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Implementation of SNA 2008 in the 2013 Comprehensive Revision of the U.S. National

Income and Product Accounts (NIPAs)

Marshall B. ReinsdorfWorkshop on SNA 2008 in Latin American National Accounts

Rio de Janeiro

September 17-18, 2013

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Comprehensive revisions of NIPAs

▪ Comprehensive revision about every 5 years▪ 14th comprehensive revision just happened in

2013▪ Incorporate results of the 5-year economic

census and the benchmark input-output accounts

▪ Update the reference year for prices/quantities▪ Opportunity to introduce major changes in

concepts, methods, and tables▪ The entire time span back to 1929 is

potentially open for revisions

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BEA’s implementation of SNA 2008

▪ The U.S. Bureau of Economic Analysis (BEA) had already adopted some of SNA 2008 changes before 2013: Non-life insurance and reinsurance. Military fixed assets

Also had full sequence of accounts in Integrated Macroeconomic Accounts.

▪ In 2013 comprehensive revision, BEA implemented the major SNA changes affecting production and income: Capitalization of research and development Capitalization of costs of ownership transfer Pension entitlements Improvements to measure of FISIM Entertainment, literary, and artistic originals (was in 1993

SNA)

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For future implementation

▪ Several changes require development of new data sources and methods and are on BEA’s work plan: Treatment of employee stock options

Currently recorded by BEA when exercised SNA 2008 treatment is based on fair value

and is recorded between grant and vesting Recording of goods sent abroad for processing

on a change-of-ownership basis Merchanting to be reclassified as trade in

goods

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Borrowing/Investment from the Integrated Macroeconomic

Accounts

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Holding Gains and Saving of Holding Gains and Saving of Households Households from the Integrated from the Integrated

Macro AccountsMacro Accounts

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Holding Gains and Saving from the Holding Gains and Saving from the Integrated Macro AccountsIntegrated Macro Accounts

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Research and development

▪ Expenditures on R&D have the characteristics of fixed assets and should be treated as investment: Ownership rights, long-lasting, used in production

▪ Previous treatment: Business R&D expenditures were classified as intermediate

inputs R&D expenditures of nonprofit institutions and

governments were included in consumption expenditures

▪ New treatment: R&D expenditures by businesses, NPISH, and governments

are counted as fixed investment Depreciation of R&D added to consumption of fixed capital

(CFC)

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From R&D expenditures to GDP impacts

▪ Identify R&D investment Sum R&D input costs based on performer data

Remove double-counting of software Include depreciation of other fixed assets used to produce R&D

Assign investment to owning sector—usually funder of the R&D

Business Nonprofit institutions serving households Government (federal and state and local)

Deflate nominal investment Input-cost approach with a productivity adjustment

▪ Estimate R&D capital stocks by owner Create capital stocks with perpetual inventory method

Model derives industry-specific depreciation rates from investment & profits

For general government, based on useful service lives of technologies

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Impact of capitalizing R&D in U.S.

▪ Total R&D investment for 2012: $417.7 billion 2.6% of (revised) GDP

Business R&D: $248.7 billion Formerly treated as intermediate spending

Government & nonprofit R&D: $169.0 billion Reclassified from consumption to investment

▪ Impact on GDP revision for 2012: $396.7 billion 2.5% of (previously published) GDP

Business investment added to GDP: $248.7 billion Government & nonprofit—add CFC for R&D:

$148.0 billion

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Top Private Business R&D-investing Industries

19872007

Percent of Private Business Investment in R&D

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R&D: Quarterly estimates

▪ Private business R&D investmentAfter 2007 - quarterly financial statements (Compustat)Before 2007 - wages and employment

▪ Federal R&D investmentInterpolated based on trends in intermediate R&D services

▪ NPISH and state and local government R&D investmentInterpolated as a smooth trend

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Entertainment, literary, and artistic originals

▪ Original films, sound recordings, literary and music compositions, and artwork that can be used for the production and sale of copies

▪ Estimates for several types, including: Motion pictures Long-lasting television programs Books Music compositions and recordings Miscellaneous artwork

▪ Treatment as fixed investment in way that is similar to R&D, except entirely in private sector

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Entertainment originals: Implementation

▪ Little data on production costs Except theatrical movies, pre-2007

▪ Value of Investment = Net Present Value of Revenue (NPV) Minus Non-Artwork Cost Revenue data adjusted to include only revenue

from new works Net revenue is estimated by removing non-

artwork costs Adjusted net revenue is multiplied by an “NPV

factor” to derive investment value of future revenue stream The discount rate is 7% real

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Entertainment originals: Implementation

