DEFINITION of 'Generational Accounting'

Generational accounting is a forecasting method that considers how current fiscal policies affect future generations. Generational accounting analyzes whether government spending and tax programs that benefit current members of society will produce an unfair tax obligation for future generations. The purpose of this accounting style is to achieve generational balance, where current and future generations have equivalent lifetime net tax rates, which allows for fiscal sustainability.

BREAKING DOWN 'Generational Accounting'

The government's tax programs and fiscal policy can be adjusted to provide more care and benefits for certain members of a country's population. However, focusing programs on a specific group forces other generations to pay the costs, essentially imposing a taxation without representation. For example, spending on retirement programs for the elderly requires that younger generations foot the bill.

This concept can be extended to future generations. Let's say the government were to lavishly spend on programs to benefit its current population in the short term. The debt obligations could be so large, that they could not be repaid by the current population in an average lifetime. In this case, the debt would be passed on to the next generation of citizens, who must then pay for benefits they never received. Generational accounting aims to eliminate policies that negatively impact future generations.

Generational Accounting Taken Seriously?

Ridiculous question - the answer is no. There may be a few principled lawmakers here or there, but the name of the game is to stay in power. Therefore, a majority of legislators will ignore unbiased estimates of future debt dangers and vote expediently to kick the can down the road. They get to keep their jobs and let the next set of legislators deal with ugly budget issues. If they are still in office when budgets are up for renewal, they will do more of the same. Many city and state pension plans are shockingly underfunded thanks to officials who promised their constituents (i.e., their voters) amounts of money in retirement that will not be there, bar a miracle. The hard-working men and women who undertake generational accounting can run financial models that show the impact of budget policies and pass along their analyses to legislative chambers. A majority will not care. At the national level, critics of the Tax Cuts and Jobs Act of 2017 point to the trillions of dollars of additional federal debt that awaits future Americans. Some lawmakers from the ruling party protested at first, but in order to keep their seats they had to eventually vote with the majority.

RELATED TERMS
  1. Generation Gap

    A generation gap is the difference found between members of different ...
  2. Budget

    A budget is an estimation of revenue and expenses over a specified ...
  3. Retirement Money Market Account

    A retirement money market account is a money market account that ...
  4. Policy Mix

    The combination of fiscal and monetary policy a nation's policymakers ...
  5. Trumponomics

    Trumponomics is a term for the economic policies of President ...
  6. Sandwich Generation

    The sandwich generation refers to middle-aged individuals who ...
Related Articles
  1. Personal Finance

    The Generational Debt Gap

    Are future generations in trouble when it comes to how much debt they have? We compare debt between other age groups to find out.
  2. Insights

    Successful Ways That Governments Reduce Federal Debt

    Governments have many options when trying to reduce debt, and throughout history some of them have actually worked.
  3. Insights

    How Debt Limits A Country's Options

    While debt is fundamentally necessary to the operation of a national government, it can also be limiting and dangerous.
  4. Insights

    The Current State of the U.S. Debt

    Discover the current state of U.S. national debt, whether it's increasing or decreasing, and what is projected for the next 10 years.
  5. Trading

    The Power of Program Trades

    Learn how programs make up a significant portion of the volume traded each day.
  6. Financial Advisor

    The Generation Gap

    Studies suggest that young workers may not be able to retire comfortably - or at all.
  7. Personal Finance

    Accountant: Job Description & Average Salary

    Discover what the job description of an accountant entails, along with education and training, salary and skills necessary for success.
  8. Investing

    The Best Investment Accounts for Young Investors

    What are the best investment accounts for young investors? A few types to consider.
  9. Retirement

    Should Social Security Be Privatized?

    The idea of controlling your own retirement money is one that continues to hold appeal for a large segment of voters.
  10. Taxes

    Parties For Taxes: Republicans Vs. Democrats

    Read about the political parties' differences in tax ideology, and how it can affect your paycheck.
RELATED FAQS
  1. Who sets fiscal policy, the president or congress?

    Discover how fiscal policy is set in the United States, including how all three branches of government can affect a given ... Read Answer >>
  2. What's the difference between monetary policy and fiscal policy?

    Discover the distinctions between these two tools designed to influence national economies. Read Answer >>
  3. What are the pros and cons of operating on a balanced-budget?

    Take a brief look at some of the major arguments for and against balanced budgets for the U.S. government, the largest debtor ... Read Answer >>
  4. Can state and local governments in the US run fiscal deficits?

    Discover why most state and local governments do not – or cannot – run fiscal deficits in the same manner as the U.S. federal ... Read Answer >>
Hot Definitions
  1. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  2. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  3. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  4. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  5. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  6. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
Trading Center