Fiscal and Generational Imbalances: An Update

This paper provides an update of the US fiscal and generational imbalances that we originally calculated in Gokhale and Smetters (2003) and presents the calculations in several alternative ways. We find that a lot has changed in just a few years. In particular, the nation's fiscal imbalance has grown from around $44 trillion as of fiscal year-end 2002 to about $63 trillion, mostly due to the recent adoption of the prescription drug bill (Medicare, Part D). The imbalance also grows by more than $1.5 trillion (in inflation adjusted terms) each year that action is not taken to reduce it. This imbalance now equals about 8 percent of all future gross domestic product (GDP) and it could, in theory, be eliminated by more than doubling the employer-employee payroll tax from 15.3 percent of wages to over 32 percent immediately and forever—assuming, quite critically, no reduction in labor supply or national saving and capital formation. Massive cuts in government spending would also be required to achieve fiscal balance: the total federal fiscal imbalance now equals 77.8 percent of non-Social Security and non-Medicare outlays.