Population Aging, Intergenerational Transfers, and the Economy
Andrew Mason University of Hawaii – Manoa East-West Center
National Transfer Accounts
Motivation
► Three
features of the economy
Economic lifecycle Population age structure Systems for shifting resources across age
► Saving
► Public
transfer programs ► Familial Support systems
► Interaction
influences economic performance and generational equity ► Implications for economic and population policy
National Transfer Accounts
Organization
I.
II.
III.
Fundamental Ideas Brief Review of Recent Research Current Effort: National Transfer Accounts
Basic Concepts Three Important Issues
► ►
National Transfer Accounts
Fundamentals The Economic Lifecycle
Relative to labor income(30-49)
1.2 1 0.8 0.6 0.4 0.2 0
Consumption Labor Income
12
18
24
30
36
42
48
54
60
66
72
78
84
National Transfer Accounts
Note: Based on estimates for Costa Rica, Indonesia, Taiwan, and Thailand.
90
0
6
Consumption-Loan Economy (Samuelson 1958)
► Labor
income only ► All output is immediately consumed ► Age reallocation system: Transfers only; no saving ► Per capita age profiles of consumption and production are fixed ► Population age structure varies
National Transfer Accounts
Aggregate C and YL Very Young Population (US 1850)
1600 1400 1200 1000 800 600 400 200 0
Deficit for childrenand the elderly exceeds surplus of workers. Consumption must decline.
C Yl
24
34
44
54
64
74
84
94 90 -
4
10 -1
20 -
30 -
40 -
50 -
60 -
70 -
National Transfer Accounts
80 -
10 0+
04
Aggregate C and YL Very Young Population (US 1850)
1600 1400 1200 1000 800 600 400 200 0
Consumption drops by 25 percent.
C Yl C'
24
34
44
54
64
74
84
94 90 -
4
10 -1
20 -
30 -
40 -
50 -
60 -
70 -
National Transfer Accounts
80 -
10 0+
04
Aggregate C and YL Large Working-age Pop (India 2040)
120000 100000 80000 60000 40000 20000 0
Reduction of consumption of only 3% is needed.
C Yl C'
24
34
44
54
64
74
84
94 90 -
4
10 -1
20 -
30 -
40 -
50 -
60 -
70 -
National Transfer Accounts
80 -
10 0+
04
Aggregate C and YL Old Population (Japan 2080)
6000 5000 4000 3000 2000 1000 0
Old population leads to 26% decline in consumption.
C Yl C'
24
34
44
54
64
74
84
94 90 -
4
10 -1
20 -
30 -
40 -
50 -
60 -
70 -
National Transfer Accounts
80 -
10 0+
04
First Demographic Dividend Economic Support Ratio
1 0.95 0.9 0.85 0.8 0.75 0.7 US Japan India
National Transfer Accounts
18 50 18 70 18 90 19 10 19 30 19 50 19 70 19 90 20 10 20 30 20 50 20 70 20 90
Source: Mason 2007.
Summary of Implications
► Changes
in the relative numbers of workers and consumers over the demographic transition leads to a demographic dividend.
Bloom and Williamson Bloom, Canning, and Sevilla Lee and Mason
► The
effect erodes as populations age.
National Transfer Accounts
Introduce Capital
► Economy
with capital
Workers save during their working years Rely on asset income and dis-saving during retirement.
► For
solving the old-age lifecycle problem, capital and transfers are close substitutes. ► However, capital also has favorable effects on economic growth.
National Transfer Accounts
What determines the lifecycle demand for capital?
► Features
of the economic lifecycle
Consumption by the elderly (now & future) Labor income of the elderly (now & future)
► Relative
number of elderly: More elderly implies greater demand for lifecycle capital.
National Transfer Accounts
Demand for wealth Old versus Young Population
Young Population
1600 1400 1200 1000 800 600 400 200 0
Old Population
6000 5000 4000 3000
Yl
Yl
C
2000 1000 0
C
20 -2 4
30 -3 4
40 -4 4
50 -5 4
60 -6 4
70 -7 4
80 -8 4
90 -9 4
4
10 -1 4
20 -2 4
30 -3 4
40 -4 4
50 -5 4
60 -6 4
70 -7 4
80 -8 4
90 -9 4
LC demand for wealth is negligible
National Transfer Accounts
10 -1
LC demand for wealth is large
10 0+
10 0+
04
04
What determines the lifecycle demand for capital (continued)?
