Aging and Social Policy: An International Perspective

Andrew Mason Sang-Hyop Lee Ronald Lee Chong-Bum An

Outline

I.

Background: National Transfer Accounts II.

1.

Estimating the Economic Lifecycle Consumption and labor income by age for Korea 2.

Comparison with Taiwan and the US III.

1.

The Age Reallocation System Estimates for Korea 2.

Comparison to Taiwan and the US IV.

Conclusions

National Transfer Accounts

• System for measuring economic flows across age groups in a manner consistent with National Income and Product Accounts • Comprehensive – Asset-based reallocations • • Public and private saving • Public and private credit – Public transfers – Private transfers

Inter vivos

• Bequests inter-household • Intra-household

National Transfer Accounts

• Issues being explored: – How do economic support systems evolve within countries and differ across countries?

– How do economic support systems interact with age structure to influence macro-economic performance and generational equity? – How should policies with respect to public pensions, health care, and education change over time?

– What are the appropriate roles of the family and the state in providing support to children and the elderly?

NTA Project Organization

• Coordination – Ronald Lee (UC – Berkeley) – Andrew Mason (East-West Center/UH) • Core support: National Institute on Aging • Website: www.ntaccounts.org

• Countries currently participating in the project – Korea: An Chong-Bum (SungKyunKwan University) – Taiwan: Andrew Mason and An-Chi Tung (Academia Sinica, Taipei) – US: Ronald Lee – 14 other countries are members of the project

II. The Economic Lifecycle

The Economic Lifecycle of Korea, Annual Aggregate Flows, Nominal Values, 2000 14000 12000 Surplus Labor Income 10000 8000 6000 4000 Consumption 2000 0 Deficits

Features of the Economic Lifecycle • Age refers to people not household heads.

• Consumption – Includes all public and private consumption – Age allocation is based on consumption surveys (private) and administrative records (public) • Labor income includes – wages and salaries – labor’s estimated share of mixed income – taxes paid by employers on behalf of employees including a portion of indirect taxes

Lifecycle of Korea (2000), Per Capita Values

1.6

1.4

1.2

1 0.8

0.6

0.4

0.2

0 0

Labor Income Consumption Education Spending

10 20 30

Female LFPRs

40 50

C declines with age

60 70 80 90+

Lifecycle of Taiwan (1998) and Korea (2000), Per Capita Values

1.6

1.4

1.2

1 0.8

0.6

0.4

0.2

0 0

Consumption

10

Labor Income

20 30 40

K T

50

Higher LFPRs

70

Lower C in ROK T

80

K

90+

Lifecycle of US (2000) and Korea (2000), Per Capita Values

US LFPRs > ROK LFPRs

1.6

1.4

1.2

1 0.8

0.6

0.4

0.2

0

Labor Income Consumption K US K ROK LFPRs > US LFPRs US High US C is health care

0 10 20 30 40 50 60 70 80 90+

Some Implications

• A given rise in the older population has a much greater impact in the US given current LC. However, aging is much more rapid in ROK. • Importance of female employment.

• Reducing the LC deficit at old ages is not simply a matter of higher LFPRs among the elderly. High productivity jobs needed.

• Rising health care costs is the Achilles heel if US experience is any guide.

The Age Reallocation System

Table 1. A Classification of NTA Reallocations (revised 1/13/06). Asset-based Reallocations Capital and Other Non-Financial Assets Credit Public

Public infrastructure Public land and sub soil minerals Public debt Student loans Money

Transfers

Public education Public health care Unfunded pension plans

Private

Housing Consumer durables Factories, Farms Private land and sub-soil minerals Inventories Source: Adapted from Lee 1994.

Consumer credit Familial support of children and parents Bequests Charitable contributions

The Transfer Option

14000 12000 10000 8000 6000 4000 2000 0 Consumption Tax workers. Provide cash and in-kind payments to the elderly Labor Income

The Saving Option

14000 12000 2000 0 Labor Income 10000 8000 Consumption 6000 4000 Invest Asset Income & Dissaving

Transfers vs. Saving

• Both can satisfy reallocation objectives.

• Transfers can do so immediately; saving only with a delay.

• Saving is pro-growth. • Other research shows that aging can lead to substantial capital deepening if transfer programs are kept in check.

0

Age Reallocations, Korea, 2000, Per Capita Annual Flows

Asset-based Reallocations Inter Vivos Transfers Public Transfers Bequests 10 20 30

Total Inflows

40 50

Total Outflows

60 70 80 15000 10000 5000 0 -5000 90+ -10000

How are Taiwan, Korea, and the US financing old-age consumption?

100 90 80

Asset-based reallocations

Work 40 30

Total transfers much greater in Korea

20

Large in US

10

public transfers

0 US (2000) Korea (2000) Taiwan (1998)

Note. Familial transfers do not include bequests.

Asset-based Reallocation Familial Transfers Public Transfers

Why are asset-based reallocations so low in Korea and Taiwan?

• Did familial transfers crowd out saving?

• Did familial transfers fill a gap that saving could not meet? – High rates of growth in Korea and Taiwan led a 6-fold increase in lifetime earnings each generation.

– Unlikely that saving rates could be high enough to achieve the flat age profiles of consumption.

Lesson to Draw

• Familial transfers served East Asia well by maintaining generational equity during a period of very rapid economic growth. • Slower economic growth and population aging  shift to asset-based reallocations.

• High saving rate and shift away from familial support systems are welcome developments.

The End

NT Flow Account Identity:

• Inflows – Labor income – Capital income – Interest income – Transfer inflows • Outflows – Consumption – Investment – Accumulation of credit – Transfer outflows

y l



y k



y m

  

I K



I M

  

NT Flow Account Identity:

Lifecycle Deficit = Age Reallocations = Capital-based Reallocations + Credit-based Reallocations + Net Transfers

C



y l y k



I k y m



I M



NT Flow Account, Aggregate. Taiwan, 1998 (NT$ billion), nominal Age Reallocations

Asset-based reallocations Asset Income Less: Saving Transfers Public, current Private, current Capital transfers Total 832 0-19 1894 20-29 6 Age 30-49 -1569 50-64 -25 65+ 526 861 2,456 1,595 -29 2 -31 0 -16 3 19 1910 579 1330 0 -210 139 349 216 76 65 75 605 1492 887 -2174 -692 -1568 86 299 585 286 -323 -138 -95 -91 184 237 54 342 176 236 -70 Lower panel measures the reallocation systems employed to satisfy the lifecycle deficits and surpluses at each age. Asset-based reallocations combine capital, other non-financial assets, and credit. Source: Mason, Lee, Tung, Lai, and Miller, forthcoming.