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VI Generational Accounts for Sweden

Desmond Lachman, Ramana Ramaswamy, J. Green, Robert Hagemann, and Adam Bennett
Published Date:
October 1995
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Robert Hagemann

This section provides an alternative perspective on the stance of fiscal policy in Sweden. In particular, it utilizes generational accounting to assess in part the extent to which policies adopted in November 1994 have reduced the fiscal burden imposed on future taxpayers.1 Generational accounts provide estimates of the remaining lifetime net taxes of persons born at different times under certain economic and demographic assumptions. Although still a subject of intense debate, generational accounting has received growing attention from fiscal analysts and policymakers in recent years.2 The Lindbeck Commission (Lindbeck and others (1994)) recommended that generational accounts be calculated for Sweden. This section provides a brief description of generational accounting, which is followed by estimates of generational accounts in Sweden under policies in effect prior to the recent elections, as well as estimates that reflect implementation of a number of policies announced by the new Government.

Generational Accounting in Brief

Some analysts challenge the relevance of the traditional government budget balance as the most appropriate measure of the government’s impact on economic agents.3 Rather than focusing on the traditional budget, they argue that what should in principle matter is whether the lifetime budget constraints of households currently alive are augmented or reduced by the government’s fiscal policies. The cash deficit provides little information regarding this question. In contrast, generational accounting, by allowing for the cohort-specific incidence of spending and taxing, helps to assess the potential impact of fiscal policies on household budgets, under admittedly strained assumptions about consumer behavior.4

The starting point of generational accounting is that all individuals, both those alive today and members of future generations, face, under current policy, future streams of taxes and transfers. A generational account simply reflects the present value of the expected net tax payments of an individual today, where “net taxes” refer to taxes paid less transfers received. Generational accounts incorporate explicitly the intertemporal budget constraint of the government, which requires that the present value of current and future government consumption is covered by the sum of the net tax payments of all current and future generations plus the existing government’s net wealth.5

The key question that generational accounting addresses is how much future generations are going to pay in net taxes compared with payments by generations alive today. Indeed, what differentiates generational accounting from the traditional budget deficit is its emphasis on the intertemporal distribution of fiscal burdens. The sum of the present value of the net taxes of all generations alive today equals the new net debt that will accumulate over time. Given an operational assumption typically adopted in generational accounting that repayment of government debt is spread across future generations, it is straightforward to derive an estimate of the accounts of these future generations as well.

Formally, generational accounts are derived from the government’s intertemporal budget constraint, which says that at any time t:

Present value of net tax payments of current generations + Present value of net tax payments of all future generations + Government net wealth at time t = Present value of government consumption

or, symbolically:

The first term on the left-hand side of equation (1) is the present value at time t of the net tax payments that all generations alive at that time are contributing to the budget and can be expected to contribute in the future;s = 0 refers to the two generations born this year, s = 1 the two generations born last year, s = 2 to those born two years ago, and so on. The maximum age is D. The second term shows the present value at time t of the net tax payments that all generations born in the future (that is, at time t + 1, t + 2, and so on) may be expected to pay.6Wtg denotes government net financial wealth at time t. Gs is government consumption in year s (starting again at t). All future flows are discounted to year t at the pretax rate of rj.

The formulation of equation (1) makes the implications of the government budget constraint clear. For example, a tax reform that lowers the overall tax burden for all living generations will (holding the right-hand side constant) ultimately increase the tax burden on future generations.

Application to Sweden

Generational accounts calculated for Sweden based on tax and spending policies that were in place prior to the elections in September 1994 are discussed below. The data and the assumptions used in making the calculations are first described and then the estimates are presented.

Definitions and Assumptions Underlying the Estimates

The construction of generational accounts requires estimation of three basic elements: (1) the present value of net tax payments (that is, generational accounts) of living generations; (2) government net wealth in the base year; and (3) the present value of future government consumption.

