Preview of the 2013 Comprehensive Revision of the National Income and Product Accounts


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Comprehensive NIPA revisions differ from annual NIPA revisions primarily because of the scope of the changes. Comprehensive revisions typically incorporate three major types of improvements: (1) changes in definitions and classifications that update the accounts to more accurately portray the evolving U.S. economy and to provide for consistent comparisons with data for the economies of other nations, (2) statistical changes that update the accounts to reflect the introduction of new and improved methodologies and the incorporation of newly available and revised source data, and (3) changes in presentations that update the NIPA tables to reflect the changes in definitions and the statistical changes and to make the tables more informative. Comprehensive revisions are usually conducted at 5-year intervals that correspond with the integration of updated statistics from BEA’s quinquennial benchmark input-output accounts.1

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Preview of the 2013 Comprehensive Revision of the National Income and Product Accounts

  1. 1. March 2013 13Preview of the 2013 Comprehensive Revisionof the National Income and Product AccountsChanges in Definitions and PresentationsI N JULY, the Bureau of Economic Analysis (BEA) will release the initial results of the 14th comprehen­sive, or benchmark, revision of the national income accounts.4 BEA’s strategic plan for the national eco­ nomic accounts outlines several major objectives, in­ cluding addressing data gaps and other shortcomings,and product accounts (NIPAs). The last comprehen­ improving consistency and integration with other BEAsive revision was released in July 2009. accounts, and improving consistency with interna­ Comprehensive NIPA revisions differ from annual tional guidelines. These changes in definitions andNIPA revisions primarily because of the scope of the presentations and the planned statistical improve­changes. Comprehensive revisions typically incorpo­ ments constitute important steps toward meeting eachrate three major types of improvements: (1) changes in of these objectives.definitions and classifications that update the accounts This revision presents an opportunity to incorpo­to more accurately portray the evolving U.S. economy rate changes to the NIPAs that reflect the updated in­and to provide for consistent comparisons with data ternational guidelines for national accounts, thefor the economies of other nations, (2) statistical System of National Accounts 2008 (SNA).5 BEA played achanges that update the accounts to reflect the intro­ key leadership role in updating the SNA, which was de­duction of new and improved methodologies and the veloped by the international statistical community inincorporation of newly available and revised source order to facilitate comparisons between countries anddata, and (3) changes in presentations that update the to serve as a guide for countries as they develop theirNIPA tables to reflect the changes in definitions and economic accounting systems. The United States pro­the statistical changes and to make the tables more in­ duces all five of the core components of the SNA, rang­formative. Comprehensive revisions are usually con­ ing from quarterly accounts to balance sheets, andducted at 5-year intervals that correspond with the with this revision, the NIPAs will have adopted theintegration of updated statistics from BEA’s quinquen­ most important of the major changes introduced innial benchmark input-output accounts.1 the 2008 SNA, including the recognition of research This article discusses the major changes in defini­ and development expenditures as fixed investment andtions and presentations that will be a part of the up­ the accrual-based approach to measuring defined ben­coming comprehensive revision.2 An article in May efit pension plans. Most other developed economies,will describe the major statistical changes.3 An article including those of Europe, will have incorporated mostin September will discuss the results of the revision, in­ of the major changes included in the 2008 SNA intocluding estimates that reflect the effects of the changes their economic accounts by 2014. While the NIPAs willin definitions and statistical methods as well as thechanges in presentation. 4. The Bureau of Economic Analysis Strategic Plan for 2012–2016 is avail­ able on BEA’s Web site. Comprehensive revisions and, to a lesser extent, an­ 5. The latest edition of the System of National Accounts 2008 can be foundnual revisions, provide the opportunity to introduce at improvements that are outlined in BEA’s strate­gic plan for maintaining and improving its economic Contributors 1. This year’s comprehensive revision of the NIPAs will incorporateresults from BEA’s 2007 benchmark input-output accounts, which will be Shelly Smith coordinated the preparation of this arti­released later this year. cle with extensive assistance from Alyssa E. Holdren. 2. The changes in definitions and classifications that are discussed in this Other BEA staff members who contributed signifi­article are changes that affect the conceptual content of the components ofthe NIPAs. cantly include Marissa J. Crawford, Pamela A. Kelly, 3. Last month’s SURVEY OF CURRENT BUSINESS introduced a statistical Robert J. Kornfeld, Nicole M. Mayerhauser, Brent R.improvement that will be made to BEA’s measures of imputed financial ser­ Moulton, Dylan G. Rassier, Marshall B. Reinsdorf,vices of commercial banks. See Kyle K. Hood, “Measuring the Services of Andrew G. Schmidt, and David F. Sullivan.Commercial Banks in the National Income and Product Accounts,” SURVEY93 (February 2013): 8–19.
  2. 2. 14 Preview of the 2013 Comprehensive Revision of the NIPAs March 2013be largely consistent with the SNA, they, like the ac­ year for the chain-type quantity and price indexes andcounts of other countries, will differ from the SNA in for the chained-dollar estimates will be changed tosome respects, especially in regard to the allocation of 2009 from 2005.certain units or transactions to institutional sectors.6 In the following sections of the article, each change The major changes in definitions and classifications is described, the reason for the change is given, the cur­in this comprehensive revision are as follows: rent treatment and the new treatment are outlined, ● Recognize expenditures by business, government, and the effects on the NIPA summary accounts are and nonprofit institutions serving households provided. Also, the section “Changes in Presentations” (NPISH) on research and development as fixed describes the major changes to the NIPA tables as a re­ investment. sult of the implementation of these improvements. ● Recognize expenditures by business and NPISH on Table 1 lists the major changes and the affected entertainment, literary, and other artistic originals components of the NIPAs. as fixed investment. ● Expand the ownership transfer costs of residential Changes in Definitions fixed assets that are recognized as fixed investment and improve the accuracy of the associated asset Capitalization of research and development values and services lives. expenditures ● Measure the transactions of defined benefit pension Research and development (R&D) is defined in the plans on an accrual accounting basis by recognizing SNA as “creative work undertaken on a systematic the costs of unfunded liabilities and showing the basis to increase the stock of knowledge, and use of pension plans as a subsector of the financial corpo­ this stock of knowledge for the purpose of discover­ rate sector. ing or developing new products, including im­ ● Harmonize the treatment of wages and salaries by proved versions or qualities of existing products, or using accrual-based estimates consistently through­ discovering or developing new or more efficient out the accounts. processes of production.”7 Expenditures for R&D have These major improvements also result in presenta­ long been recognized as having the characteristics oftion changes to the accounts. In addition, the reference fixed assets—defined ownership rights, long-lasting, and repeated use and benefit in the production pro­ 6. For discussion of differences between the NIPAs and the SNA, espe­cially with respect to the sector accounts, see Charles Ian Mead, Karin E. cess. Recognizing that the asset boundary should beMoses and Brent R. Moulton, “The NIPAs and the System of National expanded to include innovative activities, such asAccounts,” SURVEY 84 (December 2004): 19–21. Note that some of the dif­ R&D, the NIPAs will record private and governmentferences between the NIPAs and the SNA in 2004, such as the treatment ofmilitary weapon systems, have now been resolved by the 2008 SNA adopt­ing the treatment currently used in the NIPAs. 