National Institute of Economic and Social Research Development and applications of the National...

National Institute of Economic and Social Research

Development and applications of the National Institute General Equilibrium model

of Ageing (NiAGE)

NIESR, London, November 30, 2015Katerina Lisenkova

Financial support from the Economic and Social Research Council under the grant: “A dynamic

multiregional OLG-CGE model for the study of population ageing in the UK” is gratefully acknowledged.


Background

Future Research Leaders ESRC grant November 2012 – December 2015


Overview

Why study the economic effects of population ageing

NiAGE development

Applications

Projecting healthcare spending


Population pyramids. England and Wales

1911 2014 2114*

* 2014-based principal ONS projections

males females

36M

57M 89M

3,000 2,000 1,000 0 1,000 2,000 3,0003,000 2,000 1,000 0 1,000 2,000 3,0000 ‒ 4

10 ‒ 14

20 ‒ 24

30 ‒ 34

40 ‒ 44

50 ‒ 54

60 ‒ 64

70 ‒ 74

80 ‒ 84

90 ‒ 94

100+

3,000 2,000 1,000 0 1,000 2,000 3,000


Projection

Old age dependency ratio*

* Population aged 65+ divided by population aged 20-64

197119761981198619911996200120062011201620212026203120362041204620512056206120662071207620812086209120962101210621110%

10%

20%

30%

40%

50%

60%

70%

24%

30%

61%

Source: 2014-based principal ONS projections


Economic effects

Labour supply Productivity Demand composition Technological progress Public spending Pensions Immigration


Overview


NiAGE development

Applications



NiAGE is a Computable General Equilibrium model with an Overlapping Generations structure (CGE-OLG)


Structure of a CGE model

Firms Households

Goods market

External sector

Capital market

Factors market

Public sector

GoodsGoods Goods

Factors

Factors Savings Savings

Savings

Investment

Borrow

ing

Export

Import

Migration

Taxes Taxes


Overlapping generations structure

A1 A2 A3 A4 A5

T1 G1

T2 G2 G1

T3 G3 G2 G1

T4 G4 G3 G2 G1

T5 G5 G4 G3 G2 G1

T6 G6 G5

T7 G7 G5

T8 G8 G5

T9 G9 G5

T10 G10 G9 G8 G7 G6

T11 G11 G10

T12 G12 G10

T13 G13 G10

T14 G14 G10

Age

Time

Generation

• Alternative to a “representative agent”

• Several generations• Realistic life cycle (birth,

work, retirement, death)• Age-specific

characteristics/behaviour• productivity (age-earnings

profiles)• labour force participation

rates• demand for public services


Why OLG-CGE?

Partial equilibrium analysis demonstrates that other things being equal …– but other things will not stay equal– general equilibrium effects– change in labour supply wages

Macro model with micro foundation– Based on principals of optimisation (utility maximisation for

household, profit maximisation for firms)– Especially important for long-term simulations, as currently

observed relationships become less relevant Rich demographic structure and realistic life cycle

– Important for countries undergoing demographic transition


NiAGE

Several versions of the model– Multi-regional model

• three regions: Scotland, the rest of the UK (RUK) and the rest of the World (ROW)

• It can straightforwardly be extended to include Wales and Northern Ireland – Multi-sector model

• three sectors: 1) healthcare, 2) education and 3) the rest of the economy • detailed simulations of the effect of demographic change on provision of

public healthcare and education services– Qualification disaggregation

• three qualification levels• It is useful to study the effects of demographic change on human capital

accumulation and productivity– With migration

• This version has detailed treatment of migration flows and is suitable for simulations of interaction of demographic transition with migration policy


Overview


NiAGE development

Applications



Applications

Migration policy – effect of reducing net migration from “hundreds of thousands to tens of thousands”

Scotland’s independence – is population ageing one of the factors favouring staying in the UK

Time-variable rate of time preferences – attempt to calibrate the model to closer fit age consumption profile

Projecting future public healthcare expenditures


Overview


NiAGE development

Applications



Healthcare spending in OECD countries, % of GDPTu

rkey

Est

onia

Mex

ico

Pol

and

Kor

ea

Cze

ch R

epub

lic

Chi

le

Hun

gary

Isra

el

Slo

vak

Rep

ublic

Uni

ted

Kin

gdom

Finl

and

Icel

and

Slo

veni

a

Italy

Spa

in

Nor

way

Por

tuga

l

Gre

ece

New

Zea

land

Aus

tria

Bel

gium

Can

ada

Japa

n

Den

mar

k

Fran

ce

Ger

man

y

Sw

eden

Net

herla

nds

Sw

itzer

land

Uni

ted

Sta

tes

0

1

2

3

4

5

6

7

8

9

10

General government Private sector

Source: OECD database


Public sector healthcare expenditure in the UK, % of GDP

0

1

2

3

4

5

6

7

8

9

7.4% 2014

Source: OECD database


What factors determine future healthcare spending?