► Support
system for the elderly
Importance of the capital system Familial and public transfer systems undermine capital accumulation
National Transfer Accounts
II. Summary of Recent Research
► Population,
Saving, and Wealth
Changes in age structure are only partially responsible for high saving rates in Asia (LMM various; KM 2007). Longer life expectancy led to a behavioral change that reinforced age structure effects (LMM various; KM 2007). A decline in familial support for the elderly may have played an important role (LMM 2003). Aging will lead to somewhat lower saving (LMM various) or not (KM 2007). Longer life expectancy and aging are leading to a permanent increase in wealth (LMM various; KM 2007)
National Transfer Accounts
II. Summary of Recent Research
► Demographic
Dividends
Changes in age structure produce two demographic dividends First dividend
► Concentration
of population in working ages leads to more rapid economic growth; ► Effect unwinds as populations age.
Second dividend: changes in age structure and increase in life expectancy lead to
rapid economic growth ► Permanently higher economic growth.
► More
Sources: Mason and Lee, various; Mason, various.
National Transfer Accounts
Important Issues to be Explored
► How
does the economic lifecycle vary and why? ► What systems do societies use to shift resources from surplus to deficit ages? ► Why do the systems vary across countries and evolve over time? ► What are the implications for economic performance? For generational equity? ► What are the implications for economic policy? For population policy?
National Transfer Accounts
III. National Transfer Accounts
►
Objective:
Develop and apply a comprehensive system of accounts that measures economic flows across age groups in a manner consistent with the System of National Accounts.
►
Conceptual foundation:
Lee (1994) but also Samuelson (1958), Diamond (1965), and Willis (1988).
►
Organization:
Collaboration between EWC/UH and UC-Berkeley. Core funding from NIA. Sub-projects supported by UNFPA and others.
►
Website: www.ntaccounts.org
National Transfer Accounts
Participating Countries
ASIA
China India Indonesia Japan Korea, S. Philippines Taiwan Thailand
EUROPE
Austria France Hungary Slovenia Sweden
LATIN AMERICA
Brazil Chile Costa Rica Mexico Uruguay
NORTH AMERICA
United States
OCEANIA
Australia
National Transfer Accounts
National Transfer Account Flows
Labor Income
Dis-saving & Interest income
Transfers
Asset System
Saving & Interest expense
Age Group
Transfers
Transfer System
Consumption
National Transfer Accounts
Inflows
Outflows
The Flow Account Identity
► Inflows ► Outflows
Labor Income Asset Income Transfer Inflows
l a
Consumption Saving Transfer Outflows
Y (a ) Y (a) (a) C (a) S (a) (a)
Inflows Outflows
C (a ) Y l (a ) Y a (a ) S (a ) (a ) (a ) Lifecycle Deficit Asset-based Reallocations Net Transfers
Age Reallocations
National Transfer Accounts
Detailed National Transfer Flow Account
► Consumption:
public and private for health, education, housing, and other. ► Public transfers: in-kind (health, education, other) and cash (pensions and other). ► Private transfers: intra-household for health, education, housing, and all other; inter-household for other. ► Asset-based reallocations: Public and private investment; public and private credit/debt. ► Domestic flows and flows to ROW.
National Transfer Accounts
Approach to Estimation
► National
Income Accounts and other aggregate statistics are used as aggregate controls ► Age profiles are based on nationally representative surveys, e.g., income and expenditure surveys, labor force surveys, health expenditure surveys, etc. ► Common methodology documented on www.ntaccounts.org
National Transfer Accounts
Issue 1: Lifecycle Deficit, Children
► Does
the lifecycle deficit per child increase as the number of children declines?
Becker quality-quantity tradeoff If so, the decline in fertility will have a smaller effect on capital accumulation. However, if consumption is higher because parents are spending more on education, then human capital will increase as the number of children declines.
National Transfer Accounts
Per Capita Lifecycle Deficit, Japan 2004, Survival Weighted
1.4 1.2
Relative to Yl(30-49)
1 0.8 0.6 0.4 0.2 0
Child LCD 15.1 years of prime-adult labor
Elderly LCD 10.5 years of prime-adult labor
0
10
20
30
40 Age
50
60
70
80
90
National Transfer Accounts
Note. US 1985-89 life table used for all countries.