7. SNA 2008, 119, paragraph 6.207. Table 1. Changes in Definitions Affecting the NIPA Estimates Change Major components affectedRecognize expenditures by business, government, and nonprofit institutions serving GDP, GDI, GNP, national income, PCE, gross private domestic investment,households (NPISH) on research and development as fixed investment government consumption expenditures and gross investment, net operating surplus, consumption of fixed capital, proprietors’ income, corporate profits, personal income, DPI, personal saving, government saving, net saving, and gross saving.Recognize expenditures by business and NPISH on entertainment, literary, and GDP, GDI, GNP, national income, PCE, gross private domestic investment, netother artistic originals as fixed investment operating surplus, consumption of fixed capital, proprietors’ income, corporate profits, personal income, DPI, personal saving, net saving, and gross saving.Expand the ownership transfer costs of residential fixed assets that are recognized GDP, GDI, GNP, national income, gross private domestic investment, net operatingas fixed investment and improve the accuracy of the associated asset values and surplus, consumption of fixed capital, proprietors’ income, rental income of persons,services lives corporate profits, personal income, DPI, personal saving, net saving, and gross saving.Measure transactions of defined benefit pension plans on an accrual accounting GDP, GDI, GNP, national income, government consumption expenditures and grossbasis by recognizing the costs of unfunded liabilities and showing the pension plans investment, compensation of employees, net operating surplus, net interest,as a subsector of the financial corporate sector corporate profits, personal interest income, personal saving, current surplus of government enterprises, net government interest, and government saving.Harmonize the treatment of wages and salaries by using accrual-based estimates GDI, national income, compensation of employees, statistical discrepancy, personalconsistently throughout the accounts income, DPI, personal saving, government saving, net saving, and gross saving. NOTE. These changes in definitions will be incorporated into the NIPA estimates for 1929 GDP Gross domestic productforward. GNP Gross national product DPI Disposable personal income NIPA National income and product account GDI Gross domestic income PCE Personal consumption expenditures
  3. 3. March 2013 SURVEY OF CURRENT BUSINESS 15expenditures for R&D as investment.8 Investment in an enterprise’s R&D is equal to the present value of theR&D will be presented along with investment in soft­ future benefits that the company derives from theware and in entertainment, literary, and artistic origi­ R&D. In practice, because future benefits are not ob­nals in a new asset category entitled “intellectual servable and most R&D is produced on own-account,property products,” beginning with 1929. These esti­ the standard approach is to measure the activity as themates will be presented in a new table, an example of sum of production costs. Using data from Nationalwhich is presented in table 2. The recognition of R&D Science Foundation (NSF) surveys of R&D expendi­as investment will improve BEA’s measures of fixed in­ tures by performer, BEA will estimate the productionvestment, allow users to better measure the effects of costs associated with spending for R&D to derive an­innovation and intangible assets on the economy, and nual current-dollar estimates of R&D output; table 3make the NIPAs more consistent with recommenda­ lists several of the NSF surveys that will be used to esti­tions in the SNA.9 mate R&D output. Adjustments to source data. After compiling NSF-Current treatment reported R&D expenditures, adjustments will be madeCurrently, expenditures for private R&D are not re­ for coverage, for scope, and for alignment with thecorded as final expenditures in the calculation of gross NIPA framework and concepts.12domestic product (GDP). Expenditures for purchased Sector assignment. Ownership of the R&D produc­R&D are classified as intermediate inputs, and the tion is needed to properly assign investment and in­costs of producing own-account R&D (that is, produc­ come flows to the business, NPISH, and generaltion of R&D by an enterprise for its own use) are sim­ply included with the other costs of production and 12. Examples of the adjustments include (1) accounting for imported andare not identified as contributing to the output of a exported R&D, (2) including R&D expenditures not captured in the NSF data in certain years—such as social science R&D—to align BEA’s measureseparate commodity. For nonprofit institutions serv­ of R&D with the SNA, (3) converting depreciation for structures anding households (NPISH) and for governments, whose equipment used to produce R&D to an economic cost, rather than histori­production is derived using a production-cost ap­ cal cost, basis, (4) reconciling NSF data with data from the Census Bureau’s economic censuses, (5) removing expenditures on software R&D that BEAproach, expenditures for R&D are included in con­ already includes in NIPA estimates of investment in software, and (6) insumption expenditures but generally are not separately certain cases, converting measures for purchased R&D from a cost-basis to a purchase-basis.identified. In addition, BEA’s estimates of exports andimports of services include R&D services. Table 2. Private Fixed Investment in Intellectual Property ProductsNew treatment NIPA series Start dateThe new treatment will recognize expenditures forboth purchased and own-account R&D by businesses, Private fixed investment in intellectual property products .................................. 1929 Software ......................................................................................................... 1959NPISH, and general governments as fixed investment Prepackaged ............................................................................................... 1985and the depreciation of these assets in consumption of Custom........................................................................................................ 1985fixed capital (CFC).10 Government R&D expenditures Own account ............................................................................................... 1985will be treated as investment regardless of whether the Research and development ........................................................................... 1929 Business ..................................................................................................... 1959R&D is protected or made freely available to the pub­ Manufacturing .......................................................................................... 1959lic, because the provision of public services is part of Pharmaceutical and medicine manufacturing ...................................... 1959the economic benefits generated by government Chemical manufacturing, excluding pharmaceutical and medicine...... 1959R&D.11 Semiconductor and other electronic component manufacturing .......... 1959 Other computer and electronic product manufacturing ........................ 