estimated to have
been $3.0 trillion in 2004. Although this represents a
large amount of research, it is a relatively small portion
of total National wealth. Of this stock, 39 percent was
funded by the Federal Government.
Liabilities: When considering how much the United
States owes as a Nation, the debts that Americans owe
to one another cancel out. When the debts of one American
are the assets of another American, these debts
are not a net liability of the Nation as a whole. Table
13–4 is intended to show National totals only. Total
debt is important even though it does not appear in
Table 13–4. The amount of debt owed by Americans
to other Americans can exert both positive and negative
effects on the economy. Americans’ willingness and abil221
13. STEWARDSHIP
ity to borrow have helped fuel the current expansion
by supporting consumption and housing purchases. On
the other hand, growing debt would be a risk to future
growth, if the ability to service the high level of debt
were to become impaired.
The only debts that do appear in Table 13–4 are
the debts Americans owe to foreigners for the investments
that foreigners have made here. 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. It amounted to 4.5 percent of total assets in
2004.
Federal debt does not appear explicitly in Table 13–4
because most 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. Currently,
Federal net liabilities, as reported in Table 13–1,
amount to 5.6 percent of net U.S. wealth as shown
in Table 13–4. Prospectively, however, Federal liabilities
are a much larger share of national wealth, as
shown by the long-run projections in Part III.
Trends in National Wealth
The net stock of wealth in the United States at the
end of FY 2004 was almost $100 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 3.0 percent per year,
which paralleled the slowdown in real GDP over this
period. Since 1995 growth has picked up for both net
wealth and real GDP. Net wealth has been growing
at an average rate of 4.2 percent since 1995, about
the same rate as from 1960 to 1973. This is the same
period in which productivity growth accelerated following
a similar slowdown from 1973 to 1995.
The net stock of private nonresidential plant and
equipment accounts for about 29 percent of privately
owned physical assets. It grew 3.3 percent per year
on average from 1960 to 2004. It grew especially rapidly
from 1960 to 1973, at an average rate of 3.9 percent
per year. Since 1973 it has grown more slowly, averaging
around 3.0 percent per year. Unlike most other
categories of wealth accumulation, growth of plant and
equipment over the last eight years accelerated by only
a few tenths of a percentage point compared with
1973–1995. Private plant and equipment grew 2.9 percent
per year on average between 1973 and 1995 and
just 3.2 percent per year from 1995 through 2004. Higher
than average growth in the investment boom of the
late 1990s has been offset by less rapid growth since
then. Meanwhile, privately owned residential structures
and land have all grown much more rapidly in real
value since 1995 than from 1973 to 1995.
The accumulation of education capital has averaged
4.6 percent per year since 1960. It also slowed down
between 1973 and 1995 and has grown somewhat more
rapidly since then. It grew at an average rate of 5.8
percent per year in the 1960s, 1.9 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 4.3 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. Meanwhile,
R&D stocks have grown at an average rate of 4.1 percent
per year since 1995.
Other Federal Influences on Economic Growth
Federal investment decisions, as reflected in Table
13–4, obviously are important, but the Federal Government
also affects wealth in ways that cannot be easily
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 policies on credit
assistance and insurance.
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 13–5 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.
