1. www.bea.gov 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. www.bea.gov Comprehensive revisions of NIPAs Comprehensive revision about every 5 years 14 th 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 2

3. www.bea.gov 3 BEAs 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. www.bea.gov For future implementation Several changes require development of new data sources and methods and are on BEAs 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 4

5. www.bea.gov Borrowing/Investment from the Integrated Macroeconomic Accounts 5

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

7. www.bea.gov Holding Gains and Saving from the Integrated Macro Accounts 7

8. www.bea.gov 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) 8

9. www.bea.gov 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 sectorusually 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. www.bea.gov 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 & nonprofitadd CFC for R&D: $148.0 billion 10

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

12. www.bea.gov 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 12

13. www.bea.gov 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 13

14. www.bea.gov 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 14

15. www.bea.gov 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 % 15

16. www.bea.gov New NIPA Tables 16

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

18. www.bea.gov 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. www.bea.gov Costs of ownership transfer 19

20. www.bea.gov 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 Boards 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. www.bea.gov 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 21

22. www.bea.gov 22 Defined benefit pension concepts Actuarial Liability (Benefit Entitlement) Actuarial value of accumulated benefit entitlements AL = service cost + interest cost – benefits paid + effects of assumption 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. www.bea.gov 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. Employers normal cost is compensation income. Dont 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. www.bea.gov 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. www.bea.gov New DB Pension Flows 25

26. www.bea.gov DB pension flows in the NIPAs 26 Financial assets Employer Employees 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 plans funding gap (UAL) Rerouted employer contribution s Benefit payments and administrative services

27. www.bea.gov 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. www.bea.gov Pension Table, Top Part (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 32.2 Current 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

29. www.bea.gov Pension 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 0.8 Change in benefit entitlements including implied funding of benefits from holding gains 61.8

30. www.bea.gov Effects of DB Plan Changes on Saving (research estimates for 2007; $ billions) Private Business State & Local Governments Federal GovernmentHouseholds Saving, DB pensions on cash basis 270.712.2-245.2248.7 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

31. www.bea.gov 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. www.bea.gov 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. www.bea.gov 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. www.bea.gov Accrued interest for unfunded actuarial liabilities 34

35. www.bea.gov 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. www.bea.gov Effect of smoothing and default adjustment on borrower services 36 Proposed method