FIs = PV_Ls,c — PV_Fs,c — NWs,c (3.3)
Here, the subscript s indicates a generic “social security” program that conforms to the
financing conditions described above.
Generational imbalance (GI) measures the contribution of past and living generations to
FI. The motivation for the GI measure is the same as that for generational accounting—to
analyze the intergenerational redistribution of resources that current fiscal policies would
bring about if they were maintained throughout the lifetimes of current generations. GI
represents the simplest decomposition of FI. It is alternatively called the “closed-group
unfunded obligation” where the term “closed-group” refers to past and living generations.
That is, GI is derived by subtracting the government’s total unfunded obligations under
current policies on account of future generations from FI.21 However, whereas FI can be
calculated for the entire government and for subprograms having the features described
earlier, the GI measure can be easily calculated only for such subprograms.22
The significance and policy relevance of GI measures are not well appreciated, even
among budget practitioners. Many believe that GI is similar to the unfunded accrued
obligation concept and is relevant only to “fully funded” pension programs - such as
those offered by private employers.23 However, the GI measure is also relevant and useful
within the context of a “pay-as-you-go” public pension system. It indicates the amount of
total outstanding obligations arising under current policies on account of past and living
generations. Obligations arising from past generations’ transactions with the government
and from the past transactions of living generations are incorporated in the government’s
accumulated net financial assets. Also included in GI are future net payment obligations
under current policies triggered by past transactions involving living generations and
future payment obligations that would be triggered under current policies by future events
involving living generations.
The size of GI reveals the amount of benefits living generations may, under current
policies, expect to receive from a government program in excess of their past and future
expected taxes or contributions toward funding them. This measure remains policy-
relevant because it represents a net (expected) wealth gain for living generations. Not
only are such fiscal-policy-induced wealth gains directly policy-relevant, they also hold
the potential to influence those generations’ economic choices - their consumption and
labor force participation. Hence, analyzing the potential behavioral implications of the
current fiscal stance requires a measure of the public provision of net benefits to living
21
22
23
The FI and GI concepts correspond to the accounting concepts of open-group and closed-group
unfunded obligations, respectively. The open-group unfunded obligation refers to government
obligations to all individuals regardless of their cohort affiliation (that is, their birth dates) - whether
in the past or in the (infinite) future. Limited-horizon open-group obligations are also calculated by
excluding the net obligations arising after a specific (future) date. Closed-group obligation measures
include the net obligations to a subset of individuals - for example, those born before a certain date.
However, all past net payments and future net obligations to such individuals are included in the
calculation
Calculating GI for the entire government would require making strong assumptions about the
intergenerational distribution of benefits from government public goods and services provision -
such as defense, international diplomacy, domestic security, judicial services, and so on.
Private sector firms that offer pension benefits to employees may be subject to regulations about
funding adequacy. That requires measurement of existing funding levels for comparison with
regulated thresholds, and accrual accounting is normally used to provide the benchmark for 100
percent funding.
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