222 ANALYTICAL PERSPECTIVES
TABLE 13–5. ECONOMIC AND SOCIAL INDICATORS
Calendar Years 1960 1965 1970 1975 1980 1985 1990 1995 2000 2002 2003 2004
Economic:
Living Standards:
Real GDP per person (2000
dollars) ................................. 13,840 16,420 18,392 19,961 22,666 25,382 28,429 30,128 34,760 34,953 35,664 36,893
average annual percent
change (5–year trend) .... 1.7 3.5 2.3 1.7 2.6 2.3 2.3 1.2 2.9 1.9 1.7 1.7
Median Income:
All Households (2003 dollars)
................................. N/A N/A 35,832 35,559 37,447 38,510 40,865 40,845 44,853 43,381 43,318 N/A
Married Couple Families
(2003 dollars) .................. 30,903 35,966 43,130 44,789 48,917 50,695 54,431 56,395 63,110 62,657 62,405 N/A
Female Householder, Husband
Absent (2003 dollars)
................................. 15,616 17,485 20,889 20,619 22,000 22,267 23,102 23,596 27,462 29,665 29,307 N/A
Income Share of Lower 60%
of All Households ............... 31.8 32.2 32.3 32.0 31.5 30.0 29.4 28.0 27.3 27.1 26.9 N/A
Poverty Rate (%) (a) ............... 22.2 17.3 12.6 12.3 13.0 14.0 13.5 13.8 11.3 12.1 12.5 N/A
Economic Security:
Civilian Unemployment (%) .... 5.5 4.5 4.9 8.5 7.1 7.2 5.5 5.6 4.0 5.8 6.0 5.5
CPI-U (% Change) .................. 1.7 1.6 5.8 9.1 13.5 3.5 5.4 2.8 3.4 1.6 2.2 2.7
Payroll Employment Increase
Previous 12 Months (millions)
.................................... –0.4 2.9 –0.4 0.4 0.3 2.5 0.3 2.2 1.9 –0.6 –0.1 2.2
Managerial or Professional
Jobs (% of civilian employment)
................................... N/A N/A N/A N/A N/A 27.3 29.2 32.0 33.8 34.6 34.8 34.9
Wealth Creation:
Net National Saving Rate (%
of GDP) (b) ......................... 10.6 12.4 8.3 6.7 7.4 6.2 4.4 4.1 5.9 1.7 1.2 1.6
Innovation:
Patents Issued to U.S. Residents
(thousands) (c) ......... 42.3 54.1 50.6 51.5 41.7 45.1 56.1 68.2 103.6 104.6 105.9 N/A
Multifactor Productivity (average
5 year percent change) 0.9 2.9 0.8 1.1 0.8 0.5 0.5 0.6 1.1 N/A N/A N/A
Nonfarm Output per Hour (average
5 year percent
change) ............................... 1.6 3.4 2.1 2.3 1.1 1.7 1.5 1.5 2.5 3.0 3.4 3.6
Environment:
Air Quality:
Nitrogen Oxide Emissions
(thousand short tons) ..... 18,163 21,297 26,883 26,377 27,079 25,757 25,529 24,956 22,598 21,102 N/A N/A
Sulfur Dioxide Emissions
(thousand short tons) ..... 22,268 26,799 31,218 28,043 25,925 23,307 23,076 18,619 16,347 15,353 N/A N/A
Lead Emissions (thousand
short tons) ....................... N/A N/A 221 160 74 23 5 4 4 N/A N/A N/A
Water Quality:
Population Served by Secondary
Treatment or Better
(mils) .......................... N/A N/A N/A N/A N/A 140 162 174 201 N/A N/A N/A
Social:
Families:
Children Living with Mother
Only (% of all children) .. 9.2 10.2 11.6 16.4 18.6 20.2 21.6 24.0 22.3 23.2 23.2 N/A
Safe Communities:
Violent Crime Rate (per
100,000 population) (d) .. 160.0 199.0 364.0 482.0 597.0 558.1 729.6 684.5 506.5 494.4 475.0 N/A
Murder Rate (per 100,000
population) (d) ................ 5.1 5.1 7.8 9.6 10.2 8.0 9.4 8.2 5.5 5.6 5.7 N/A
Murders (per 100,000 Persons
Age 14 to 17) ........ N/A N/A N/A 4.5 5.9 4.9 9.8 11.0 4.8 4.5 N/A N/A
Health:
Infant Mortality (per 1000
Live Births) (e) ................ 26.0 24.7 20.0 16.1 12.6 10.6 9.2 7.6 6.9 7.0 6.8 6.6
Low Birthweight [<2,500
gms] Babies (%) (e) ....... 7.7 8.3 7.9 7.4 6.8 6.8 7.0 7.3 7.6 7.8 7.9 N/A
Life Expectancy at birth
(years) ............................. 69.7 70.2 70.8 72.6 73.7 74.7 75.4 75.8 77.0 77.3 N/A N/A
223 13. STEWARDSHIP
TABLE 13–5. ECONOMIC AND SOCIAL INDICATORS—Continued
Calendar Years 1960 1965 1970 1975 1980 1985 1990 1995 2000 2002 2003 2004
Cigarette Smokers (% population
18 and older) (f) N/A 41.9 39.2 36.3 33.0 29.9 25.3 24.6 23.2 22.4 21.6 20.1
Learning:
High School Graduates (%
of population 25 and
older) ............................... 44.6 49.0 55.2 62.5 68.6 73.9 77.6 81.7 84.1 84.1 84.6 N/A
College Graduates (% of
population 25 and older) 8.4 9.4 11.0 13.9 17.0 19.4 21.3 23.0 25.6 26.7 27.2 N/A
Participation:
Individual Charitable Giving
per Capita (2000 dollars) 247 296 355 377 410 422 468 444 680 669 N/A N/A
(by presidential election year) (1960) (1964) (1968) (1972) (1976) (1980) (1984) (1988) (1992) (1996) (2000) (2004)
Voting for President (% eligible
population) ............. 62.8 61.9 60.9 55.2 53.5 52.8 53.3 50.3 55.1 49.0 51.2 55.3
(a) The poverty rate does not reflect noncash government transfers such as Medicaid or food stamps.