1959 Measuring R&D output. Conceptually, the value of Motor vehicles, bodies and trailers, and parts manufacturing .............. 1959 Aerospace products and parts manufacturing...................................... 1959 8. BEA first published an R&D satellite account that examined the impact Other manufacturing............................................................................. 1959of R&D expenditures on the U.S. economy in 1994; a revised satellite Nonmanufacturing ................................................................................... 1959account was introduced in 2006, and updates to that account were pub­ Scientific research and development services ..................................... 1987lished in 2007 and 2010. For the most recent update, see Jennifer Lee andAndrew G. Schmidt, “Research and Development Satellite Account Update: All other nonmanufacturing .................................................................. 1987Estimates for 1959–2007” SURVEY 90 (December 2010): 16–27. The R&D Nonprofit institutions serving households ................................................... 1959satellite accounts were produced with valuable support from the National Universities and colleges ......................................................................... 1959Science Foundation, which continues to cooperate with BEA in the devel­ Other nonprofit institutions....................................................................... 1959opment of R&D source data for estimating investment in the core eco­ Entertainment, literary, and artistic originals .................................................. 1929nomic accounts. Theatrical movies ........................................................................................ 1929 9. SNA 2008,108, paragraphs 10.103–10.108. Long-lived television programs ................................................................... 1949 10. Spillovers will not be included in the valuation of R&D, consistent Books .......................................................................................................... 1929with recommendations of the SNA (SNA 2008, 206, paragraph 10.102). Music........................................................................................................... 1929 11. This treatment is consistent with recommendations of the SNA (SNA2008, 122, paragraph 6.230, 206, paragraph 10.103). Other ........................................................................................................... 1929
  4. 4. 16 Preview of the 2013 Comprehensive Revision of the NIPAs March 2013government sectors in the NIPAs.13 BEA will classify Depreciation of newly recognized assets. The de­the funder of the R&D, as reported in the NSF surveys, preciation of R&D fixed assets will be included in con­as the owner of the R&D. This decision was made for sumption of fixed capital, which is the economictwo primary reasons: (1) funders typically reserve charge for the decline in value of fixed assets as theysome rights to the outcome of the R&D and receive age. R&D depreciation rates are critical for calculatingeconomic benefits from the R&D; and (2) the alloca­ the rates of return to R&D investments and capital ser­tion of ownership between the funder and the per­ vice costs. As with measuring R&D production, mea­former cannot otherwise be distinguished in the suring R&D depreciation rates is difficult becauseexisting R&D survey data. In many cases, the owner­ market values are generally unobservable.ship of federally funded R&D may be less clear than for For business depreciation of R&D, unlike tangiblebusiness-funded R&D. Federally funded R&D is sup­ assets that depreciate over time from physical decay orported through two primary mechanisms—purchases wear and tear, R&D depreciation reflects its decliningand grants. The ownership of purchased R&D is usu­ contribution to a firm’s profit as R&D assets becomeally straightforward, because the federal government less valuable or obsolete. Based on this understanding,normally retains ownership of the outcome of the pur­ BEA analyzed the relationship between investment inchased R&D activity. For grant-based R&D, however, R&D and future profits using firm-level data and es­the ultimate beneficiary is difficult to ascertain because tablishment-level data. Using this forward-lookingboth the federal government and the performer can profits model, in which each period’s R&D investmentbenefit from the transaction. NSF surveys do not col­ contributes to the profits in later periods but at a geo­lect information on the allocation of the ownership of metrically declining rate, BEA derived R&D deprecia­federally funded R&D. Thus, due to lack of direct in­ tion rates for certain R&D intensive industries.15formation on ownership, federal purchases and grants NPISH R&D depreciation will be based on estimates ofof R&D will both be treated as investment by the fed­ business depreciation.eral sector because the federal government is assumed For general government R&D, a contribution toto receive the primary economic benefit. profits is out of scope, but like business R&D, depreci­ R&D asset types. The application of produced R&D ation reflects obsolescence over time. Based on thisis generally unobservable, so BEA will classify R&D as­ concept, BEA observed a progression of R&D invest­sets by the industry or sector that is funding the R&D, ments by function that led to observable outcomes,as reported by NSF, in its presentations of private in­ such as investments in stealth technology that resultedvestment, capital stock, and CFC.14 Table 3 shows the in the development of particular military aircraft. Assource data for the R&D asset types that will be pub­ innovations give way to newer technologies, the origi­lished in the new intellectual property products NIPA nal R&D becomes less valuable or obsolete, thus bring­table mentioned above. ing an end to the effective service life of the R&D. 13. For government enterprises, BEA will assume no investment in R&D. 15. Wendy C.Y. Li, “Depreciation of Business R&D Capital,” Bureau of 14. For example, BEA will record NSF-reported pharmaceutical industry Economic Analysis and National Science Foundation R&D Satellitespending on R&D as investment in a pharmaceutical R&D asset. Account Paper (October 2012); Table 3. National Science Foundation (NSF) Performer Surveys That Will Underlie the R&D Estimates Sector Description FrequencyWithin private investment:Business Business Research and Development and Innovation Survey 1 AnnualNonprofit institutions serving households Private nonprofit universities Higher Education Research and Development Survey 2 Annual Other Surveys of nonacademic nonprofit institutions 3 SporadicWithin government investment:Government Federal Survey of Federal Funds for Research and Development Annual State and local Public universities Higher Education Research and Development Survey 2 Annual Other Surveys of State Research and Development Expenditures 4 Sporadic NOTE. For periods before NSF surveys are available, estimates will be primarily based on based on versions of annual NSF surveys of universities and colleges.research from The Formation and Stocks of Total Capital by John Kendrick and Research and 3. NSF survey data for nonprofit institutions are available for 1964, 1966, 1969, 1973, 1996,Development: Its Growth and Composition by Nestor Terleckyj and on estimates from BEA’s and 1997. When survey data are not available, estimates will be based primarily on data from1994 R&D satellite account. the Census Bureau. 1. Survey data will be used for estimates for 2008 forward. Estimates for 1953–2007 will be 4. NSF survey data for state and local governments are available for 1964–1969, 1972, 1973,based on data from NSF’s annual Survey of Industrial Research and Development. 1977, 1987, 1988, 1995, 2006, 2007, and 2009. When survey data are not available, various 2. Survey data will be used for estimates for 2010 forward. Estimates for 1953–2009 will be estimation methods will be used.
