Population Aging, Intergenerational Transfers, and the Economy

NNational ational TTransfer ransfer AAccountsccounts

Population Aging, Population Aging, Intergenerational Intergenerational Transfers, and the Transfers, and the EconomyEconomy

Andrew MasonAndrew Mason

University of Hawaii – ManoaUniversity of Hawaii – Manoa

East-West CenterEast-West Center

National Transfer Accounts

MotivationMotivation

► Three features of the economy Three features of the economy Economic lifecycleEconomic lifecycle Population age structure Population age structure Systems for shifting resources across ageSystems for shifting resources across age

► SavingSaving► Public transfer programsPublic transfer programs► Familial Support systemsFamilial Support systems

► Interaction influences economic performance Interaction influences economic performance and generational equityand generational equity

► Implications for economic and population Implications for economic and population policypolicy


OrganizationOrganization

I.I. Fundamental IdeasFundamental Ideas

II.II. Brief Review of Recent ResearchBrief Review of Recent Research

III.III. Current Effort: National Transfer Current Effort: National Transfer AccountsAccounts

► Basic ConceptsBasic Concepts► Three Important IssuesThree Important Issues


FundamentalsFundamentalsThe Economic LifecycleThe Economic Lifecycle

0

0.2

0.4

0.6

0.8

1

1.2

0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 90

Rel

ativ

e to

lab

or

inco

me(

30-4

9)

Consumption

Labor Income

Note: Based on estimates for Costa Rica, Indonesia, Taiwan, and Thailand.


Consumption-Loan EconomyConsumption-Loan Economy(Samuelson 1958)(Samuelson 1958)►Labor income only Labor income only ►All output is immediately consumedAll output is immediately consumed►Age reallocation system: Transfers Age reallocation system: Transfers

only; no savingonly; no saving►Per capita age profiles of consumption Per capita age profiles of consumption

and production are fixedand production are fixed►Population age structure variesPopulation age structure varies


Aggregate C and YLAggregate C and YLVery Young Population (US Very Young Population (US 1850)1850)

0

200

400

600

800

1000

1200

1400

1600

0-4

10-

14

20-2

4

30-3

4

40-4

4

50-5

4

60-6

4

70-7

4

80-8

4

90-9

410

0+

C

Yl

Deficit for childrenand the elderly exceeds surplus of workers. Consumption must decline.


Aggregate C and YLAggregate C and YLVery Young Population (US Very Young Population (US 1850)1850)

0

200

400

600

800

1000

1200

1400

1600

0-4

10-

14

20-2

4

30-3

4

40-4

4

50-5

4

60-6

4

70-7

4

80-8

4

90-9

410

0+

C

Yl

C'

Consumption drops by 25 percent.


Aggregate C and YLAggregate C and YLLarge Working-age Pop (India Large Working-age Pop (India 2040)2040)

0

20000

40000

60000

80000

100000

120000

0-4

10-

14

20-2

4

30-3

4

40-4

4

50-5

4

60-6

4

70-7

4

80-8

4

90-9

410

0+

C

Yl

C'

Reduction of consumption of only 3% is needed.


Aggregate C and YLAggregate C and YLOld Population (Japan 2080)Old Population (Japan 2080)

0

1000

2000

3000

4000

5000

6000

0-4

10-

14

20-2

4

30-3

4

40-4

4

50-5

4

60-6

4

70-7

4

80-8

4

90-9

410

0+

C

Yl

C'

Old population leads to 26% decline in consumption.


First Demographic DividendFirst Demographic DividendEconomic Support RatioEconomic Support Ratio

0.7

0.75

0.8

0.85

0.9

0.95

1

1850

1870

1890

1910

1930

1950

1970

1990

2010

2030

2050

2070

2090

US

Japan

India

Source: Mason 2007.


