3.2 Public Asset-Based Reallocations


Public asset-based reallocations summarize the inflows to and outflows from age groups that are a consequence of public asset transactions. Asset-based reallocations consist of two distinct flows – public asset income (or loss) and public saving. Public asset income (if positive) is an inflow for “taxpayers” while public saving (if positive) is an outflow for “taxpayers”. Thus, public asset-based reallocations is calculated as public asset income less public saving.

Public asset-based reallocations can play a role that is very similar to private asset-based reallocations. A public pension program is an obvious example. The needs of future retirees can be met through transfers as in PAYGO systems. Or governments can fund pension programs by accumulating public assets by taxing workers, for example, and purchasing securities. In subsequent periods income from the assets or dis-saving of the assets can be used to fund pensions of retirees. Fully-funded public pension programs are unusual, but many countries have partially-funded public pension programs. Some public pension programs maintain individual accounts and, hence, the assets can be readily assigned to individuals and to ages. Chile and Singapore’s Central Provident Fund (CPF) are examples. Most public asset-based reallocation systems do not share this feature. Rather, public assets are collectively owned. Whether the assets of public pension programs are held in individual accounts or collectively, they provide an economic mechanism for reallocating resources across age, as well as, over time. If the social contributions or taxes of workers exceed current benefit payments (transfers), the surplus is accumulated as an asset. In subsequent periods, retirees can be supported, for example, using income earned on the asset and by drawing down the public fund.

Two other important forms of public financial assets are Currency Stabilization Funds and Sovereign Wealth Funds. Currency Stabilization Funds do not have an explicit intergenerational or age reallocation rationale. Rather these funds are maintained to smooth exchange rate fluctuations. Sovereign wealth funds, on the other hand, are often used by countries with substantial revenues generated by the depletion of natural resources with an explicit intergenerational equity objective. Norway and UAE, for example, both have large SWFs funded from oil revenues. A few countries are running fiscal surpluses and accumulating funds as a response to anticipated future fiscal needs of aging populations. Australia’s Future Fund is an example.

Public debt is another important example of an asset involved in asset-based reallocations. Increasing pubic debt, i.e., dis-saving, generates an inflow to current taxpayers. Existing public debt generates an outflow, interest expense, from current taxpayers. Some countries have large publicly-owned natural resources that generate substantial public asset income. By convention, public capital does not yield asset income.

In NTA public asset-based flows are assigned to age groups in proportion to each age group’s general (non-earmarked) tax payments. The basis for this approach is relatively clear for public asset-based outflows: interest expense and the acquisition of public assets. Public interest expense is paid by taxpayers and allocated across age groups using the same procedures followed for allocating public transfer outflows. Likewise the acquisition of public assets is funded from taxes that are assigned to age groups using the same procedures as used to assign public transfer outflows.

The conceptual foundation for treating public asset income and public borrowing in this way relies on a counterfactual. In the absence of public asset income or public borrowing, general tax revenues would have been greater (given public spending). Thus, the asset-based inflow is allocated to age groups in proportion to the general taxes that they pay. Note that the asset-based inflow is balanced in the accounts by an asset-based outflow or a public transfer outflow. For example, the inflow public asset income may lead to an outflow public saving. Or, the inflow public borrowing may be lead to an outflow – the deficit in public transfer outflows.

Social security funds are often classified as separate institutional units within general government. If funds are significant in size it may be advisable to calculate asset-based reallocations separately from other units of general government. In these cases the age profile of taxes used to fund the independent program provides the basis for determining age profile of asset income or program surpluses or deficits.

Public Asset Income

Two primary sources of revenues for the government are National Income Accounts and Government Financial Statistics. Following the UN System of National Accounts, Public Asset Income is equivalent to the Net Operating Surplus plus Property Income of the Government which are reported in the Allocation of primary income account. The net operating surplus for the government is generally quite small because public capital does not generate an operating surplus.

In UNSNA property income consists of five components:

  • Interest
  • Distributed income of corporations
  • Reinvested earnings on direct foreign investment
  • Property income attributed to insurance policy holders
  • Rent

The exact components of property income will vary from country to country. Note that in SNA rent refers to the return to land and sub-soil assets. For more detailed information about each of these components the reader is referred to the UNSNA Manual (UN 1993) pp 176-182.

Public capital used in the production of public goods and services does not generate income in the System of National Accounts. The reason is that public goods and services are not sold and, hence, they are valued at the cost of production. Consequently, there is no profit and no measured capital income generated.

Public asset income is allocated to age groups in proportion to the age profile of taxes as explained above.

Public Saving

Public saving in SNA is reported in the Use of disposable income account as net saving by general government (UNSNA 1993 Table 9.1, pp 204) or in the Capital account UNSNA 1993 Table 10.1, pp 220). The age profile of public saving is equal to the age profile of general taxes or earmarked taxes in the case of quasi-independent programs.

Public Asset-based Reallocations can be produced using the spreadsheet RA.xls that is available on the website.

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