(b) 2004 through Q3 only.
(c) Preliminary data for 2003.
(d) Not all crimes are reported, and the fraction that go unreported may have varied over time.
(e) Data for 2003–2004 provisional, data for 2004 through June.
(f) Smoking data for 2004 through June.
The indicators shown in Table 13–5 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 in reaching 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.
It is worth noting that, in recent years, many of
the trends in these indicators turned around. The improvement
in economic conditions beginning around
1995 has been widely noted, and there have also been
some significant social improvements. Perhaps, most
notable has been the turnaround in the crime rate.
Since reaching a peak in the early 1990s, violent crime
has fallen 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 early
1960s. The 2001 recession had an effect on some of
these indicators: unemployment rose and real GDP
growth declined for a time. But as the economy recovered
much of the improvement shown in Table 13–5
was preserved. Indeed, productivity growth, the best
indicator of future changes in the standard of living
accelerated. Since 1999, it has increased faster than
in any other five-year period since 1960.
TECHNICAL NOTE: SOURCES OF DATA AND
METHOD OF ESTIMATING
Long-Range Budget Projections
The long-range budget projections are based on longrange
demographic and economic assumptions. A simplified
model of the Federal budget, developed at OMB,
computes the budgetary implications of these assumptions.
Demographic and Economic Assumptions: For the
years 2005-2015, the assumptions are identical to those
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
2004 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 implied by the budget’s economic
assumptions.
224 ANALYTICAL PERSPECTIVES
• CPI inflation holds stable at 2.4 percent per year;
the unemployment rate is constant at 5.1 percent;
and the yield on 10-year Treasury notes is steady
at 5.7 percent.
• Real GDP per hour 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 eventually
reaches 0.2 percent.
• Real GDP growth declines over time with the expected
slowdown in population growth and the increase
in the portion of the population over age
65, which contributes less work effort. Historically,
real GDP has grown at an average yearly rate
of 3.4 percent. In these projections, average real
GDP growth declines to around 2.5 percent per
year.
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 2010, receipts
and outlays follow the budget’s policy projections.
In the long run, receipts are projected using simple
rules of thumb linking income taxes, payroll taxes, excise
taxes, and other receipts to projected tax bases
derived from the economic projections. Discretionary
outlays grow at the rate of growth in nominal GDP.
Social Security is projected by the Social Security actuaries
using these long-range assumptions. Medicare
benefits are projected based on the estimates in the
2004 Medicare trustees’ report, adjusted for differences
in inflation rate and the growth rate in GDP per capita.
Federal pensions are derived from the most recent actuarial
forecasts available at the time the budget is prepared,
repriced using Administration 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: For
1979–2003, the estimates are the actuarial accrued liabilities
as reported in the annual reports for the Civil
Service Retirement System, the Federal Employees Retirement
System, and the Military Retirement System
(adjusted for inflation). Estimates for the years before
1979 are extrapolations. The estimate for 2004 is a
projection. The health insurance liability was estimated
by the program actuaries for 1997–2003, and extrapolated
back for earlier years. Veterans disability compensation
was taken 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.
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 2004.
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 2004 using in225
13. STEWARDSHIP
vestment 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 16
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 year-round, full-time
earnings of 18–24 year olds with selected educational
attainment levels. These year-round earnings are reduced
by 25 percent because students are usually out
of school three months of the year. For high school
students, these adjusted earnings are further reduced
by the unemployment rate for 16–17 year olds; for college
students, by the unemployment rate for 20–24 year
olds. Yearly earnings by age and educational attainment
are from Money Income in the United States, series
P60, published by the Bureau of the Census.
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 industryfinanced
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 13–5
assume that basic research does not depreciate. BEA
also assumes 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.