Summary of ImplicationsSummary of Implications

►Changes in the relative numbers of Changes in the relative numbers of workers and consumers over the workers and consumers over the demographic transition leads to a demographic transition leads to a demographic dividend.demographic dividend. Bloom and WilliamsonBloom and Williamson Bloom, Canning, and SevillaBloom, Canning, and Sevilla Lee and MasonLee and Mason

►The effect erodes as populations age. The effect erodes as populations age.


Introduce Capital Introduce Capital

►Economy with capitalEconomy with capital Workers save during their working yearsWorkers save during their working years Rely on asset income and dis-saving during Rely on asset income and dis-saving during

retirement.retirement.

►For solving the old-age lifecycle For solving the old-age lifecycle problem, capital and transfers are close problem, capital and transfers are close substitutes.substitutes.

►However, capital also has favorable However, capital also has favorable effects on economic growth.effects on economic growth.


What determines the lifecycle What determines the lifecycle demand for capital?demand for capital?►Features of the economic lifecycleFeatures of the economic lifecycle

Consumption by the elderly (now & Consumption by the elderly (now & future)future)

Labor income of the elderly (now & future)Labor income of the elderly (now & future)

►Relative number of elderly: More Relative number of elderly: More elderly implies greater demand for elderly implies greater demand for lifecycle capital.lifecycle capital.


Demand for wealthDemand for wealthOld versus Young PopulationOld versus Young Population

0

200

400

600

800

1000

1200

1400

1600

0

1000

2000

3000

4000

5000

6000

0-4

10-

14

20-2

4

30-3

4

40-4

4

50-5

4

60-6

4

70-7

4

80-8

4

90-9

410

0+

Young Population Old Population

LC demand for wealth is negligible

LC demand for wealth is large

Yl

C

Yl

C


What determines the lifecycle What determines the lifecycle demand for capital (continued)?demand for capital (continued)?

►Support system for the elderlySupport system for the elderly Importance of the capital systemImportance of the capital system Familial and public transfer systems Familial and public transfer systems

undermine capital accumulationundermine capital accumulation


II. Summary of Recent II. Summary of Recent ResearchResearch► Population, Saving, and WealthPopulation, Saving, and Wealth

Changes in age structure are only Changes in age structure are only partially partially responsible responsible for high saving rates in Asia (LMM various; KM 2007).for high saving rates in Asia (LMM various; KM 2007).

Longer life expectancy led to a behavioral change that Longer life expectancy led to a behavioral change that reinforced age structure effects (LMM various; KM reinforced age structure effects (LMM various; KM 2007). 2007).

A decline in familial support for the elderly may have A decline in familial support for the elderly may have played an important role (LMM 2003). played an important role (LMM 2003).

Aging will lead to somewhat lower saving (LMM Aging will lead to somewhat lower saving (LMM various) or not (KM 2007). various) or not (KM 2007).

Longer life expectancy and aging are leading to a Longer life expectancy and aging are leading to a permanent increase in wealth (LMM various; KM 2007)permanent increase in wealth (LMM various; KM 2007)


II. Summary of Recent II. Summary of Recent ResearchResearch► Demographic DividendsDemographic Dividends

Changes in age structure produce two Changes in age structure produce two demographic dividendsdemographic dividends

First dividendFirst dividend► Concentration of population in working ages leads to more Concentration of population in working ages leads to more

rapid economic growth;rapid economic growth;► Effect unwinds as populations age.Effect unwinds as populations age.

Second dividend: changes in age structure and Second dividend: changes in age structure and increase in life expectancy lead toincrease in life expectancy lead to

► More rapid economic growthMore rapid economic growth► Permanently higher economic growth.Permanently higher economic growth.

Sources: Mason and Lee, various; Mason, Sources: Mason and Lee, various; Mason, various. various.