  5. 5. March 2013 SURVEY OF CURRENT BUSINESS 17Using this approach, BEA derived service lives for four adjustment for productivity gains.federal government functions: defense, health, space,and energy. Effects on the accounts Quarterly estimates. Prior to 1991, quarterly esti­ The recognition of R&D as investment will affect esti­mates of private business R&D investment will be mates of gross private domestic investment, personalinterpolated using an aggregate wage series. For consumption expenditures (PCE), and government1991–2007, a composite indicator series, constructed consumption expenditures and gross investment.using weighted industry-specific wage and employ­ Gross private domestic investment will be boosted byment information from the Quarterly Census of Em­ the amount of business and NPISH R&D expendi­ployment and Wages (QCEW), will be used to tures. PCE will be reduced, as the impact of reclassify­interpolate business R&D investment. For 2008 for­ ing NPISH R&D expenditures to private investmentward, the pattern of quarterly R&D business invest­ more than offsets the additional consumption of fixedment will reflect a tabulation of R&D expenditures capital (CFC) associated with the expenditures. Gov­reported by publicly held firms in their quarterly fi­ ernment consumption expenditures and gross invest­nancial statements.16 Quarterly estimates of federal ment will be boosted by the CFC associated with theR&D largely will be interpolated using the pattern of R&D investment—in government consumption ex­R&D spending implied in the currently published esti­ penditures and gross investment, R&D spending willmates of intermediate R&D services. Quarterly esti­ be reclassified from consumption expenditures tomates of NPISH and of state and local government gross investment, and the additional CFC will be re­R&D will be interpolated without an indicator. corded in consumption expenditures. As a result, GDP Prices. BEA will measure R&D price changes using will be boosted by the amount of business R&D invest­an input-cost approach with a productivity adjust­ ment and by the CFC associated with R&D investmentment.17 For R&D that is produced for internal use by, by NPISH and by general governments. Based on pre­or purchased from, businesses, NPISH, and state and liminary estimates for 2007, this change will boost thelocal governments, BEA will construct an aggregate level of GDP by about 2 percent, or about $300 billion,R&D composite input-price index based on input cost with about two-thirds coming from private fixed in­weights derived from spending category data from the vestment and the remainder primarily coming fromNSF surveys. These categories include labor, material government consumption expenditures.19inputs, overhead, and depreciation. For recent time On the income side of the accounts, the new treat­periods, BEA will primarily use existing price data ment will increase GDI by the same amount as GDP.from its GDP by Industry KLEMS program and aver­ CFC will increase by the amount of depreciation onage wages derived from the QCEW to construct the ag­ the newly recognized R&D assets held by business,gregate price index. BEA will then apply a productivity NPISH, and general government. The net operatingadjustment to the input-cost price.18 R&D produced surplus will increase by the difference between busi­for internal use by, or purchased from, higher educa­ ness R&D investment and business CFC for R&D as­tion academic institutions will also reflect a similar in­ sets (that is, the “net R&D investment”).put-cost approach that is adapted to measure R&D In the private enterprise income account, corporatecosts incurred by academic institutions. The academic profits and proprietors’ income will increase by the netR&D price index will also be adjusted to account for effect of removing spending on R&D from currentproductivity gains. For government R&D performed production expenses and adding the CFC on the R&Don own-account, BEA will derive prices using input assets to current production expenses. In other words,costs for compensation of government employees and corporate profits will be boosted by the net R&D in­for intermediate goods and services purchased, with an vestment of corporate business and proprietors’ in­ come by the net R&D investment of noncorporate 16. For advance estimates, R&D investment will be based on trend or business. These changes will also be reflected by anemployment and wage extrapolation that will be replaced in the second or equal increase in the net operating surplus of privatethird estimates as the R&D data from company financial reports becomeavailable. enterprises. 17. Although the input-cost method is useful for estimating the impact of In the personal income and outlay account, theinflation on R&D inputs, it is less appropriate for R&D output because it increase in proprietors’ income will boost personaldoes not account for productivity growth; it assumes that real output growsat the same rate as real inputs. An adjustment will be made to the input- income. The boost in personal income combined withcost price indexes to account for productivity gains that some would argue the reduction in PCE will boost both personal savingare perpetually inherent in R&D production, particularly given increases incomputing power and other scientific advances. 18. The productivity adjustments will be based on nonfarm business mul­ 19. The impact on GDP from the additional CFC associated with NPISHtifactor productivity estimates produced by the Bureau of Labor Statistics. R&D expenditures will be minor.
  6. 6. 18 Preview of the 2013 Comprehensive Revision of the NIPAs March 2013and the personal saving rate. NIPAs and help better align the NIPAs with recom­ In the government current receipts and expendi­ mendations of the SNA.22tures account, government consumption expenditureswill be reduced, as the R&D investment removed from Current treatmentconsumption expenditures will be greater than the ad­ The costs associated with the production of entertain­ditional CFC, resulting in an increase to government ment originals are currently classified as expenses thatsaving. are consumed as part of the production of other goods In the foreign transactions account, BEA will at­ and services. Therefore, expenditures for the produc­tempt to separately identify the sales and purchases of tion of entertainment originals do not enter into theR&D assets, such as patents, and reclassify them as ex­ calculation of GDP.ports and imports of R&D services. Currently, thesetransactions are included in exports and imports of New treatmentroyalties and license fees. Royalties and license fees will Under the new treatment, BEA will record the privatecontinue to include transactions related to the use of expenditures associated with producing or purchasingR&D assets. The reclassification will not affect overall entertainment originals as private fixed investment inexports and imports or the trade and current account the measure of GDP.23balances.20 The production of entertainment originals may In the saving and investment account, the increases span several years. Theoretically, these costs should bein personal saving, corporate profits, and government recorded as investment when accrued; however, due tosaving combined with the increase in CFC results in an practical constraints, BEA will record the value of theincrease in gross saving that is equal to the combined investment in the year the asset is released to the pub­value of private and government R&D investment. lic. Entertainment originals are rarely sold in an openCapitalization of entertainment, literary, and market, so it is difficult to observe market prices forother artistic originals these original works. This is a common problem withSome entertainment, literary, and other artistic origi­ measuring the value of intangible assets, and in suchnals are designed to generate mass reproductions for cases, other valuation methods must be utilized, suchsale to the general public and to have a useful lifespan as the sum of the production costs (which is used forof more than one year. For 1929 forward, BEA will own-account software and R&D) or the estimated netcapitalize these items, which include theatrical movies, present value (NPV).24 Because adequate informationlong-lived television programs, books, music, and on production costs is not available for most entertain­“other” miscellaneous entertainment.21 This change ment originals, BEA will estimate the value of these as­will expand BEA’s measures of intangible assets in the sets based on the NPV of expected future royalties or other revenue obtained from these assets, net of any as­ sociated sales costs. For investment in theatrical mov­ 20. BEA is continuing to investigate how to fully implement the new ies prior to 2007, the estimates will be derived using atreatment of R&D in the international transaction accounts (ITAs). Trans­actions reflecting the sales and purchases of R&D assets are commingled production costs approach based on movie budgetwith royalties and license fees in BEA’s source data. BEA is researching how separately identify these transactions and to reclassify them as R&D ser­ For each type of entertainment originals asset, thevices. In addition, multinational corporations are important producers ofR&D, and capitalizing R&D will impact direct investment receipts and pay­ expected net cash flow of the producing industry willments. BEA’s surveys of multinational companies have been used to develop be estimated using revenue and cost data from theexperimental estimates of the impact of capitalizing R&D on direct invest­ment income for the BEA R&D satellite account; because both direct invest­ Census Bureau’s economic censuses and surveys, nu­ment income receipts and payments will be raised by the new treatment, merous trade sources, and databases such asthe impact on the direct investment income surplus is expected to be small.For a detailed discussion of the difficulties of identifying R&D in the ITAs 22. This change was introduced in a SURVEY article by Rachel H.and a detailed description of the methodology used to construct the inter­ Soloveichik, “Artistic Originals as Capital Assets,” SURVEY 91 (June 2011):national component of the R&D satellite account, see Carol A. Robbins and 43–51. See also SNA 2008, 207, paragraph 10.115 and “Entertainment, Lit­Carol E. Moylan, “Research and Development Satellite Account Update,” erary, and Artistic Originals,” in the Handbook on Deriving Capital Mea­SURVEY 87 (October 2007): 49–64. Daniel R. Yorgason contributed the por­ sures of Intellectual Property Products (Organization for Economic Co­tion on international R&D estimates. operation and Development (OECD): Paris, October 2010): 150–166. 21. Long-lived television programs include situation comedies and drama 23. BEA will not identify any investment in entertainment originals byprograms. Other types of television programs, including news programs, governments.sporting events, game shows, soap operas, and reality programming have 24. The SNA discusses the use of NPV for estimating the value of assetsmuch shorter service lives and will not be capitalized. “Other” miscella­ (SNA 2008, 22, paragraph 2.60, 52, paragraph 3.137–138); see also theneous entertainment includes miscellaneous artwork including theatrical OECD Handbook on Deriving Capital Measures of Intellectual Property Prod­play scripts, greeting card designs, and commercial stock photography. uct, 18, 158–159.
