The Development of Public Transfer Accounts
in the US: Historical Generational Accounts for
Education, Social Security and Medicare
Antoine Bommier (Toulouse)
Ronald Lee (Berkeley)
Timothy Miller (Berkeley)
Stephane Zuber (Ecole Normale, Paris)
Research funded by NIA: R37-AG11761. Thanks to
Wenlan Qian for research assistance and to David Cutler
for sharing his data and calculations for Medicare. Kent
Smetters, Alan Auerbach, the Berkeley Public Finance
Seminar and the NBER Summer Institute on Economics
of Aging provided valuable comments.
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Plan of talk
• Estimate historical and future generational
accounts for major public transfers in US
– Social Security, Medicare & Public education.
– Generations born 1850 to 2090
• Discuss results in terms of several questions:
– Which generations are net gainers or losers?
– Compare historical patterns to Becker-Murphy theory
– Consider implications of different budget balancing
policies for generational redistribution of income
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
All industrial nations have huge public
transfer programs for pensions and
health care.
• Greedy Geezers?
Intergenerational rip-off?
• Do these programs permit the current elderly to
live well at the unfair expense of today’s youth
and tomorrow’s newborns?
–
–
–
–
Large implicit debts
Very large fiscal imbalances
Low rates of return
Unsustainable programs under current policy
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Becker and Murphy (1988).
• Initially, parents under-invest in children’s
education because their altruism is limited and no
institutions guarantee repayment
• Public education taxes parents to provide more
education for kids (adults worse off)
• Then taxes kids (as adults) to provide pensions
for the elderly (now the parents are better off).
• Thus linked transfers permit efficient investment
in human capital, more rapid economic growth.
• With right timing and size of transfers, possible
that no generation loses.
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Public transfers are a zero sum game across
generations, unless there are efficiency gains
or losses. Here there are two potential gains:
• Educational transfer yields an improved allocation
of investment between physical and human
capital, following Becker-Murphy, if initially the
rate of return to educ > to capital
• Possible spillover effects of educated population
lead to faster growth of per capita income.
• However, deadweight losses from higher taxes
work in opposite direction
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Net Present Value of life time benefits minus taxes (NPV) by
generation for upward transfers versus downward transfers
First gens
Upward, e.g. Soc Sec,
Medicare
NPV ($)
Steady state < 0
Downward, e.g. Educ
NPV ($)
Steady state > 0
First gens
Year of birth of generation
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Factors influencing the generational accounts:
Net Present Value trajectory (NPV)
• Changes in terms of transfer programs.
– Windfall gains and losses at startup
– Similar whenever taxes or benefits change, e.g. introduction of
drug benefit, raising pay roll tax
• Changes in demography
– Population aging
– Baby boom, baby bust
– Increasing longevity
• NPV in steady state mature system
– Relative size of upward and downward transfers
– Dollar of education is worth 12 dollars of pensions at 50%
survival & 3% discount
– Discount rate relative to growth rate of GDP
– NPV can be positive or negative
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Public Education Benefits Received by Age and
Time (2004 US $) per Native Born Individual
Age
Time (Calendar Year)
1850 1851 …
2004
…
2200
0
1
2
…
109
110
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Calculating NPV for generation
born in year t
• (x,s) = tax paid at age x in year s
• β(x,s) = benefit received at age x in year s
• l(x,t+x) = proportion of births in year t surviving to
age x in year t+x.
• NPV(t)= ∑e-rxl(x,t+x)[β(x,s+x) - (x,s+x)]
• r=.03 in baseline. Also try .02, .05. Also historical,
varying year to year.
• NPV can be calculated from any age; here mostly at
birth, i.e. age 0.
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Historical data and methods
• Data sources
– IPUMS
– Administrative data
– National Accounts control totals
• Methods for imputation
– Estimate age profiles of taxes and benefits
– Adjust height of profiles to match control totals
– Assume balanced budget for education
• Other accounts directly from data
• Discount at constant 3% for baseline; sensitivity
tests (2%, 5%, historical 6 mo treasury).
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Historical data and methods (cont.)
• For education, IPUMS and Admin data
– costs driven by enrollment rates, number of kids, and
costs per pupil at each level
– property taxes are set to generate revenue equal to
costs
• For Social Security and Medicare, we use actual
historical data on taxes and benefits.
• For budget balancing etc. we use actual
population by age each year, with immigrants.
• NPV calculations are for native born.
• Discount at 3% for baseline; sensitivity tests
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Projections
• Demography – standard (Soc Sec assumps)
• Taxes and benefits –we match official assumptions and
rules for Social Security and Medicare
• Health expenditures per enrollee rise 1% faster than
prod growth throughout 21st century
• Productivity growth at 1.6%, covered wages at 1.4%.
• For education, assume costs per student rises with
productivity growth
Projections are reasonably consistent with
– Official US projections
– recent Gokhale-Smetters fiscal imbalance
– recent generational accounts for US (Gokhale et al, 2000)
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Alternative policy scenarios:
• Current policies would lead to ballooning
deficits, and cannot be sustained.