▪ Prices of entertainment assets PPIs, CPIs

▪ Annual depreciation will follow a geometric pattern, based on trends in NPV over time. Theatrical movies: 9.3 % Long-lived television: 16.8 % Books: 12.1 % Music: 26.7 % Miscellaneous: 10.9 %

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New NIPA Tables

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NIPA series Start datePrivate fixed investment in intellectual property products 1929 Software 1959 Prepackaged 1985 Custom 1985 Own account 1985 Research and development 1929 Business 1959 Manufacturing 1959 Pharmaceutical and medicine manufacturing 1959 Chemical manufacturing, excluding pharmaceutical and medicine 1959 Semiconductor and other electronic component manufacturing 1959 Other computer and electronic product manufacturing 1959 Motor vehicles, bodies and trailers, and parts manufacturing 1959 Aerospace products and parts manufacturing 1959 Other manufacturing 1959 Nonmanufacturing 1959 Scientific research and development services 1987 All other nonmanufacturing 1987 Nonprofit institutions serving households 1959 Universities and colleges 1959 Other nonprofit institutions 1959 Entertainment, literary, and artistic originals 1929 Theatrical movies 1929 Long-lived television programs 1949 Books 1929 Music 1929 Other 1929

Private Fixed Investment in Intellectual Property Products

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Real private intellectual property products

[Percent change from preceding period, SAAR]

-10

-5

0

5

10

15

20

25

Per

cent

Private Investment in IPP[Percent Change from Previous Quarter]

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Costs of ownership transfer

▪ Old treatment Real estate brokers’ commissions on structures classified

as fixed investment Depreciated over the life of the structure (80 years)

▪ New treatment Commissions on structures and land, title fees, attorney

fees, other non mortgage related costs Depreciated over the typical holding period (12 years)

▪ Effects Increase GDP by the newly recognized investment (2007:

$60 billion) Increase CFC more than investment (2007: $130 billion) Decrease net operating surplus (2007: $70 billion)

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Costs of ownership transfer

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Changes in Treatment of DB Pensions

▪ Accrual-based accounting replaces cash accounting Gives more accurate picture of compensation and sector

saving. Actuarial methods, which depend on assumptions, must be

used.

▪ New Pension Plan Sector Consistent with the Federal Reserve Board’s Flow of Funds

Accounts. Part of Financial Corporations Sector

▪ New Tables National totals for defined benefit plans. Private, state & local government, and Federal DB plans.

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Accrual-based measures of pensions

▪ New measures for defined-benefit (DB) plans

▪ Accrual-based accounting Matches income earned with related production Recognizes employer liabilities for promised pension

benefits Replaces cash-based accounting

▪ Compensation of employees Deferred compensation Benefits accrued on services rendered in current period

▪ Interest Benefits accrued on services rendered in past periods Includes interest on unfunded actuarial liabilities

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Defined benefit pension concepts

▪ Actuarial Liability (“Benefit Entitlement”) Actuarial value of accumulated benefit entitlements ∆AL = service cost + interest cost – benefits paid +

effects ofassumption changes and plan amendments

Service cost is also known as “normal cost”

▪ Unfunded Actuarial Liability (UAL) = actuarial liability – plan assets

▪ Change in Plan Assets = contributions + property income – benefits paid – admin. exp. +/- holding gains/losses + net capital transfers

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Challenges in designing the new table

▪ Guidelines of the 2008 SNA (table 17.8) and the Flow of Funds Accounts have a pension plan sector located in the financial corporations sector.

▪ Employer’s normal cost is compensation income.

▪ Don’t want to affect saving of financial corporations sector. Saving by pension plans defined to equal zero. Dividend and interest income passed through to

persons.

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Challenges in designing the new table

▪ Gap between interest on the actuarial liability and property income on plan assets is likely to occur because plans use holding gains to fund benefits and have non-zero UAL .

▪ Assets that generate holding gains pay less income, so property income < assumed interest rate value of assets.

▪ If plan invests in assets that can be expected to generate holding gains, shortfall in property income from assets vs. the income implied by the assumed interest rate will be termed “implied funding of benefits from holding gains” .

▪ Interest imputed on the loan from plan to the employer if the unfunded actuarial liability (UAL) > 0, or on prepaid contributions if UAL < 0.

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New DB Pension Flows

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DB pension flows in the NIPAs

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Financial assets

EmployerEmployees and

former employees

Pension plan

Pension promises (actual and imputed

contributions as compensation)

Labor services

Monetary interest and dividend

income Imputed interest and

dividend income from assets and

employer

Contribution supplements

(equal to imputed income received) and

direct contributions

Imputed interest cost of plan’s funding gap

(UAL)Rerouted employer

contributions

Benefit payments and administrative

services

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What do contribution lines in the table equal?

