Implementation of SNA 2008 in the 2013 Comprehensive Revision of the U.S. National Income and Product Accounts (NIPAs)

1. Implementation of SNA 2008 in the 2013 Comprehensive Revision of the U.S. National Income and Product Accounts (NIPAs) Marshall B. Reinsdorf Workshop on SNA 2008 in Latin American National Accounts Rio de Janeiro September 17-18, 2013

2. 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

3. 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)

4. 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

5. Borrowing/Investment from the Integrated Macroeconomic Accounts

6. Holding Gains and Saving of Households from the Integrated Macro Accounts

7. Holding Gains and Saving from the Integrated Macro Accounts

8. 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)

9. 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

10. 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

11. Top Private Business R&D-investing Industries Percent of Private Business Investment in R&D 2007 1987

12. R&D: Quarterly estimates • Private business R&D investment • After 2007 - quarterly financial statements (Compustat) • Before 2007 - wages and employment • Federal R&D investment • Interpolated based on trends in intermediate R&D services • NPISH and state and local government R&D investment • Interpolated as a smooth trend

13. 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

14. 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

15. 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 %

16. New NIPA Tables

17. Real private intellectual property products [Percent change from preceding period, SAAR]

18. 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)

19. Costs of ownership transfer

20. 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.

21. 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

22. 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

23. 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.

24. 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.

25. New DB Pension Flows

26. DB pension flows in the NIPAs Benefit payments and administrative services Monetary interest and dividend income Financial assets Pension plan Imputed interest and dividend income from assets and employer Imputed interest cost of plan’s funding gap (UAL) Contribution supplements (equal to imputed income received) and direct contributions Rerouted employer contributions Employees and former employees Employer Labor services Pension promises (actual and imputed contributions as compensation)

27. 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.

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

29. Pension Table, Bottom Part

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

31. 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).

32. 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.

33. 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.

34. Accrued interest for unfunded actuarial liabilities

35. 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

36. Effect of smoothing and default adjustment on borrower services Proposed method