• We assume imbalances will be corrected,
in one of three alternate ways (once trust
funds exhausted):
– Raise taxes to meet cost of benefits.
– Cut benefits to meet tax revenues.
– OUR BASELINE: Combine tax and benefit
adjustments 50-50.
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Development of US public transfer system,
1850 – 2000, and projected to 2050
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
The changing age profiles of taxes and benefits in the US:
1900, 1930 and 2000
1850
0
% per
capita
gdp
80
1930
2000
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
The effects of different policy scenarios.
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
“Total Education Rate”—sum over age of enrollment rates
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Putting it all together
• Combine NPV for upward transfers
– Soc Sec
– Medicare
• With downward transfers: Pub Ed
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Generational redistribution is
opposite to our expectations
• All born 1880-1929 are net gainers, as expected.
• But also: All generations born from 1948 to 2052 are net
gainers from transfer system, not expected.
– Current children and young adults are all net gainers
– All their future children and even grandchildren are net gainers.
• Those born 1977 to 2001 all have bigger proportionate
gains than any other generation, including 1880-1929
who got windfall Soc Sec.
– peak 5.3% in 1914-1915
– peak 5.8% for 1982-1994
• Current ages 57 to 74 are all net losers– but only slightly
(<1%); born 1930-1947.
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Roughly consistent with BeckerMurphy theory
• NPVs from upward transfers (pensions and elder
health care) and downward transfers (public
education) are mirror images.
• Combined NPV is closer to zero than its
components.
• Could be Pareto improving (intergenerationally),
if efficiency gains of public education outweigh
deadweight losses.
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Now look at generational consequences of
different budget balancing policies and their
political implications.
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Everyone alive today is better off if we just
raise taxes to balance budget rather than
cutting benefits.
• Includes newborns today, who gain 30K, and all
babies born through 2040
• 25 year olds gain 80K
• 65 year olds gain 60K
For those born after 2040, this policy is increasingly
catastrophic, but no voters for many decades will
have self interest in cutting benefits.
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Some Sensitivity Tests on Discount Rates–
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Remaining Tasks
• Some earlier public pension programs
need to be added to the accounts.
• Adding other transfers (SSI, Medicaid,
AFDC, Food Stamps, EITC etc.) may alter
the outcome, although we don’t expect so.
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
Conclusions
• Windfall gains for early Soc Sec and Medicare
generations are halved by their losses through
education
• Losses through education for generations born 1930
to 1960 are virtually eliminated by gains through Soc
Sec and Medicare.
• Broadly consistent with Becker-Murphy (which does
not mean Becker-Murphy is right explanation).
• Even slight spillover effect on economic growth would
make all generations after 1880 gainers.
• Picture is very different than expected!
• current and future young are big winners
• current elderly are losers.
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
USA and France: A Comparison (Stephane Zuber)
15
10
5
0
NPVs for the US
-5
-10
Education
Public Pensions + Health Benefits
-15
Combined
18
50
18
60
18
70
18
80
18
90
19
00
19
10
19
20
19
30
19
40
19
50
19
60
19
70
19
80
19
90
20
00
20
10
20
20
20
30
20
40
20
50
20
60
20
70
20
80
20
90
-20
Year of Birth
15
10
5
0
NPVs for France
-5
Education
-10
Public Pensions + Health Benefits
Combined
-15
18
50
18
60
18
70
18
80
18
90
19
00
19
10
19
20
19
30
19
40
19
50
19
60
19
70
19
80
19
90
20
00
20
10
20
20
20
30
20
40
20
50
20
60
20
70
20
80
20
90
-20
Year of Birth
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley
18
50
18
60
18
70
18
80
18
90
19
00
19
10
19
20
19
30
19
40
19
50
19
60
19
70
19
80
19
90
20
00
20
10
20
20
20
30
20
40
20
50
20
60
20
70
20
80
20
90
21
00
21
10
21
20
21
30
21
40
21
50
21
60
21
70
21
80
21
90
22
00
18
5
18 0
6
18 0
7
18 0
8
18 0
9
19 0
0
19 0
1
19 0
2
19 0
3
19 0
4
19 0
5
19 0
6
19 0
7
19 0
8
19 0
9
20 0
0
20 0
1
20 0
2
20 0
3
20 0
4
20 0
5
20 0
6
20 0
7
20 0
8
20 0
9
21 0
0
21 0
1
21 0
2
21 0
3
21 0
4
21 0
5
21 0
6
21 0
7
21 0
8
21 0
9
22 0
00
USA and France: Accounting for the differences (1)
35
30
25
20
15
Education
10
10
Spending as Percent of GDP:
US
Social Security
Medicare
5
0
Year
35
30
25
20
15
Education
Spending as Percent of GDP:
France
Public Pensions
Health Benefits
5
0
Year
From Bommier, Lee, Miller and Zuber, Univ CA, Berkeley