Measuring the degree of government intervention on intergenerational family transfers (IFT)

using NTA estimates

Concepció Patxot Elisenda Renteria

Miguel Sánchez RomeroGuadalupe Souto

A proposal to the Incentives Working Group (IWG)

1. Integrated results for GA and NTA for Spain: some implications for the sustainability of welfare state (paper finished for Spain)2. Measuring the degree of government intervention on intergenerational family transfers (IFT) using NTA estimates (paper almost finished for Spain)3. A proposal of a comparative paper on indicators

Concepció Patxot Elisenda Renteria

Miguel Sánchez RomeroGuadalupe Souto

• Ageing threats the sustainability of one of the Welfare State –one of greatest social achievements of the past century.

• Effects of population ageing on the economy

– L scarce– K relatively abundat

Effects depend on:– Preferences on savings: retirement/bequest/precaution motive + intergenerational transfers– Other endogenous variables: Even fertility!

• Effects on budget depend on: – Increase in demographic dependency and…– Increase in ratio benefit receivers/tax payers (wage us the tax base, so…) – NTA/GA allows to obtain some helpful indicators (Stiglitz commission)

• What happens to the rest of age reallocations?! It matters for intra/intergenerational redistribution and there is no an integrated theoretical model accounting for all the transfers.– We can measure the degree of intervention to both sides

¿ ↑ k=K/L? ¿ ↑ w ↓ r

General motivación

Measuring the degree of government intervention on intergenerational family transfers (IFT) using NTA estimates

• Why is ageing a problem for the welfare state?:.. Besides the traditional constraints on public policy• Tax schedules that are as neutral as possible

• A new difficulty emerges: most of the social programs (pensions, health care, education, etc.) – Entail not only intra but intergenerational redistribution– It implies intertemporal movement of public funds, usually financed –

either explicitly or implicitly – on a pay-as-you-go basis (PAYG).– Most outstanding example: Pension system (explicit PAYG), but also health,

etc. – The “transition problem”: The initial gift must be born by the current active

who should raise a new fund so they bear 2 burdens (a third one: child rearing!!!)

• A deeper question: Why should de government interfere in the forward or backward intergenerational transfers (from parents to their offspring or vice versa).

TransfersMoney, time and time &effort

Types Motives Substitution from Market or Government?

Reasons for public intervention (+/-)

To young dependents Birth (IF)Subsistence (IF)Health Care, personal relationsEducation (IF)Bequests (EF)Gifts

Altruism (Fwd)/ Social contractExchange

Liquidity constraints prevent market substitution!

Health care scarcely substitutable

Need to consider bargaining between parents (marriage)…

+ Redistribution, equal opportunities, intergenerational mobility

+ External positive effects on growth (and liquidity constraints)- External effect on fertility (not on saving plans)- PAYG finance subject to demographic risk

Old dependents SubsistenceHealth care, personal relationsGifts

Altruism (Bkw)Social contractExchange

Demonstration effect as a reinforcing device on social contract??

In general more substitutable than to young

RedistributionMyopia Uninsurable risk (Long term care)

Issues

Social changes occurred

• Affecting lifecycle timing: Increase in life expectancy and delay in entry in the labor market due to education . A reduction on the productive/dependent period?• Female participating : Reduces the availability of non market work

Effects on capital accumulation

• Private transfers might be “fully funded” (except if myopia) or human capital funded (if invested on education of the young)

Motivation• A deeper question: Why should de government interfere in

the forward or backward intergenerational transfers (from parents to their offspring or vice versa).

• A too complex issue to model, but we can do something using NTA estimates:– Measure the degree of intervention in both sides (paper

for Spain)• Comparative analysis (general paper)

– Measure the first and second demographic dividend (Mason & Lee 2006)

– A more transparent way of measuring the room left for the second DD: A sinthetic indicator (general paper)

TG from 41,74

13,14 LCD from 41,31 73,65122.85% 140.20%

78.31% 156.33%

101.33% 19.78%

74,99

29.10%

11,48

14,29 62.33TF from 43.43

TF from 74.94

Measuring the degree of government intervention on IFT“Modified” Lee Arrows

Transfers Expenditure to GDP(%)

Forward looking (from parents to kids) 2.004 2.050

Education 4,41 4,21

Family 0,5 0,47

Health (to the young) 0,71 0,69

Total forward looking 5,60 5,37

Backward looking (from adult children to parents) 2.004 2.050

Retirement pensions 6,02 13,54

Long term care 0,33 0,97

Health (to the elderly) 4,58 7,81

Total backward looking 12,16 22,32

Source: Ferrer and Patxot (2007)

Measuring the degree of government intervention on IFT: “Modified” Lee Arrows

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YDR 0-15 / 16-64 ODR 65+ / 16-64 Total DR

(Back to the effects on budget) The Spaish demography

NTA and GA an integrated view

Baseyear, t

EconomicVariables

DemographicVariables:Population (P)

tttt TFTGABRLCD

Standard NTA: Baseyear Cross Section

tABR

tTF

tTG

tLCD

etP

GA: forward lookingSustainability of TG

Fist DDBackard looking

TimeGA

newbornGA

Future

GA/NTA indicators• Tipical GA sustainability indicator

– PV future net deficits/PV future GDP– = “Intertemporal” Debt/ “Intertemporal” GDP– Evolution of Budget balance/GDP

• NTA indicators: Base year and changing population– “Economic” Support Ratio (ESR)

• L/C (weighted by NTA profiles)

• Another option: LCD/LCS = Aggregate - LCD/aggregate + LCD (LCS)– Evolution of financing sources of LCD– Sustainability Indicators (more GA)ABR/Yl needed an interesting “Residual”

• Issues– 3-4 “economic sustainability” indicators– (NTA) TG is “zero” in a closed economy , but still: its evolution is interesting– General equilibrium AND wealth account missing

LCDABR

LCDTF

LCDTG 1

llll YABR

YTF

YTG

YLCD

Figure 6 Evolution of the share of TG, TF and ABR in LCD (1908-2150)

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Figure 7 Evolution of economic sustainability indicators for Spain (1908-2150)

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ABR/Yl Ya/Yl S/Yl LCD/Yl

Figure 8 Evolution of the ABR aggregates (1908-2150)

DiscussionA comprative paper exploring the romm left for the second demographic

dividend

• Sustainability ABR/Yl• Balance: “Modified” Lee Arrows• Explicit funding and implicit or pre “funding” : (More modified rows)

Where about in the demographic transition?• Best/worst moment?

Thank you

Spain

Comparative