The Costs to Different Generations of Policies That Close the Fiscal Gap: Working Paper 2015-10
This working paper analyzes five stylized changes in federal fiscal policy that would close a fiscal gap of 1.8 percent of GDP, and measures the costs that those policy changes would impose on different generations.
By Felix Reichling (CBO) and Shinichi Nishiyama (formerly an employee of CBO)
Based on the projections in CBO’s The 2014 Long-Term Budget Outlook, we analyze five stylized changes in federal fiscal policy that would close a fiscal gap of 1.8 percent of GDP by immediately and permanently increasing tax revenues or decreasing spending. Those policy changes would stabilize the debt-to-GDP ratio at the 2014 level of 74 percent. We conduct our analysis using a heterogeneous-agent overlapping-generations model of the U.S. economy and examine how the stylized policy changes would affect the economy over time and the well-being of different generations. Importantly, the significant benefits of stabilizing the debt-to-GDP ratio do not depend on the specific policy used. As a result, we focus on measuring the costs that the stylized policies would impose on different generations. We find that for households containing working-age adults or retirees, tax increases are less costly than benefit cuts, whereas for future generations, cuts to Social Security and Medicare benefits are the least costly of the options we analyze. The choice of policy has a relatively small effect on the economy’s output in the long run, and a policy’s effect on output is a poor predictor of how its implementation would affect households’ well-being.