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.