Important Issues to be Important Issues to be ExploredExplored► How does the economic lifecycle vary and How does the economic lifecycle vary and

why?why?► What systems do societies use to shift What systems do societies use to shift

resources from surplus to deficit ages?resources from surplus to deficit ages?► Why do the systems vary across countries Why do the systems vary across countries

and evolve over time? and evolve over time? ► What are the implications for economic What are the implications for economic

performance? For generational equity?performance? For generational equity?► What are the implications for economic What are the implications for economic

policy? For population policy? policy? For population policy?


III. National Transfer III. National Transfer AccountsAccounts► Objective: Objective:

Develop and apply a comprehensive system of accounts Develop and apply a comprehensive system of accounts that measures economic flows across age groups in a that measures economic flows across age groups in a manner consistent with the System of National Accounts. manner consistent with the System of National Accounts.

► Conceptual foundation: Conceptual foundation: Lee (1994) but also Samuelson (1958), Diamond (1965), Lee (1994) but also Samuelson (1958), Diamond (1965),

and Willis (1988).and Willis (1988).► Organization: Organization:

Collaboration between EWC/UH and UC-Berkeley. Core Collaboration between EWC/UH and UC-Berkeley. Core funding from NIA. Sub-projects supported by UNFPA and funding from NIA. Sub-projects supported by UNFPA and others.others.

► Website: www.ntaccounts.orgWebsite: www.ntaccounts.org


Participating CountriesParticipating Countries

ASIAASIAChinaChina

IndiaIndia

IndonesiaIndonesia

JapanJapan

Korea, S.Korea, S.

PhilippinesPhilippines

TaiwanTaiwan

ThailandThailand

EUROPEEUROPEAustriaAustria

FranceFrance

HungaryHungary

SloveniaSlovenia

SwedenSweden

NORTH AMERICANORTH AMERICAUnited StatesUnited States

LATIN LATIN AMERICAAMERICABrazilBrazil

ChileChile

Costa RicaCosta Rica

MexicoMexico

UruguayUruguay

OCEANIAOCEANIAAustraliaAustralia


Age Group

TransferSystem

Asset System

LaborIncome

Consumption

Transfers

Transfers

Saving &Interest expense

Dis-saving& Interestincome

National Transfer Account FlowsNational Transfer Account Flows

Inflows Outflows


The Flow Account IdentityThe Flow Account Identity

► InflowsInflows Labor IncomeLabor Income Asset IncomeAsset Income Transfer InflowsTransfer Inflows

► OutflowsOutflows ConsumptionConsumption SavingSaving Transfer OutflowsTransfer Outflows

Inflows Outflows

( ) ( ) ( ) ( ) ( ) ( )l aY a Y a a C a S a a

Lifecycle Deficit Asset-based Reallocations Net Transfers

Age Reallocations

( ) ( ) ( ) ( ) ( ) ( )l aC a Y a Y a S a a a


Detailed National Transfer Flow Detailed National Transfer Flow AccountAccount► Consumption: public and private for health, Consumption: public and private for health,

education, housing, and other.education, housing, and other.► Public transfers: in-kind (health, education, Public transfers: in-kind (health, education,

other) and cash (pensions and other).other) and cash (pensions and other).► Private transfers: intra-household for Private transfers: intra-household for

health, education, housing, and all other; health, education, housing, and all other; inter-household for other. inter-household for other.

► Asset-based reallocations: Public and Asset-based reallocations: Public and private investment; public and private private investment; public and private credit/debt.credit/debt.

► Domestic flows and flows to ROW.Domestic flows and flows to ROW.


Approach to EstimationApproach to Estimation

►National Income Accounts and other National Income Accounts and other aggregate statistics are used as aggregate statistics are used as aggregate controlsaggregate controls

►Age profiles are based on nationally Age profiles are based on nationally representative surveys, e.g., income representative surveys, e.g., income and expenditure surveys, labor force and expenditure surveys, labor force surveys, health expenditure surveys, surveys, health expenditure surveys, etc. etc.