Tradeoff: Spending per Child and Number of Children, 13 Countries
16 15 14 13 12 11 10 9 8 7 6 0.2 0.4 0.6 0.8
LCD Children/Yl(30-49)
y = -7.7914x + 15.473 R2 = 0.6125
1
1.2
Child Dependency Ratio: N(0-19)/N(20-59)
National Transfer Accounts
Tradeoff: Spending per Child and Number of Children, 13 Countries
16 15 14 13 12 11 10 9 8 7 6 0.2
LCD Children/Yl(30-49)
Jp US SK Th Ur CR Ch
Tw Sw Fr
Indo In
Ph
0.4
0.6
0.8
1
1.2
Child Dependency Ratio: N(0-19)/N(20-59)
National Transfer Accounts
Issue 2: Lifecycle Deficit, Elderly
► Does
the lifecycle deficit per elderly decline as the number of elderly rises?
Preston and others argue yes – political power. If so, the rise in the old-age population will have a larger effect on capital accumulation.
National Transfer Accounts
Tradeoff: Spending per Elderly and Number of Elderly, 13 Countries
12 11 10 9 8 7 6 5 4 3 2 0.1 0.15 0.2 0.25 0.3
LCD Elderly/Yl(30-49)
y = 11.993x + 4.5285 R2 = 0.4266 0.35 0.4 0.45 0.5
Old-age Dependency Ratio: N(60+)/N(20-59)
National Transfer Accounts
Tradeoff: Spending per Elderly and Number of Elderly, 13 Countries
12 11 10 9 8 7 6 5 4 3 2
LCD Elderly/Yl(30-49)
US CR Th Ch Tw SK
Ur
Jp Fr Sw
Ph In Indo
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
Old-age Dependency Ratio: N(60+)/N(20-59)
National Transfer Accounts
Issue 3. Support Systems for the Elderly.
► How
do they differ across countries? ► Do Asian countries rely more on familial transfers and Western countries more on public transfers? ► Does the expansion of public systems crowd saving as hypothesized by Feldstein? ► Or familial transfers?
National Transfer Accounts
Saving
Capital-based transformation
Social welfare transformation
Traditional society?
Familial Transfers
Old-Age Reallocation Systems
Public Transfers
National Transfer Accounts
Saving
Mixed Strategies
50-50 familial and saving
50-50 saving and public
50-50 familial and public
Familial Transfers
Old-Age Reallocation Systems
Public Transfers
National Transfer Accounts
Saving
Public transfers and familial transfers are substitutes.
Familial Transfers
Old-Age Reallocation Systems
Public Transfers
National Transfer Accounts
Saving
Feldstein: Public transfers to the elderly crowd out saving.
Familial Transfers
Old-Age Reallocation Systems
Public Transfers
National Transfer Accounts
Old-age Reallocation System, Selected Countries.
100 0
25 75
US elderly rely on asset-based reallocations and public transfers.
Public transfers (%)
50 Asset-based (%)
US
50
75 25
100 0 100 75 50 Fam ily Transfers (%) 25 0
National Transfer Accounts
Old-age Reallocation System, Selected Countries.
100 0
Thai elderly rely on asset-based reallocations and on familial transfers.
25 75 Public transfers (%)
Thailand 50 Asset-based (%)
50
75 25
100 0 100 75 50 Fam ily Transfers (%) 25 0
National Transfer Accounts
Old-age Reallocation System, Selected Countries.
100 0
25 75 Public transfers (%)
Thailand 50 Asset-based (%)
US
50
Taiwan has a relatively balanced 25 support system.
Costa Rica 75 Taiw an Japan
Costa Rica and Japan rely heavily on public transfers; no familial transfers.
100 0 100 75 50 Fam ily Transfers (%) 25 0
National Transfer Accounts
Conclusions
► Decline
in fertility may
Lead to more consumption by children reducing the effect on saving Lead to more spending on education for children leading to second demographic dividend due to human capital investment. Influence familial support systems in ways that have not yet been explored.
National Transfer Accounts
Conclusions
► Aging
may lead to
Larger per capita lifecycle deficit reinforcing the effects of aging The economic effect will be some unknown combination of the three:
►Increase
saving and economic growth ►Increase the size of public programs and budget deficits; or ►Increase the burden on families which support the elderly.
National Transfer Accounts
Conclusions
► The
support systems for the elderly are varied and do not conform to simple regional classifications. ► The elderly in Costa Rica and Japan are relying on saving and public transfers. Have public programs crowded out familial transfers? ► In Taiwan and Thailand, the familial support system is still important.