Net Tax Payments of Living Generations

The most important ingredients in the calculation of generational accounts of living generations are net tax payments (taxes paid minus transfers received). Following Auerbach, Gokhale, and Kotlikoff (1994), average levels of benefit payments and taxation by age and sex group have been used.7 Several different taxes have been distinguished: taxes on personal income paid to the central and local governments, property taxes, wealth and capital income taxes, taxes on income from self-employment, and payroll taxes. Value-added and excise taxes were distributed using age-consumption patterns from the United States, lacking such information for Sweden. Per capita transfer payments were available for five items: pensions, sick pay, labor market assistance, parental allowances, and educational grants.8 Data on child allowances, the accommodation allowance, and social assistance were available only by household, and had to be distributed across single age and sex groups. For the years beyond 1999, it is assumed that taxes and transfers increase at the same rate as productivity growth.

Government Net Wealth and Government Consumption

Government net wealth consists of the difference between government financial assets and the gross debt of the general government. In 1991 (the base year of the analysis), the public sector net wealth is estimated to have reached about SKr 68 billion, or 5 percent of GDP.9 This figure comprises the consolidated debt of the central and local governments and the social security sector.

Estimates of the present value of government consumption are based on actual spending in the years 1991-93, on estimates for 1994, and on the medium-term projections of the Ministry of Finance. For purposes of the present analysis, consumption of the general government includes subsidies that are not paid to households, as well as public investment. Beyond 1999, it is assumed that total expenditures on these items increase in line with productivity growth.

Key Assumptions

Productivity growth. The rate of productivity growth is a critical parameter in generational accounting. Sweden, like many other industrial countries, has experienced a pronounced drop in the rate of growth of labor productivity in recent years. On average, labor productivity grew by 1.1 percent annually between 1970 and 1993, compared with 4 percent between 1950 and 1970 (Lindbeck and others (1994)). For present purposes, the average annual growth of productivity is assumed to remain constant at 1.5 percent a year over the long run.

Discount rate. The choice of discount rate is also fundamental to generational accounting. In the present study, it has been assumed that a rate that is midway between the average yield on government bonds and the real rate of return to private sector capital provides a reasonable indicator of society’s trade-off between present and future consumption. On this basis, a real discount rate of 4.65 percent has been used, although alternative estimates using 4 percent and 6 percent are also provided.10


Base Case

The base case scenario reflects the policies in place in September 1994. The results from this scenario are presented in Table 6-1. The accounts are shown in U.S. dollars to facilitate comparisons with estimates for other countries (Table 6-2). A negative figure means that the generation is projected to receive more in transfers than it will pay in taxes over its remaining lifetime. Conversely, a positive figure implies that the generation will pay more in taxes than it will receive in transfers.

Table 6-1.Generational Accounts Under the Base Case Scenario

(In thousands of US. dollars)1

Present Value of Net Tax Payments
Age of Generation in 1991MaleFemale
Future generations209.7124.7
Percentage difference from account of age zero generation37.037.0
Source: IMF staff estimates.

Based on 1.5 percent per annum rate of productivity growth and discount rate of 4.65 percent.

Source: IMF staff estimates.

Based on 1.5 percent per annum rate of productivity growth and discount rate of 4.65 percent.

Table 6-2.Selected Countries: Generational Accounts(In thousands of U.S. dollars)
Age of Generation in Base YearItaly (1990)1Norway (1992)2United States (1993)3United States (1992, with reform)4
Future generations259.556.3305.413.1202.5113.8144.779.7
Percentage difference from account of age zero generation2992991351351651657474
Base case assumption5 (in percent)5,1.54,0.756,0.756,0.75

United States (1994). The figures include the effects of the Omnibus Budget Reconciliation Act of 1993 and the expected impact of a health care system if implemented as proposed by the U.S. Administration.

First figure, real discount rate; second figure, productivity growth.

United States (1994). The figures include the effects of the Omnibus Budget Reconciliation Act of 1993 and the expected impact of a health care system if implemented as proposed by the U.S. Administration.

First figure, real discount rate; second figure, productivity growth.