►Common methodology documented on Common methodology documented on www.ntaccounts.orgwww.ntaccounts.org


Issue 1: Lifecycle Deficit, Issue 1: Lifecycle Deficit, ChildrenChildren►Does the lifecycle deficit per child Does the lifecycle deficit per child

increase as the number of children increase as the number of children declines? declines? Becker quality-quantity tradeoffBecker quality-quantity tradeoff If so, the decline in fertility will have a If so, the decline in fertility will have a

smaller effect on capital accumulation. smaller effect on capital accumulation. However, if consumption is higher because However, if consumption is higher because

parents are spending more on education, parents are spending more on education, then human capital will increase as the then human capital will increase as the number of children declines. number of children declines.


Per Capita Lifecycle Deficit, Per Capita Lifecycle Deficit, Japan 2004, Survival WeightedJapan 2004, Survival Weighted

0

0.2

0.4

0.6

0.8

1

1.2

1.4

0 10 20 30 40 50 60 70 80 90

Age

Rel

ativ

e to

Yl(

30-4

9)

Child LCD15.1 years of prime-adult

labor

Elderly LCD10.5 years of prime-adult

labor

Note. US 1985-89 life table used for all countries.


Tradeoff: Spending per Child and Tradeoff: Spending per Child and Number of Children, 13 CountriesNumber of Children, 13 Countries

y = -7.7914x + 15.473

R2 = 0.6125

6789

10111213141516

0.2 0.4 0.6 0.8 1 1.2

Child Dependency Ratio: N(0-19)/N(20-59)

LC

D C

hil

dre

n/Y

l(30

-49)


Tradeoff: Spending per Child and Tradeoff: Spending per Child and Number of Children, 13 CountriesNumber of Children, 13 Countries

6789

10111213141516

0.2 0.4 0.6 0.8 1 1.2

Child Dependency Ratio: N(0-19)/N(20-59)

LC

D C

hil

dre

n/Y

l(30

-49)

Jp

US ChTwSK Th

SwFr

IndoUrCR In

Ph


Issue 2: Lifecycle Deficit, Issue 2: Lifecycle Deficit, ElderlyElderly►Does the lifecycle deficit per elderly Does the lifecycle deficit per elderly

decline as the number of elderly rises? decline as the number of elderly rises? Preston and others argue yes – political Preston and others argue yes – political

power. power. If so, the rise in the old-age population will If so, the rise in the old-age population will

have a larger effect on capital have a larger effect on capital accumulation. accumulation.


Tradeoff: Spending per Elderly and Tradeoff: Spending per Elderly and Number of Elderly, 13 CountriesNumber of Elderly, 13 Countries

y = 11.993x + 4.5285

R2 = 0.4266

23456789

101112

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)

LC

D E

lder

ly/Y

l(30

-49)


Tradeoff: Spending per Elderly and Tradeoff: Spending per Elderly and Number of Elderly, 13 CountriesNumber of Elderly, 13 Countries

23456789

101112

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)

LC

D E

lder

ly/Y

l(30

-49)

UrJpUS

Fr

Sw

CRTw

ThCh

SK

Ph InIndo


Issue 3. Support Systems for Issue 3. Support Systems for the Elderly. the Elderly. ►How do they differ across countries?How do they differ across countries?►Do Asian countries rely more on Do Asian countries rely more on

familial transfers and Western familial transfers and Western countries more on public transfers? countries more on public transfers?

►Does the expansion of public systems Does the expansion of public systems crowd saving as hypothesized by crowd saving as hypothesized by Feldstein?Feldstein?

►Or familial transfers? Or familial transfers?


Old-Age Reallocation SystemsOld-Age Reallocation Systems

Saving

Public Transfers

FamilialTransfers

Traditional society?

Capital-based transformation

Social welfare transformation



Saving

Public Transfers

FamilialTransfers

Mixed Strategies

50-50 familial and saving

50-50 familial and public

50-50 saving and public



Saving

Public Transfers

FamilialTransfers

Public transfers and familial transfers are substitutes.



Saving

Public Transfers

FamilialTransfers

Feldstein: Public transfers to the elderly

crowd out saving.