1. Size and age structure of the population– Real demand

2. Price of healthcare – Wages are expected to increase due to population

ageing and productivity growth– Healthcare is labour-intensive

• However indexing healthcare cost to wages is not correct– Multi-sector model

3. Growth rate of productivity4. Many other factors (technology, public

policy etc…)


How population affects demand for healthcare

Size– Larger population demands more healthcare– In relative terms (e.g. as a share of GDP) depends on age structure

Age – Demand for healthcare services increases with age– Relationship is very stable over time and across countries

Proximity to death– Growing body of literature demonstrates that demand for healthcare

also depends on proximity to death (Zweifel et al, 1999; 2004; Grey, 2005; Seshamani and Gray, 2004; Geue, 2013)

– Requires patient level longitudinal data linked to death data• The Scottish Longitudinal Study• Oxford Record Linkage Study• English Record Linkage Study


Population projections

2014 2018 2022 2026 2030 2034 2038 2042 2046 2050 2054 2058 2062 2066 2070 2074 2078 2082 2086 2090 2094 2098 2102 2106 2110 21140%

20%

40%

60%

80%

100%

120%

140%

160%

29%24%

151%

48%

0-19

20-64

65+

Total

Source: 2014-based principal ONS projections


Adjustment of healthcare spending for longevity improvement

Healthcare expenditures should depend on improvements in longevity– As longevity increases, healthcare expenditure for the same age groups

should get smaller Extrapolate 2007 healthcare spending profile for future

years– one year increase in life expectancy corresponds to one year increase

in healthy life expectancy ONS provides detailed life expectancy with its population

projection up to 2113 Between 2007 and 2113 life expectancy at birth for

males and females combined is projected to increase by almost 15 years


Age distribution of healthcare spending

0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99 100+0%

2%

4%

6%

8%

10%

12%

14%

16%

2007

2057

2107


Healthcare spending relationship with age, Finland

0-410

-1420

-2430

-3440

-4450

-5460

-6470

-7480

-8490

-94 100+

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Age related

Death related

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Source: ETLA


Healthcare spending relationship with age

0-410

-1420

-2430

-3440

-4450

-5460

-6470

-7480

-8490

-94 100+

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Age relatedDeath related

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

0-410

-1420

-2430

-3440

-4450

-5460

-6470

-7480

-8490

-94 100+

0%

2%

4%

6%

8%

10%

12%

14%

16%

?

Finland

UK


Healthcare spending relationship with age

0-410

-1420

-2430

-3440

-4450

-5460

-6470

-7480

-8490

-94 100+

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Age relatedDeath related

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

0-410

-1420

-2430

-3440

-4450

-5460

-6470

-7480

-8490

-94 100+

0%

2%

4%

6%

8%

10%

12%

14%

16%

0-410

-1420

-2430

-3440

-4450

-5460

-6470

-7480

-8490

-94 100+-2%

0%

2%

4%

6%

8%10%

12%

14%

16%

Age related

Death related

Finland

UK


Main features of the model

Closed economy– Interest rate reacts to population ageing

Demography:– 21 generations (0-4, … 100+)

Discounting– pure rate of time preference – probability of survival

Three sectors– Healthcare services– Education services– The rest of the economy (ROE)

Age-specific public consumption– Healthcare– Education

Balanced budget– taxation endogenous


Multi-sector model

K

L

ROE

Healthcare services

Education services

L

L

Household

Government

Investment

Government

Government


Multi-sector model 2

Population size and structure

Government spending on Healthcare

Government spending on Education

Healthcare services ROE Education

services ROE

59%41% 17%83%

Wage Price

PH

Wage Price

PE


Scenarios

Naive– Application of 2007 age profile for all future

years LE adjustment

– Adjustment of 2007 age profile in line with improvements in life expectancy

PTD– Differentiation of age related and death

related healthcare spending


TFP growth

Growth unexplained by change in the amount or quality of factors of production

In the UK– Past 10 years – -0.30% per year– Past 20 years – 0.43% per year– Past 30 years – 0.32% per year– Past 40 years – 0.36% per year

Source: ONS


Healthcare spending,% of GDP, pp difference – no TFP growth

2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 2090 2095 2100 2105 21100%

1%

2%

3%

4%

5%

6%

Naive

LE adjustment

PTD


Healthcare spending,% of GDP, pp difference – TFP growth 0.32%

2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 2090 2095 2100 2105 21100.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

Naive

LE adjustment

PTD


Healthcare spending,% of GDP, pp difference – TFP growth 0.43%

2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 2085 2090 2095 2100 2105 2110

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

NaiveLE adjustmentPTD


Conclusions

Public healthcare expenditures in the UK are not very high compared to other OECD countries

Projecting future healthcare spending – Population size and age structure

• Taking into account proximity to death significantly reduces projections of future healthcare spending

• Adjusting age profile has smaller positive effect• It is important to produce UK estimates taking into account proximity to

death– Price

• Important to use multi-sector model– Productivity growth

• Very important• Historically UK experienced productivity growth sufficient to make projected

healthcare spending manageable• Recent productivity growth records are poor


Thank you for your attention

Follow us on Twitter @NiAGEproject


CGE model

General– All the markets, sectors and industries are modelled

together with corresponding inter-linkages Equilibrium

– All markets are in equilibrium in every period Computable

– Tend to be very complex and thus cannot be solved analytically

– Calibrated to “real world” data and rely on solver algorithms that find numerical solutions satisfying all of the model’s equations


CGE model 2

Mathematical description of an economy using a system of simultaneous equations

CGE models are very flexible, and can be used to analyse the macro-economic effects of variety of economic shocks and policies

Simulation (what if) not a forecasting tool!


Limitations

Complicated– Technical skills – Time/Data– Trade off between complexity and usability

Calibration– Some parameters are calibrated on base year data

Relies on serious assumptions– All assumptions are explicit – Perfect foresight/ rational decision making– Type of utility / productivity function– Assignment of exogenous variables

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