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Population Aging, Intergenerational Transfers, and the Economy Andrew Mason University of Hawaii – Manoa East-West Center Motivation Three features of the economy Economic lifecycle Population age structure Systems for shifting resources across age Saving Public transfer programs

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population aging intergenerational transfers and the economy

Population Aging, Intergenerational Transfers, and the Economy

Andrew Mason

University of Hawaii – Manoa

East-West Center

National Transfer Accounts

motivation
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
Organization
  • Fundamental Ideas
  • Brief Review of Recent Research
  • Current Effort: National Transfer Accounts
    • Basic Concepts
    • Three Important Issues

National Transfer Accounts

fundamentals the economic lifecycle
FundamentalsThe Economic Lifecycle

Labor Income

Consumption

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

National Transfer Accounts

consumption loan economy samuelson 1958
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
Aggregate C and YLVery Young Population (US 1850)

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

National Transfer Accounts

aggregate c and yl very young population us 18507
Aggregate C and YLVery Young Population (US 1850)

Consumption drops by 25 percent.

National Transfer Accounts

aggregate c and yl large working age pop india 2040
Aggregate C and YLLarge Working-age Pop (India 2040)

Reduction of consumption of only 3% is needed.

National Transfer Accounts

aggregate c and yl old population japan 2080
Aggregate C and YLOld Population (Japan 2080)

Old population leads to 26% decline in consumption.

National Transfer Accounts

first demographic dividend economic support ratio
First Demographic DividendEconomic Support Ratio

National Transfer Accounts

Source: Mason 2007.

summary of implications
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
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
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
Demand for wealthOld versus Young Population

Young Population

Old Population

Yl

Yl

C

C

LC demand for wealth is negligible

LC demand for wealth is large

National Transfer Accounts

what determines the lifecycle demand for capital continued
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
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 research17
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
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
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
Participating Countries

National Transfer Accounts

national transfer account flows
National Transfer Account Flows

Labor

Income

Asset

System

Age

Group

Transfer

System

Dis-saving

& Interest

income

Transfers

Saving &

Interest

expense

Transfers

Consumption

National Transfer Accounts

Inflows

Outflows

the flow account identity
Inflows

Labor Income

Asset Income

Transfer Inflows

Outflows

Consumption

Saving

Transfer Outflows

The Flow Account Identity

National Transfer Accounts

detailed national transfer flow account
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
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
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
Per Capita Lifecycle Deficit, Japan 2004, Survival Weighted

Child LCD

15.1 years of prime-adult labor

Elderly LCD

10.5 years of prime-adult labor

National Transfer Accounts

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

tradeoff spending per child and number of children 13 countries28
Tradeoff: Spending per Child and Number of Children, 13 Countries

Jp

US

Ch

Tw

SK

Th

Sw

Fr

Indo

Ur

CR

In

Ph

National Transfer Accounts

issue 2 lifecycle deficit elderly
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

tradeoff spending per elderly and number of elderly 13 countries31
Tradeoff: Spending per Elderly and Number of Elderly, 13 Countries

Ur

Jp

US

CR

Fr

Tw

Th

Ch

Sw

SK

Ph

In

Indo

National Transfer Accounts

issue 3 support systems for the elderly
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

old age reallocation systems
Old-Age Reallocation Systems

Saving

Capital-based transformation

Social welfare transformation

Traditional society?

Familial

Transfers

Public Transfers

National Transfer Accounts

old age reallocation systems34
Old-Age Reallocation Systems

Saving

Mixed

Strategies

50-50 saving

and public

50-50 familial and saving

50-50 familial

and public

Familial

Transfers

Public Transfers

National Transfer Accounts

old age reallocation systems35
Old-Age Reallocation Systems

Saving

Public transfers and familial transfers are substitutes.

Familial

Transfers

Public Transfers

National Transfer Accounts

old age reallocation systems36
Old-Age Reallocation Systems

Saving

Feldstein: Public transfers to the elderly crowd out saving.

Familial

Transfers

Public Transfers

National Transfer Accounts

slide37

US elderly rely on

asset-based reallocations

and public transfers.

National Transfer Accounts

slide38

Thai elderly rely on

asset-based

reallocations and on

familial transfers.

National Transfer Accounts

slide39

Costa Rica and Japan rely heavily on public transfers; no familial transfers.

Taiwan has a relatively balanced support system.

National Transfer Accounts

conclusions
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

conclusions41
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

conclusions42
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

slide43

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

National Transfer Accounts

slide44

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

slide45

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

slide46

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

slide47

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

slide48

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

slide49

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

slide50

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

The End

Support: National Institutes of Health

NIA, R01-AG025488

NIA, R37-AG025247

National Transfer Accounts

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