Old-age Reallocation System, Selected Countries.

0

50

75

100

75

75

50

50

25

25

0

0

25

100

100

Asset-based

(%)

Public

transfers (%)

Family Transfers (%)

US

US elderly rely on asset-based reallocations

and public transfers.



0

50

75

100

75

75

50

50

25

25

0

0

25

100

100

Asset-based

(%)

Public

transfers (%)


Thailand

Thai elderly rely on asset-based

reallocations and on familial transfers.



0

50

75

100

75

75

50

50

25

25

0

0

25

100

100

Asset-based

(%)

Public

transfers (%)


US Thailand

Costa Rica

Japan

Taiwan

Costa Rica and Japan rely

heavily on public

transfers; no familial

transfers.

Taiwan has a relatively balanced support system.


ConclusionsConclusions

►Decline in fertility may Decline in fertility may Lead to more consumption by children Lead to more consumption by children

reducing the effect on savingreducing the effect on saving Lead to more spending on education for Lead to more spending on education for

children leading to second demographic children leading to second demographic dividend due to human capital dividend due to human capital investment.investment.

Influence familial support systems in ways Influence familial support systems in ways that have not yet been explored. that have not yet been explored.



►Aging may lead to Aging may lead to Larger per capita lifecycle deficit Larger per capita lifecycle deficit

reinforcing the effects of agingreinforcing the effects of aging The economic effect will be some The economic effect will be some

unknown combination of the three:unknown combination of the three:►Increase saving and economic growthIncrease saving and economic growth►Increase the size of public programs and Increase the size of public programs and

budget deficits; orbudget deficits; or►Increase the burden on families which support Increase the burden on families which support

the elderly. the elderly.



►The support systems for the elderly The support systems for the elderly are varied and do not conform to are varied and do not conform to simple regional classifications.simple regional classifications.

►The elderly in Costa Rica and Japan are The elderly in Costa Rica and Japan are relying on saving and public transfers. relying on saving and public transfers. Have public programs crowded out Have public programs crowded out familial transfers? familial transfers?

► In Taiwan and Thailand, the familial In Taiwan and Thailand, the familial support system is still important. support system is still important.


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-DirectorMason, 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)


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 LeaderMatsukura, 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)


AustraliaKey Institution: Australia National University

Jeromey Temple, Country LeaderBrazil

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 LeaderChina

Key Institution: China Center for Economic Research, Beijing, China.

Ling, Li(Lingli), Country Leader Chen, Quilin(Chen)


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)

MexicoKey Institution: Consejo Nacional de Población

Partida, Virgilio (virgilio), Country Leader Mejía-Guevara, Iván(ivan)


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)


Uruguay Bucheli, Marisa(marisa), Country Leader

Furtado, Magdalena(furtado) South Korea

An, Chong-Bum (cban), Country LeaderChun, 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)


Austria Key Institution: Vienna Institute of Demography

Fuernkranz-Prskawetz, Alexia (alexia), Country LeaderSambt, Joze(joze)

Costa Rica Key Institution: CCP, Universidad de Costa Rica

Rosero-Bixby, Luis(lrosero), Country Leader Slovenia

Sambt, Joze(joze), Country Leader


United States Key Institution: Center for the Economics and Demography of Aging

Lee, Ronald(ronlee), Country LeaderMiller, Tim(tmiller)

Ebenstein, Avi(ebenstei) Boe, Carl(cboe)

Comelatto, Pablo(pabloc) Donehower, Gretchen(gstockma)

Schiff, Eric(eric) Langer, Ellen(erlanger)

NNational ational TTransfer ransfer AAccountsccounts

The EndThe EndSupport: Support:

National Institutes of Health National Institutes of Health NIA, R01-AG025488NIA, R01-AG025488NIA, R37-AG025247 NIA, R37-AG025247

Population Aging, Intergenerational Transfers, and the Economy

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