Generational Accounting versus Computable General Equilibrium

Generational Accounting is only a shortcut to a general equilibrium analysis because it is assumed that individual decisions are unaffected by policy reforms. Nonetheless only two studies examine the accuracy of Generational Accounting, but Fehr and Kotlikoff (1996) consider changes in individual decisions and current tax adaptations to balance the Budget. Thus their approach is inappropriate as a means to compare both methods as they are used in reality. Raffelhüschen and Risa (1997) use a very simple model and simulate very stylized policy changes. So we need to carry out a new examination. Our examples are the recent fiscal reforms in Germany which encompass an income tax reform and a pension reform. The findings are that Generational Accounting is a bad shortcut for the incidence of the income tax reform, but gives a good impression of the quality and sign of the incidence for all but the younger cohorts in the case of the pension reform, and that the Fehr and Kotlikoff approach is misleading.