Generational Accounting: Some Remarks on an Application to Germany

Abstract

The paper by Bernhard Manzke examines an application of generational accounting to Germany. The paper highlights the limitations of this approach. In particular, dynamic economic feedbacks are ignored; the base year budgetary situation is projected to the future without considering that it may be affected by special factors; reforms which have been introduced but have not produced effects in the base year are ignored. The paper also stresses that generational accounts cannot be considered forecasts of the most likely future developments, rather they are indicators of the need for adjustment. Manzke argues that a gradual and limited increase in the lifetime tax rate for future generations could be considered acceptable from a distributive point of view having in mind the increase in their incomes. However, the large tax increase projected for Germany implies that future income increases would be significantly eroded by taxation. Moreover, the changes in behaviour induced by the greater tax burden would negatively affect economic growth. The paper shows that the intergenerational imbalance in Germany is determined by population ageing. Under a constant age structure assumption, the imbalance would disappear. Estimates taking the expected increases in the contribution rate to the pension system into account point to a lower generational imbalance. Present generations would carry a part of the burden of the adjustment.