Males aged 60 years and over and females 55 years and older clearly benefit from the current tax and transfer system, as reflected in a negative present value of future net taxes (Table 6-1). On the other hand, the accounts are substantially positive for newborns, and they rise steadily, reaching their maximum at around the 30-year-old cohort. In general, the accounts are lower for women than for men. This is largely due to the fact that, although high by international standards, the labor force participation rates of women are lower than those of men (so that lifetime gross taxes are lower), while their pensions are roughly comparable to those of men. In other words, there are intragenerational transfers from men to women implicit in the pension system. Finally, generations yet to be born are estimated to face substantial net lifetime tax bills, estimated at US$209,700 for men and US$124,700 for women, notwithstanding the budget consolidation measures already adopted by the previous Government.

These results are very similar to generational accounts estimated for other countries (Table 6-2). The Swedish results exhibit the same general pattern as observed in Italy, Norway, and the United States. Thus, the ages at which these accounts reach their maximum, as well as the ages at which they turn negative, are roughly the same. However, the divergence of the accounts of men and women is smaller in Sweden than elsewhere.

In view of the potential sensitivity of the estimates to different assumptions regarding the rate of productivity growth and the discount rate, Table 6-3 reports the estimated accounts for males under different assumptions.11 Compared with the baseline scenario, the burden imposed on future generations varies substantially depending upon the assumptions made. In general, the higher the discount rate (for a given rate of productivity growth), the lower the generational accounts for future generations. This reflects, of course, the fact that future flows are given much less importance in this case. On the other hand, rising productivity leads to increasing tax payments by future generations, since government consumption also rises with higher productivity.

Table 6-3.Generational Accounts of Males Under Alternative Productivity Growth and Discount Rates(In thousands of U.S. dollars)
Discount Rate1Productivity Growth2
Age4%4.65%6.0%1%1 ½%3%
Future generations245.0209.7160.2194.2209.7273.7
Percentage difference from account of age zero generation28.436.760.344.236.718.6
Source: IMF staff estimates.

Assumes a productivity growth rate of 1 ½ percent.

Assumes a discount rate of 4.65 percent.

Source: IMF staff estimates.

Assumes a productivity growth rate of 1 ½ percent.

Assumes a discount rate of 4.65 percent.

Recent Policy Changes

As noted earlier, generational accounting is especially useful in assessing the impact of changes in tax and transfer policies when these affect in different ways persons of different ages. Thus, accounts have also been calculated incorporating a number of the policies introduced by the Government in Sweden during 1994. These include (1) tax measures, including increased marginal tax rates, reduced bracket indexation, and reintroduction of capital gains and dividend taxation, with projected revenue yields (all in 1995 prices) of SKr 14.1 billion in 1995, SKr 28.6 billion in 1996, SKr 34.8 billion in 1997, and SKr 42.5 billion in 1998; (2) reductions in transfer payments (all in 1995 prices) of SKr 9.9 billion in 1995, SKr 15.7 billion in 1996, SKr 21.9 billion in 1997, and SKr 25.5 billion in 1998, allocated to the specific categories for which estimated spending reductions were provided by the Government in its November 2, 1994 Economic Policy Statement; (3) unspecified additional spending cuts (announced in January 1995) of SKr 21.7 billion spread over the period 1995-98 that have been allocated to all non-pension spending; and (4) reduced pension outlays over the long term due to the pension reform. As in the base case calculations, all variables are assumed to increase at a 1.5 percent rate of growth of productivity after 1999, except for old-age pensions, for which projections to 2050 were provided by the Ministry of Health and Social Affairs.12

The results are presented in Table 6-4, while Chart 6-1 shows the difference between the generational accounts of each age group in the policy scenario and the accounts for the same age group in the base case scenario. As can be seen, the policies adopted in November 1994, if fully implemented and in combination with the effects of the pension reform, could improve significantly the generational accounts of future generations. Compared with the base case, the net taxes of future generations would decline substantially. The improvement in the generational accounts of unborn cohorts comes at the expense, of course, of reduced net lifetime transfers to currently living generations plus reduced government consumption. In fact, if sustained, the policies would over the very long run result in a lower net tax burden on future generations than on the very young today, albeit still a very large one. The size of the impact varies both by sex and age given the composition of the measures that have been taken, as well as the length of time remaining in the lifetimes of each cohort.