  7. 7. March 2013 SURVEY OF CURRENT BUSINESS BEA will assume a 7 percent real dis­ signs, and stock photography.count rate for all asset types and will apply an NPV ad­ Quarterly estimates. For 2007 forward, quarterlyjustment factor, a ratio that represents the average estimates will be based on data from the Census Bu­NPV-to-current period revenues from new works, to reau’s quarterly services survey. For estimates prior tocurrent-year revenues in order to derive an estimate of 2007, quarterly estimates for motion pictures invest­investment in entertainment originals for that year. ment will be based on data from trade sources, and es­ Estimation methodology. First, total current-pe­ timates for other investment in entertainmentriod revenue from licensing fees, merchandise sales, originals will reflect trend extrapolation.ticket sales, and other revenue generating activities for Prices. BEA will deflate each investment categorythe industries producing the assets will be estimated. separately. For theatrical movies and long-lived TVSecond, the value of sales costs—such as advertising, programs, an input cost index will be constructedmanufacturing of reproductions, and other marketing based on a weighted average of BLS producer price in­type costs—will be subtracted from the total current dexes (PPIs) for video cameras and for electronic com­period revenues to derive net revenue values that cap­ puter manufacturing and the consumer price indexture only the revenues earned on the intangible as­ (CPI) for “admission to movies, theaters, and con­sets held by the business. Third, these net revenue certs” (which serves as a proxy for input costs associ­values will be adjusted further to only include the reve­ ated with scripts, scenery, costumes, and actors). Thisnue from the release of new works (that is, the “orig­ composite input cost index will be adjusted to accountinals”), using BEA-derived investment ratios.26 Finally, for productivity growth in the movie industry by usingthe NPV adjustment factor will be applied to the net total nonfarm business sector multifactor productivityrevenue value that has been adjusted by the investment (MFP). For literary, music, and miscellaneous enter­ratio in order to derive the current-period investment tainment originals, BEA will use a combination of PPIsvalue of the future revenue stream of these new works. and CPIs that correspond with measuring the value of Depreciation of newly recognized assets. The de­ the asset.preciation of entertainment originals assets, like thedepreciation of R&D assets, will be included in the Effects on the accountsNIPA measure of CFC. BEA will estimate service lives The recognition of entertainment originals as invest­and depreciation rates for each type of entertainment ment will boost the level of gross private domestic in­originals asset based on its net present value over time vestment, which will in turn boost the level of described above. The depreciation rates will follow a Based on preliminary research, private investment ingeometric pattern in which a constant percentage of entertainment originals for 2007 is estimated at aboutthe existing asset stock depreciates each year. The typi­ $70 billion. About one-third of the new investment iscal movie, for example, is released in theaters, followed in theatrical movies, one-third in television programs,by DVDs, premium television, regular cable networks, and the remaining one-third in the other entertain­foreign television, and U.S. broadcast networks. Based ment original assets.on an analysis of the profits obtained from these suc­ On the income side of the accounts, the new treat­cessive releases, BEA estimates an annual depreciation ment will increase GDI by the same amount as GDP.rate of 3.8 percent. For television programs, which CFC will increase by the amount of depreciation onearn a substantial proportion of their long-term reve­ the newly recognized entertainment originals assetsnue in their first airing, the depreciation rate is 16.8 held by private enterprises. Net operating surplus willpercent. For music, an even larger portion of profits is increase by the difference between the entertainmentobtained in the first year of release, and so the esti­ originals investment and related CFC (that is, the “netmated depreciation rate is 26.7 percent. The estimated entertainment originals investment”).depreciation rate is 12.1 percent for books and 10.9 In the private enterprise income account, corporatepercent for theatrical play scripts, greeting card de­ profits and proprietors’ income will be affected by the net effect of removing spending on entertainment 25. BEA will benchmark its investment estimates to revenue data from the originals from current production expenses and add­2007 economic census. 26. Based on research using trade sources, studies, and survey and eco­ ing the CFC on the entertainment originals assets tonomic census data from the Census Bureau, BEA estimates the following current production expenses. In other words, corpo­investment ratios for the five categories of entertainment originals assets: 51percent of industry revenue for theatrical movies, 50 percent of industry rate profits will be affected by the net entertainmentrevenue for music, 37 percent of industry revenue for books, 30 percent of originals investment by corporate business, and pro­industry revenue for television, and 15 percent of industry revenue for mis­ prietors’ income will be affected by the net entertain­cellaneous artwork. The remaining revenue is spent on nonartwork costssuch as advertising, stamping DVDs, or printing books. The NIPAs record ment originals investment of noncorporate business.these nonartwork costs as current production costs. These changes will balance with the increase in the net
  8. 8. 20 Preview of the 2013 Comprehensive Revision of the NIPAs March 2013operating surplus of private enterprises. life as the dwelling, which for one-unit dwellings, is es­ In the personal income and outlays account, the ef­ timated at 80 years. As a result, BEA’s estimates of resi­fect on nonfarm proprietors’ income will flow through dential fixed assets have been overstated (because theto personal income and will impact personal saving transfer costs from multiple owners remain embeddedand the personal saving rate. in the capital stock estimates), and CFC has been un­ In the saving and investment account, the impacts derstated.on personal saving and corporate profits combinedwith the increase in CFC will increase gross saving by New treatmentthe amount of the newly recognized investment. Under the new treatment, BEA will recognize the non- financial ownership transfer costs (including both theCapitalization of ownership transfer costs of acquisition and expected disposal costs) associatedresidential fixed assets with the purchase of a residential asset as capital trans­“Ownership transfer costs” are the expenses associated actions and will record these transactions as gross in­with the acquisition and disposal of fixed assets. For vestment in residential structures. Expenses associatedresidential fixed assets, these costs include brokers’ with financing a purchase of a residential asset, such ascommissions on the sale of new and used structures loan origination fees, credit reports, and adjustmentand the underlying land; title insurance; title, abstract, and collection expenses, will continue to be recordedand attorney fees (that is, closing costs other than as current expenses, because these expenses representthose associated with obtaining a mortgage); payments financial services and are not necessary to purchase afor state and local government documentary and dwelling.28stamp taxes; and payments for surveys and engineering In addition, consumption of fixed capital will reflectservices. Ownership transfer costs are a form of invest­ these capital expenditures, and will be based on thement because, like other