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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 1.2 1 Labor Income 0.8 0.6 Consumption 0.4 0.2 National Transfer Accounts Note: Based on estimates for Costa Rica, Indonesia, Taiwan, and Thailand. 90 84 78 72 66 60 54 48 42 36 30 24 18 12 6 0 0 Relative to labor income(30-49) Fundamentals The Economic Lifecycle 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 Deficit for childrenand the elderly exceeds surplus of workers. Consumption must decline. 1000 800 600 400 200 National Transfer Accounts 10 0+ 94 90 - 84 80 - 74 70 - 64 60 - 54 50 - 44 40 - 34 30 - 24 20 - 4 10 -1 04 0 C Yl Aggregate C and YL Very Young Population (US 1850) 1600 1400 1200 Consumption drops by 25 percent. 1000 C Yl C' 800 600 400 200 National Transfer Accounts 10 0+ 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 04 0 Aggregate C and YL Large Working-age Pop (India 2040) 120000 Reduction of consumption of only 3% is needed. 100000 80000 C Yl C' 60000 40000 20000 National Transfer Accounts 10 0+ 94 90 - 84 80 - 74 70 - 64 60 - 54 50 - 44 40 - 34 30 - 24 20 - 4 10 -1 04 0 Aggregate C and YL Old Population (Japan 2080) 6000 Old population leads to 26% decline in consumption. 5000 4000 C Yl C' 3000 2000 1000 National Transfer Accounts 10 0+ 94 90 - 84 80 - 74 70 - 64 60 - 54 50 - 44 40 - 34 30 - 24 20 - 4 10 -1 04 0 First Demographic Dividend Economic Support Ratio 1 0.95 0.9 US Japan India 0.85 0.8 0.75 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 0.7 National Transfer Accounts 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 Old Population 6000 1600 1400 Yl 1200 5000 Yl 4000 1000 3000 800 600 C 400 2000 C 1000 200 National Transfer Accounts LC demand for wealth is large 10 0+ 94 90 - 84 80 - 74 70 - 64 60 - 54 50 - 44 40 - 34 30 - 4 24 20 - 10 -1 10 0+ 90 -9 4 80 -8 4 70 -7 4 60 -6 4 50 -5 4 40 -4 4 30 -3 4 20 -2 4 10 -1 4 04 LC demand for wealth is negligible 04 0 0 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 ► More rapid economic growth ► Permanently higher economic growth. 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 EUROPE LATIN AMERICA China India Indonesia Japan Korea, S. Philippines Taiwan Thailand Austria France Hungary Slovenia Sweden Brazil Chile Costa Rica Mexico Uruguay NORTH AMERICA OCEANIA United States National Transfer Accounts Australia National Transfer Account Flows Labor Income Dis-saving & Interest income Asset System Transfers Age Group Saving & Interest expense Transfer System Transfers Consumption National Transfer Accounts Inflows Outflows The Flow Account Identity ► Inflows ► Outflows Labor Income Asset Income Transfer Inflows Consumption Saving Transfer Outflows Y (a ) Y (a ) (a) C (a ) S (a ) (a ) l 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 Relative to Yl(30-49) 1.2 1 Child LCD 15.1 years of prime-adult labor Elderly LCD 10.5 years of prime-adult labor 0.8 0.6 0.4 0.2 0 0 10 20 30 40 50 60 70 80 90 Age National Transfer Accounts Note. US 1985-89 life table used for all countries. LCD Children/Yl(30-49) Tradeoff: Spending per Child and Number of Children, 13 Countries 16 15 14 13 12 11 10 9 8 7 6 y = -7.7914x + 15.473 R2 = 0.6125 0.2 0.4 0.6 0.8 1 Child Dependency Ratio: N(0-19)/N(20-59) National Transfer Accounts 1.2 LCD Children/Yl(30-49) Tradeoff: Spending per Child and Number of Children, 13 Countries 16 15 14 13 12 11 10 9 8 7 6 Jp US Tw Ch SK Th Sw Fr Ur CR Indo In Ph 0.2 0.4 0.6 0.8 1 Child Dependency Ratio: N(0-19)/N(20-59) National Transfer Accounts 1.2 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 LCD Elderly/Yl(30-49) Tradeoff: Spending per Elderly and Number of Elderly, 13 Countries 12 11 10 9 8 7 6 5 4 3 2 y = 11.993x + 4.5285 R2 = 0.4266 0.1 0.15 0.2 0.25 0.3 0.35 0.4 Old-age Dependency Ratio: N(60+)/N(20-59) National Transfer Accounts 0.45 0.5 LCD Elderly/Yl(30-49) Tradeoff: Spending per Elderly and Number of Elderly, 13 Countries 12 11 10 9 8 7 6 5 4 3 2 US CR Th Ch Ur Jp Fr Tw Sw SK Ph In Indo 0.1 0.15 0.2 0.25 0.3 0.35 0.4 Old-age Dependency Ratio: N(60+)/N(20-59) National Transfer Accounts 0.45 0.5 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 National Transfer Accounts Public Transfers Saving Mixed Strategies 50-50 familial and saving 50-50 saving and public 50-50 familial and public Familial Transfers Old-Age Reallocation Systems National Transfer Accounts Public Transfers Saving Public transfers and familial transfers are substitutes. Familial Transfers Old-Age Reallocation Systems National Transfer Accounts Public Transfers Saving Feldstein: Public transfers to the elderly crowd out saving. Familial Transfers Old-Age Reallocation Systems National Transfer Accounts Public Transfers Old-age Reallocation System, Selected Countries. 100 0 US elderly rely on asset-based reallocations and public transfers. 25 75 Public transfers (%) US 50 50 Asset-based (%) 75 25 100 0 100 National Transfer Accounts 75 50 Fam ily Transfers (%) 25 0 Old-age Reallocation System, Selected Countries. 100 Thai elderly rely on asset-based reallocations and on familial transfers. 0 25 75 Public transfers (%) 50 Thailand 50 Asset-based (%) 75 25 100 0 100 National Transfer Accounts 75 50 Fam ily Transfers (%) 25 0 Old-age Reallocation System, Selected Countries. 100 0 25 75 Public transfers (%) Thailand US 50 50 Asset-based (%) Taiwan has a relatively balanced 25 support system. Costa Rica 75 Costa Rica and Japan rely heavily on public transfers; no familial transfers. Taiw an Japan 100 0 100 National Transfer Accounts 75 50 Fam ily Transfers (%) 25 0 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) National Transfer Accounts 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 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