National Transfer Accounts
The National Transfer Accounts project is a collaborative effort of East-West Center, Honolulu and Center for the Economics and Demography of Aging, University of California - Berkeley
Lee, Ronald (ronlee), Co-Director Mason, Andrew (amason), Co-Director Auerbach, Alan (auerbach) Miller, Tim (tmiller) Lee, Sang-Hyop (leesang) Donehower, Gretchen (gstockma) Ebenstein, Avi (ebenstei) Wongkaren, Turro (turro) Takayesu, Ann (takayesa) Boe, Carl (cboe) Comelatto, Pablo (pabloc) Sumida, Comfort (comfort) Schiff, Eric (eric) Stojanovic, Diana (diana) Langer, Ellen (erlanger) Chawla, Amonthep (beet) Pajaron, Marjorie Cinco (pajaron)
National Transfer Accounts
Taiwan Key Institution: The Institute of Economics, Academia Sinica, Taipei, Taiwan. Tung, An-Chi(actung), Country Leader Lai, Mun Sim (Nicole)(munsim) Liu, Paul K.C.(kliu) Andrew Mason Japan Key Institutions: Nihon University Population Research Institute and the Statistics Bureau of Japan, Tokyo, Japan. Ogawa, Naohiro(ogawa), Country Leader Matsukura, Rikiya(matukura) Fukui, Takehiro(jstat) Kondo, Makoto(kondo) Akasaka, Katsuya(akasaka) Nemoto, Kazuro(nemoto) Makabe, Naomi(makabe) Sato, Ryoko(rsato) Ogawa, Maki(mogawa) Murai, Minako(murai) Obayashi, Senichi(obayashi) Suzuki, Kosuke(Suzuki)
National Transfer Accounts
Australia Key Institution: Australia National University Jeromey Temple, Country Leader Brazil Turra, Cassio(cturra), Country Leader Lanza Queiroz, Bernardo(lanza) Renteria, Elisenda Perez(elisenda) Chile Key Institution: United Nations Economic Commission for Latin America and the Carribean, Santiago, Chile Bravo, Jorge(jbravo2), Country Leader China Key Institution: China Center for Economic Research, Beijing, China. Ling, Li(Lingli), Country Leader Chen, Quilin(Chen)
National Transfer Accounts
France Wolff, Francois-Charles(wolff), Country Leader Bommier, Antoine(bommier) Thailand Key Institution: Economics Department, Thammasat University. Phananiramai, Mathana(Mathana), Country Leader Chawla, Amonthep (Beet)(amonthep) Inthornon, Suntichai(Suntichai) India Key Institution: Institute for Social and Economic Change, Bangalore Narayana, M.R.(narayana), Country Leader Nanak Kakwani(kakwani) Ladusingh, L.(ladusingh) Mexico Key Institution: Consejo Nacional de Población Partida, Virgilio (virgilio), Country Leader Mejía-Guevara, Iván(ivan)
National Transfer Accounts
Indonesia Key Institution: Lembaga Demografi, University of Indonesia, Jakarta, Indonesia. Maliki(maliki), Country Leader Wiyono, Nur Hadi(nhwiyono) Nazara, Suahasil(nazara) Chotib(chotib) Philippines Key Institution: Philippine Institute for Development Studies. Racelis, Rachel H.(Rachel), Country Leader Salas, John Michael Ian S.(Salas) Sweden Key Institution: Institute for Future Studies, Stockholm, Sweden. Lindh, Thomas(lindh), Country Leader Johansson, Mats(Mats) Forsell, Charlotte (charlotte)
National Transfer Accounts
Uruguay Bucheli, Marisa(marisa), Country Leader Furtado, Magdalena(furtado) South Korea An, Chong-Bum (cban), Country Leader Chun, Young-Jun (yjchun) Lim, Byung-In (billforest) Kim, Cheol-Hee (Kimch) Jeon, Seung-Hoon (jsh1105) Gim, Eul-Sik (kuspia) Seok, Sang-Hun (good) Kim, Jae-Ho (ksud)
National Transfer Accounts
Austria Key Institution: Vienna Institute of Demography Fuernkranz-Prskawetz, Alexia (alexia), Country Leader Sambt, Joze(joze) Costa Rica Key Institution: CCP, Universidad de Costa Rica Rosero-Bixby, Luis(lrosero), Country Leader Slovenia Sambt, Joze(joze), Country Leader
National Transfer Accounts
United States Key Institution: Center for the Economics and Demography of Aging Lee, Ronald(ronlee), Country Leader Miller, Tim(tmiller) Ebenstein, Avi(ebenstei) Boe, Carl(cboe) Comelatto, Pablo(pabloc) Donehower, Gretchen(gstockma) Schiff, Eric(eric) Langer, Ellen(erlanger)
National Transfer Accounts
The End
Support: National Institutes of Health NIA, R01-AG025488 NIA, R37-AG025247
National Transfer Accounts