types of fixed investment, typical holding period of the asset—estimated to be 12these costs are incurred in order to receive economic years—rather than the average life of the structure, es­benefits over the entire period the asset is held. timated to be 80 years. For transfer costs paid at the Currently, only brokers’ commissions on the sale of time of the disposal of the asset, such as brokers’ com­structures are capitalized. Under the new treatment, missions paid by sellers, depreciation will begin priorfor 1929 forward, BEA will recognize all of the owner­ to the incurrence of the cost in order to align the tim­ship transfer costs as capital investment and will record ing of the depreciation expenses with the economicthe depreciation of these costs over the typical holding benefits received by the owner; chart 1 compares theperiod of the asset. This change will improve the NIPA timing of the depreciation of disposal costs in the cur­estimates of residential fixed investment, rental income rent treatment and the new treatment. As a result, bro­of persons, and consumption of fixed capital by clari­ kers’ commissions will depreciate much more rapidlyfying the scope of residential investment and by better than previously estimated.29aligning the timing of the depreciation of residentialinvestment with the housing services received by the Effects on the accountspurchaser. In addition, the change will better align the As a result of this new treatment, both gross privateNIPAs with recommendations of the SNA.27 residential fixed investment in structures and GDP will increase by the amount of the newly capitalizedCurrent treatment acquisition and disposal costs. For 2007, these costsCurrently, the NIPAs only capitalize brokers’ commis­ will total approximately $60 billion. Brokers’ commis­sions on the sale of residential structures; these sions on structures, which are already capitalized, totalcommissions are recorded in the NIPA estimates ofgross private residential fixed investment in structures. 28. The treatment of ownership transfer costs (for both acquisition andOther ownership transfer costs are recorded as current disposal costs) for nonresidential structures will not change; brokers’ com­ missions on nonresidential structures will continue to be capitalized, andexpenses in deriving estimates of rental income of per­ all other costs will remain current expenses.sons, of nonfarm proprietors’ income, and of corpo­ 29. Consistent with recommendations of the SNA, the new treatment willrate profits. In addition, the associated depreciation depreciate actual acquisition costs (beginning at the time of ownership transfer) and expected disposal costs (beginning at the time of purchase inrates for brokers’ commissions reflect the same service anticipation of future disposal). Because the depreciation of expected dis­ posal costs begins before the eventual sale of the dwelling by the purchaser, 27. For a discussion of the recommended treatment of these costs, see the current-cost net stock of ownership transfer costs (that is, the acquisi­SNA 2008, 200–201, paragraphs 10.48–10.55 and 211–212, paragraph tion costs less the disposal costs) may be negative in some years. These net10.158. stocks will be shown in BEA’s fixed asset accounts.
  9. 9. March 2013 SURVEY OF CURRENT BUSINESS 21Chart 1. Disposal Costs: Timing of Depreciation Measure transactions of defined benefit Percentage of costs remaining in net stock pension plans on an accrual basis 125 Sale of fixed asset Employer-sponsored retirement plans are generally or­ 100 ganized into two types: (1) defined contribution plans, 75 which provide benefits during retirement based on the Current treatment 50 amount of money that has accumulated in an em­ ployee’s account, and (2) defined benefit plans, which 25 New treatment provide benefits during retirement based on a formula 0 that typically depends on an employee’s length of ser­ –25 vice and average pay among other factors. To fund –50 promised benefits to retirees, defined benefit plans pri­ –75 marily rely on two major sources of income: (1) con­ tributions from employers and employees and (2)–100 –20 0 20 40 60 80 100 120 140 160 interest and dividend income earned on the financial Number of years after sale of fixed asset assets that the plans hold.30 U.S. Bureau of Economic Analysis BEA will change its recording of the transactions of defined benefit pension plans from a cash accounting basis to an accrual accounting basis as part of the com­ prehensive revision. In addition, BEA will separately approximately $85 billion. As a result, the total amount identify a pension plan subsector in the NIPAs and, to of ownership transfer costs for 2007 will be about $145 the extent possible, provide estimates of the current re­ billion. ceipts, current expenditures, and cash flow for the sub- On the income side of the accounts, the new treat­ sector. The introduction of a pension plan subsector ment will result in a parallel increase in GDI through will improve the consistency of the NIPAs with the its net effects on two components: net operating sur­ Federal Reserve Board’s flow of funds accounts and plus (specifically, the sum of rental income of persons, will more closely align the NIPAs with recommenda­ nonfarm proprietors’ income, and corporate profits) tions of the SNA. and CFC. CFC will increase by the amount of the de­ Accrual accounting is the preferred method for preciation on the newly recognized capital costs as well compiling national accounts because it matches in­ as the faster depreciation rate of brokers’ commissions comes earned from production with the correspond­ on residential structures. Net operating surplus will ing productive activity and records both in the same decrease by the difference between the newly recog­ period.31 The recording of defined benefit pension plan nized capital costs and the related CFC (that is, the transactions on an accrual basis will better align pen­ “net investment in ownership transfer costs.”) As with sion-related compensation with the timing of when GDP, GDI will be boosted by the amount of the newly employees earned the benefit entitlements and will capitalized costs; the statistical discrepancy will be un­ avoid the volatility that arises if sporadic cash pay­ affected. ments made by employers into defined benefit pension In the private enterprise income account, the com­ plans are used to measure compensation.32 In cases ponents of the net operating surplus, rental income of when defined benefit pension plans are underfunded persons, proprietors’ income, and corporate profits, or overfunded, the employers’ pension plan expenses will reflect the net effects described above. In the personal income and outlay account, the re­ 30. In addition, many plans hold assets that are expected to yield capital ductions in rental income of persons and in propri­ gains, which are treated as changes in the balance sheet rather than as cur­ rent income in the NIPAs. If capital gains are realized as expected, the etors’ income will result in reductions to both personal resulting increase in the value of the assets will provide additional resources income and saving. for paying pension benefits. 31. For a variety of reasons, accrual accounting of all income flows is not In the gross saving and investment account, the re­ always feasible. In these instances, BEA uses cash accounting and records ductions in personal saving and undistributed corpo­ the income flows in the period they are received or paid. rate profits will be more than offset by the additions to 32. Preliminary research on accrual-based estimates of the transactions of the defined benefit pension sector was presented in Marshall B. Reinsdorf CFC. As a result, gross saving will increase by the same and David G. Lenze, “Defined Benefit Pensions and Household Income and amount as gross investment. Wealth,” SURVEY (August 2009): 50–62.