Table 6-4.Generational Accounts Under the Policy Scenario, Including Impact of Pension Reform

(In thousands of U.S. dollars)1

Age of Generation in 1991Present Value of Net Tax Payments
Future generations141.589.2
Percentage difference from account of age zero generation-23.0-23.0
Source: IMF staff estimates.

Based on 1.5 percent per annum rate of productivity growth and discount rate of 4.65 percent.

Source: IMF staff estimates.

Based on 1.5 percent per annum rate of productivity growth and discount rate of 4.65 percent.

Chart 6-1.Impact of Consolidation Measures on Generational Accounts

(In thousands of U.S. dollars)

Source: IMF staff estimates.


For a more elaborate presentation of this application to Sweden, see Hagemann and John (1995). For critical reviews of generational accounting, see Haveman (1994) and Muellbauer (1992).


Generational accounting was introduced by Auerbach, Gokhale, and Kotlikoff (1991, 1992, and 1994). Generational ac-counts have been regularly published as part of the annual budget of the U.S. Government. Estimates have been made for Italy and Norway, and the Government of New Zealand recently decided to make similar calculations.


Kotlikoff (1992), pp. 123-24, argues that the main virtue of generational accounting is in providing answers to the following questions: “First, if we follow current policy and we do not extract more from those generations today, including those who have just been born, how will the treatment of future generations compare with that of current newborns? Second, if we do change policy, which of the different generations now alive and coming in the future will gain and which will lose (and by how much)?” and “Focusing on the differences in the accounts either across current and future newborns or for the same generation but across policies is the ‘appropriate use’ of generational accounts.” Despite the enthusiasm with which generational accounting is promoted, there is no consensus about replacing the traditional budget deficit with generational accounting. However, many commentators recognize its usefulness as a complement to the traditional budget deficit.


It is frequently argued that the interpretation of generational accounts requires acceptance of the life-cycle model of consumer behavior.


A “generation” is defined as a group of individuals of the same age and the same sex. “Currently living” generations consist of individuals who are alive in the base year, that is, the discounting year. “Future” generations comprise all individuals born after that time. A “cohort” consists of two generations, that is, all males and females of the same age.


The first and second terms of equation (1) are defined more explicitly as:

where m = male, F = female, and life expectancy D is assumed to be constant. Ts,kz is the net tax payment in time s of the representative of the generation born at time k. Ps,kz denotes the number of members of the generation born at k and still alive at s. For generations born up to year t, summation starts at time t; for generations born later, the summation starts with the year k (the year of birth). All figures are in current values, discounted at the rate rj.


Data from the 1991 income distribution survey (IDS) were used to determine per capita transfers and taxes by age and sex in 1991, whereas the 1992 survey was used for all subsequent years. In each year 1991 to 1994, per capita taxes and transfers were calibrated to yield actual spending and revenues, thus incorporating policies implemented during the interim period. For 1995-99, medium-term projections of transfers and taxes were provided by the Ministry of Finance, and these were distributed across the population by age and sex in each year according to the age and sex pattern observed in the 1992 IDS. These projections reflect policies contained in the April 1994 Economic Policy Statement of the Government. For population projections, the analysis uses the most recent population projections to 2050 of the Central Swedish Statistical Office. For subsequent years, the study relies on World Bank projections to the year 2190.


Only transfers paid on a cash basis have been included in the analysis. No attempt has been made to impute the cash-equivalents of benefits in kind (education, child care, subsidized theater, and so on). These expenditures are included in government consumption.


Since then, the position has shifted to net indebtedness with net debt equal to about 18 percent of GDP in 1993. This subsequent increase is implicit in the tax and spending levels observed in 1991-93.


For Sweden, the average real rate of return on ten-year government bonds has been around 4.1 percent. For the rate of return to private sector capital, the 1980-93 average return to industrial bonds of 5.2 percent was used.


Similar results are obtained for accounts of females.


The projected pension outlays are based on the assumption that the “norm” (see Section V) would be set at 1.5 percent. No final decision has been reached yet, however. In the calculations, the pensions beyond 2050 are assumed to increase at the 1.5 percent rate of productivity growth.

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