▪ Imputed employer contributions = admin expenses + service cost–actual employer contributions–employee contributions

▪ Contributions includes household contribution supplements and a negative imputation for administrative expenses, which are recorded as implicit sales of services to households.

▪ Contributions = Gross accruals of benefit entitlements excluding benefits funded by holding gains.

▪ Net change in benefit entitlements = Contributions – benefits.

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Pension Table, Top PartPension Table, Top Part(research estimates for private plans in 2007)(research estimates for private plans in 2007)

Current receipts, accrual basis 223.3 Output 9.8 Contributions 147.5 Claims to benefits accrued through service to employers 81.4 Actual employer contributions 67.1 Imputed employer contributions 23.3 Actual household contributions 0.8 Less: Pension service charges 9.8 Household pension contribution supplements 66.1 Income receipts on assets (including plans' claims on employers) 66.1 Interest 33.9 Monetary interest 37.6 Imputed interest on plans' claims on employers (for the UAL) -3.7 Dividends 32.2Current expenditures, accrual basis 223.3 Administrative expenses 9.8 Imputed income payments on assets to persons 66.1 Interest 33.9 Dividends 32.2 Benefit payments and withdrawals 158.8 Net change in benefit entitlements -11.3

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Pension Table, Bottom PartPension Table, Bottom Part

Cash flow -30.9 Actual employer and household contributions 67.9 Monetary income receipts on assets 69.7 Less: Benefit payments and withdrawals 158.7 Less: Administrative expenses 9.8

Effect of participation in plans on personal income, saving, and wealth

Effect on personal income 156.5 Less: Effect on personal consumption expenditures 9.8 Equals: Effect on personal saving 146.7 Plus: Implied funding of benefits from holding gains on assets 73.0 Interest accrued on benefit entitlements 139.1 Less: Interest and dividend income received by plans 66.1 Equals: Change in personal wealth 219.7 Less: Benefit payments and withdrawals 158.7 Plus: Household actual contributions 0.8Change in benefit entitlements including implied funding of benefits from holding gains 61.8

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Effects of DB Plan Changes on Saving (research Effects of DB Plan Changes on Saving (research estimates for 2007; $ billions)estimates for 2007; $ billions)

Private Business

State & Local

Governments

Federal Government Households

Saving, DB pensions on

cash basis270.7 12.2 -245.2 248.7

Revision in Saving –19.6 –101.3 –35.1 +156.0

Revision, as percent of disposable

personal income–0.2 –1.0 –0.3 +1.5

Actual Revision Published Data

–0.21 –0.95 –021 +1.3

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Source data for private plans

▪ We add up variables on the ABO, normal cost, contributions, benefits, and assets from almost 40,000 tax returns per year.

▪ Interest and dividend income of plans is estimated by multiplying average rates of return by corresponding values of assets.

▪ We use data sets from 2000 on (for early years extreme and missing values were problems, and some plans were missing.)

▪ For pre-2000 years, we extrapolated back normal cost rate using future benefits as a indicator.

▪ Reported numbers adjusted to reflect a common interest rate assumption based on AAA corporate bond yields (5 percent in recent years).

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Data for state & local government plans

▪ For state & local government plans, we collected samples of actuarial valuation reports covering 90% of assets and membership back to 2000.

▪ We used membership data and estimates of normal cost rates to extrapolate back to 1929 (beginning of time for the NIPAs).

▪ Census Bureau will collect normal cost data in future, helped by new reporting standards promulgated by GASB.

▪ Most of the reports use the Entry Age Normal method and assume a high rate of interest; we adjusted them to ABO method and to use same interest rate as we used for private plans.

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Data for federal government plans

▪ Actuarial reports go back to 1979 (civilians) or 1985 (military).▪ Use PBO approach; legal funding targets are also based on

PBO.▪ Normal cost for each year, the PBO for 2013, and actual plan

expenses used as inputs into simulations. For older years, we multiplied payroll by an estimated normal cost rate. Civilian simulation incorporated plan rule changes in 1930, 1942, 1948, 1956 and 1969.

▪ We assumed that trust fund received contributions equal to normal costs and earned interest on assets at the rate used by the federal actuaries. It pays benefits and administrative expenses.

▪ Trust fund balance served as estimate of PBO, with upward adjustments in 1970 for inflation surprise and in 2009-2010 for interest rate decline that was not matched by inflation decline.

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Accrued interest for unfunded actuarial liabilities

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-20

0

20

40

60

80

100

120

140

160

180

200

220

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Bill

ion

s o

f d

olla

rs

from private business from federal from state and local

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FISIM: Banking services

▪ Include only assets and liabilities with direct customer contact

▪ Exclude expected credit losses from borrower services

▪ Improve user cost estimate of depositor and borrower services

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Effect of smoothing and default adjustment on borrower services

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Proposed method