  10. 10. 22 Preview of the 2013 Comprehensive Revision of the NIPAs March 2013also will be measured more accurately under the ac­ In implementing the accrual approach, BEA willcrual approach. Additionally, measuring the transac­ treat defined benefit pension plans as “pass-through”tions of defined benefit pension plans on an accrual entities that are effectively owned by the householdbasis will provide a more accurate measure of the prof­ sector and will classify these plans as financial corpora­its of the employer and the income, saving, and wealth tions that receive contributions and property incomeof households. on behalf of plan participants but do not have income or saving of their own. As a result, new tables showingCurrent treatment the transactions of the defined benefit pension subsec­The NIPAs treat the persons participating in a pension tor will be presented; an example of the new presenta­plan as the owners of the plan’s assets, so most eco­ tion is shown in table 4.nomic transactions conducted by pension plans are An employer who offers a defined benefit pensionshown as part of personal income and outlays. Em­ plan promises that an employee will receive a specifiedployers’ cash contributions to pension plans are re­ amount of future benefits that usually increases withcorded in compensation of employees as part of each year of service. “Claims to benefits accrued“supplements to wages and salaries.” In addition, the through service” (also referred to as “normal cost” byinterest income and dividend income earned on pen­ pension actuaries) represent the present value of thesion plan assets are recognized as being paid to persons additional benefits that plan participants earn fromand are included in the estimates of personal interest employment during the accounting period. Normalincome and personal dividend income. Noninsured cost provides a more accurate measure of the com­pension plans are part of the business sector, but the pensation of employees than the employers’ cash con­only economic transactions conducted by pension tributions to the pension plans, which may haveplans that are shown in the business sector and not re­ little relationship year-by-year with the benefits thatrouted to the personal sector are the expenses associ­ated with administering the plans. Within personalconsumption expenditures, an imputation for the ex­penses of administering pension plans is recorded as Table 4. Example: Annual Transactions ofpart of “financial services furnished without payment.” Defined Benefit Pension Plans [Billions of dollars]New treatment Annual Line estimateFor defined benefit plans, the cash accounting ap­proach is inadequate because the value of the benefit 1 Current receipts, accrual basis......................................................... 350entitlements that participants accrue during a year of­ 2 Output*.............................................................................................. 10 3 Contributions ..................................................................................... 225ten fails to coincide with the plans’ cash receipts.33 For 4 Claims to benefits accrued through service to employers ............. 110example, employers sometimes skip contributions 5 Actual employer contributions .................................................... 105when the plans have enjoyed unusually good invest­ 6 Imputed employer contributions* ................................................ 14ment returns, including holding gains. As a result, the 7 Household actual contributions .................................................. 1 8 Less: Pension service charges* ................................................. 10cash accounting measure of employee compensation 9 Household pension contribution supplements* ............................. 115can show large swings that do not accurately reflect the 10 Income receipts on assets ................................................................ 115growth in pension entitlements.34 To measure pension 11 Interest........................................................................................... 75entitlements when they are accrued, BEA will adopt 12 Monetary interest ....................................................................... 40 13 Imputed interest from employers for unfunded actuarial liability* 35the accrual accounting approach for measuring pen­ 14 Dividends ....................................................................................... 40sion income, relying on actuarial estimates of pension 15 Current expenditures, accrual basis ................................................ 350costs. 16 Administrative expenses ................................................................... 10 17 Imputed income payments on assets to persons* ............................ 115 18 Interest........................................................................................... 75 33. For defined contribution pension plans, BEA’s current treatment will 19 Dividends ....................................................................................... 40not change, because these plans already record contributions on an accrual 20 Benefit payments and withdrawals.................................................... 165basis, and the plans’ assets are directly linked to employees. 21 Adjustment for the change in benefit entitlements*........................... 60 34. Under the cash accounting approach, an employer’s decision to defercontributions to a later date also results in its operating surplus being over­ * Imputationstated in the current period. NOTE. The values shown in this table are for illustrative purposes only.
  11. 11. March 2013 SURVEY OF CURRENT BUSINESS 23employees are accruing.35 Because the accounts will show the pension funds’ Under the accrual approach, the compensation of monetary and imputed interest and dividends as paidemployees consists of the value of the pension prom­ out in the form of imputed interest and dividends toises made by the employer. To enable the pension plan persons, the pension plan subsector’s net interest (in­to pay the promised benefits, the employer will make terest paid less interest received) and net dividendsactual and imputed contributions, based on normal (dividends paid less dividends received) will be zero.cost. By definition, the sum of the actual and imputed A pension plan also distributes benefit paymentscontributions equals the value of the pension prom­ and withdrawals of employee contributions to persons.ises, so the NIPAs will show employers’ actual and im­ These distributions reduce households’ claims for fu­puted contributions as part of compensation of ture benefits; the net growth in claims on a pensionemployees.36 The actual and imputed contributions plan for future payments of benefits is known in thewill then be rerouted to the pension fund as an implicit SNA as the “adjustment for the change in benefit enti­contribution, or transfer, from the personal sector to tlements.” Putting pension plans in a separate sectorthe pension plan subsector. The interest and dividend from households implies that the cash accountingincome that the pension fund earns by investing in fi­ measure of pension income of households equals thenancial assets will be passed through to households as benefits payments and withdrawals less householdimputed payments of interest and dividend income, contributions plus the administrative services that areand the households will reinvest the same amount of provided in kind to households. In an accrual account­income in the fund in the form of household pension ing framework, however, the net growth in the house­contribution supplements. holds’ claims to future benefits also counts as income, In some cases, a pension plan may be underfunded so the adjustment for the change in benefit entitle­or overfunded, implying that the fund does not ments represents the difference between the cash ac­have sufficient financial assets or that it has assets in counting and accrual accounting measures ofexcess of what are needed to earn the returns that are household income.necessary to provide for promised future benefits. In With this adjustment, distributions paid by the planthese cases, the employer is usually liable to ensure the to households will equal contributions to the pensionpayment of the promised benefits, so the new treat­ plan; contributions include the imputed employerment will show an imputed interest cost on the un­ contributions and the household contribution supple­funded actuarial liability that is paid by the employer ments. If employer contributions are viewed as incometo the pension fund.37 to households that households then contribute to the 35. How to account for benefits accrued by participants in defined benefit pension plan, then the contributions represent pay­plans is discussed in SNA 2008, 361–363, paragraphs 17.144–17.186. BEA’s ments into the plan from households, and the distribu­treatment differs from the recommendations in these paragraphs in three tions represent payments to households by the plan.respects. First, if a pension plan has an unfunded actuarial liability, theNIPAs will show an imputed interest expense for the employer responsible The equality between adjusted distributions and con­for making up the foregone investment earnings of the underfunded pen­ tributions therefore implies that net transfers from thesion plan. The SNA guidelines do not currently recommend this imputa­ pension plan sector to the personal sector will be zero.tion, though the issue is being discussed at international advisory groupsand workshops. Second, the NIPAs assume that the imputed interest pay­ The inclusion of pension plans in the corporate sectorable to households on benefit entitlements is equal to the sum of the actual will not therefore give rise to net current businessproperty income and the imputed interest received by the plans. In con­trast, the SNA recommends that the interest accrued on benefit entitle­ transfer payments. With all of these imputations, thements be calculated from the actuarial assumptions alone. Third, the NIPAs corporate profits and undistributed profits of the pen­consistently apply the accrual approach to pension income in measures of sion plan subsector will be zero, because all accrued in­both disposable income and saving. In contrast, the SNA uses a splitapproach in which the disposable income measures are based on cash bene­ come will be passed through to persons.fits, whereas measures of saving are based on accrued benefit entitlements. Transactions of the pensions sector. As shown in 36. The imputed employer contributions will be calculated as the normalcost, plus the administrative expenses, less the values of actual employer table 4, the current receipts of the new pension planand household contributions. subsector will consist of output, contributions, and in­ 37. In the case of an underfunded pension plan, the investment income come receipts on assets. Output will represent the im­that the plan foregoes because of the shortfall in its assets must be made upby the employer, so an estimate of the foregone income will be recorded as plicit sale of the administrative expenses of the pensionan imputed interest cost for the employer that reflects an implied loan from plan to households. Contributions will includethe pension fund to the employer. In the case of an overfunded pension amounts to cover claims to benefits accrued throughplan, the extra investment income earned by the plan reduces the requiredamount of employer contributions, so the employer’s imputed interest cost service and household pension contribution supple­will be negative. ments. Income on assets received by pension plans will
  12. 12. 24 Preview of the 2013 Comprehensive Revision of the NIPAs March 2013include monetary interest and dividends earned on the annual actuarial reports on the major civilian and mil­assets held by the plan as well as imputed interest itary employee retirement plans. For years when actu­earned on the unfunded actuarial liabilities. arial data are not available (before the mid-1980s), The current expenditures of the pension plan sub- BEA will derive normal costs from payrolls by apply­sector will consist of administrative expenses associ­ ing normal cost rates that will be extrapolated back toated with running the plans, imputed income 1929, taking into account historical changes in benefitpayments on assets to persons, benefit payments and rules and prevailing interest and inflation rates. Thewithdrawals, and the adjustment for the change in normal costs for the civilian and military plans will bepension entitlements. boosted slightly to account for smaller retirement Sources and methods. For both privately sponsored plans such as those for employees of the Foreign Ser­and state and local government sponsored plans, BEA vice and the Coast Guard.will adopt an accumulated benefit obligation (ABO) For private and state and local government plans,method for estimating normal costs and interest BEA will measure imputed interest costs by multiply­costs.38 In the case of private plans, the ABO method ing the assumed interest rate by the difference betweenaligns with the source data that BEA will use and with the market value of the plan’s assets and its actuarial li­legal standards for private pension plan funding. For ability. For private plans, annual liabilities will be esti­federal government plans, BEA will use a projected mated by dividing annual asset values by annualbenefit obligation (PBO) method in order to maintain funding ratios published by the Pension Benefit Guar­consistency with the main sets of published actuarial anty Corporation (PBGC) and by the Pension Re­estimates of federal pension plans and with the meth­ search Council.40 BEA will then impute an interest costods used to determine the required contributions to of the difference between plan liabilities and plan assetsfederally funded pension plans.39 assuming the same rate of return based on AAA corpo­ For privately sponsored plans, estimates of normal rate bond rates published by the Federal Reservecosts for 2000 forward will be based on ABO measures Board. For state and local sponsored plans, the actuar­reported in actuarial schedules of the Internal Revenue ial liabilities will be based on the financial reports for aService (IRS) form 5500. The discount rate assump­ large sample of the plans back to 2000 and, as withtion will be based on the AAA corporate bond rate normal costs, extrapolations back to 1929.published by the Federal Reserve Board. Prior to 2000, For federal plans, actuarial liabilities will be derivedIRS-reported tabulations of normal costs are not avail­ using estimates of normal cost, pension benefits paid,able. Thus, BEA will calculate current-period normal and a rate of return based on assumptions made bycost by applying a normal cost rate to covered payrolls federal actuaries or on interest rates of federal debt se­for each period. The normal cost rate will be extrapo­ curities. Imputed interest on the unfunded actuarial li­lated using future benefits paid as an indicator. ability will be measured as the difference between the Estimates of normal costs for state and local govern­ interest cost of the total actuarial liability at the as­ment sponsored plans will be drawn from a large sam­ sumed interest rate and the plans’ actual interest re­ple of actuarial valuation reports for plans back to ceipts.2000. BEA will adjust these data to reflect an ABO ac­tuarial cost method and the same discount rate series Effects on the accountsused for private plans. Before 2000, BEA’s estimates of In the domestic income and product account, NIPAnormal cost per employee will be extrapolated using measures of compensation and net operating surplusactual estimates of covered employees from Census will be affected.Bureau surveys, other agency surveys, and periodic In compensation, supplements to wages and sala­surveys that describe the pension plans’ characteristics. ries will reflect the addition of the imputed employer For federal government sponsored plans, estimates contributions. For state and local government spon­of normal costs will be based on data published in the sored plans, the revisions to compensation will gener­ ally be positive. For private and federal government 38. The ABO method counts only benefits that have already been accruedas the pension wealth of the plan participants and excludes the effects ofprojected future events such as pay raises. In the private sector, employees 40. For 1979 forward, funding ratios for private plans will be derivedcannot count on having the opportunity to gain from future pay raises, from actuarial liabilities and assets reported on form 5500 and published bybecause employers often freeze or terminate the defined benefit plans that PBGC. Assets will be at market value, and liabilities will be adjusted by BEAthey sponsor. The effect of future events on the pension wealth of employ­ with a discount factor based on the AAA corporate bond rate published byees of state and local governments is also uncertain because their required the Federal Reserve Board. Prior to 1979, BEA will estimate liabilities fromcontribution rates may rise and reductions in plan generosity, such as funding ratios published by the Pension Research Council in Richard A.reduced cost of living adjustments, are no longer viewed as impossible. Ippolito, Pensions, Economics and Public Policy (Homewood, IL: Dow Jones- 39. For a more indepth discussion of the differences between ABO and Irwin, 1986) and from assets published in Patrick W. Skolnik, “PrivatePBO actuarial accounting methods, please see Reinsdorf and Lenze. Pension Plans, 1950–1974,” Social Security Bulletin 39 (June 1976): 3–17.