Intergenerational Transfers, Aging, and the Economy

1. Intergenerational Transfers, Aging, and the Economy Andrew Mason University of Hawaii at Manoa & East-West Center National Transfer Accounts

2. Three Features of our Societies Motivate the NTA Project • Changes in population age structure • Large national, regional, and global changes • Economic lifecycle • Extended periods of dependency • Many other aspects of economic behavior are age dependent • Complex and varied intergenerational economic systems • Families, firms, markets, the state, and civil society all play a role. • Important implications for poverty, economic growth, and generational equity. National Transfer Accounts

3. Goals of the NTA Project • Develop a system of economic accounts that quantifies intergenerational flows in a comprehensive fashion. • Estimate the accounts with historical depth for economies with different cultures, levels of development, economic systems and policies. • Analyze and explain • variation in the economic lifecycle and the intergenerational economic systems, • macroeconomic effects of population aging, • Improve policy related to pensions, health care, education, and fertility. National Transfer Accounts

4. Outline • Population Age Structure • Economic Lifecycle • Flows and Lifecycle Wealth • NTA and Intergenerational Systems National Transfer Accounts

5. I. Population Age Structure • Population age structure is a feature of the demographic transition • Very young populations due to high fertility decline in infant and child mortality • Large working-age share as large cohorts of children reached adulthood • Old populations as old-age survival increased and fertility reached low levels. National Transfer Accounts

6. 1950 25-59 more than half Younger Percentage of population under age 25 and 60+; bubble proportional to population. Source: UN World Population Prospects, 2006. National Transfer Accounts

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8. Large birth cohorts become workers National Transfer Accounts

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11. Pop Aging National Transfer Accounts

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16. Working ages declined National Transfer Accounts

17. II. The Economic LifecyclePer Capita Consumption and Production Labor Income Consumption Note: Based on estimates for Costa Rica, Indonesia, Taiwan, and Thailand. National Transfer Accounts

18. 3 Population Age Distributions National Transfer Accounts

19. Aggregate Lifecycle • Based on per capita profile for developing countries weighted by UN estimates of 2005 age structure. • Two features are of interest • Overall dependency: Total difference between labor income and consumption. • Direction of IG flows: Do flows to children or the elderly dominate? National Transfer Accounts

20. Lifecycle Deficit: Kenya 2005 • Intergenerational flows are heavily downward. • Kenya’s LC surplus is much smaller than its deficit; extra consumption could be funded from asset income (or net transfers from the rest of the world). Impact on saving. • Alternatively people could work more or consume less than in the standard profile. Difficult to balance without spending less on children. Impact on human capital. National Transfer Accounts

21. Lifecycle Deficit: Germany 2005 • Intergenerational flows in both directions are important. • Germany’s surplus is slightly smaller than its deficit; extra consumption must be funded from asset income (or net transfers from the rest of the world). • Alternatively people could work more or consume less than in the standard profile. • Note that results will differ when per capita lifecycle for Germany is used. National Transfer Accounts

22. Future Lifecycle Deficit: Germany 2050 • Intergenerational flows to elderly have increased relative to flows to the young. • Germany’s overall deficit has grown to 10% of labor income. Almost as large as Kenya’s 2005 deficit. • How this will influence the German economy and other aging societies will depend on the systems used to reallocate resources across generations. National Transfer Accounts

23. III. Flows and Lifecycle Wealth • Understanding the relationship between flows and wealth is very important • Generational equity: What is the value of the IG transfers we will receive from future generations as compared with the value of the IG transfers we will give to future generations? • Economic growth: One form of wealth is capital which is a central element in economic growth. • Fiscal sustainability: Implicit debt, a negative form of wealth, is used to assess the sustainability of transfer programs (Generational Accounts, for example). National Transfer Accounts

24. Flows and Lifecycle Wealth: A simple thought experiment • Your granary receives 10 metric tons of grain every Fall. • You sell all of the grain, at a constant rate, during the subsequent 12 months. • What is the average stock of grain (wealth)? Source: Wikipedia. Answer: Annual flow X (Date sold – Date purchased) 10 tons/year X ½ year = 5 tons. National Transfer Accounts

25. Flows and Wealth in NTA • Under very special circumstances (golden rule growth), wealth for any intergenerational flow is given by: • Wealth = Annual flow X (Mean age of inflow – mean age of outflow) • Form of wealth depends on IG system • Saving  real assets • Transfers  transfer wealth (the present value of net transfers) National Transfer Accounts

26. Flows and Lifecycle Wealth: Golden Rule Note. Flows as a share of aggregate labor income. Downward flow implies LC debt of 0.130 X -31.3 years = -4.09 times total labor income Upward flow implies LC wealth of 0.235 X 37.2 years = 8.76 times total labor income Note: Calculation is based on assumption that mean age of outflows is the same for children and the elderly. This will not be the case in general. National Transfer Accounts

27. Observations re Lifecycle Wealth • Lifecycle pension wealth includes • Assets accumulated to fund retirement • Value of net transfers from future generations on which retirees will rely • Bequests are treated separately. • Child lifecycle wealth is value of net transfers received by future generations during their childhood • Total transfer wealth provides a comprehensive measure of the generational stance of transfers. Neutral if pension and child transfer wealth are equal and of opposite sign. • In Germany example, neutrality realized if LC pension wealth consists of 4.09 transfer wealth and 4.87 capital. This level of capital would be insufficient to achieve golden rule growth. Bequests can resolve this problem – capital not used to finance lifecycle needs and is transferred from one generation to the next. National Transfer Accounts

28. IG Flows and Wealth • Calculation of transfer wealth in more realistic cases requires projection, forecast, or simulation of public and private transfers. • Simulation studies consistently show that the demand for wealth increases as populations age. • However, the effect on assets (capital) is sensitive to policy towards old-age support systems. National Transfer Accounts

29. Simulation of Lifecycle Pension Wealth and Assets, China, 1960-2050 China’s population and economic lifecycle for developing world, technological change of 2% per annum, open economy. High scenario: two-thirds of lifecycle pension wealth consists of assets. Low scenario: one-third of lifecycle wealth consists of assets. For a detailed description of the simulation model see Mason and Lee (2007). National Transfer Accounts

30. Implications of Age Structure and Economic Lifecycle • Changes in age structure have a direct effect on standards of living by influencing the share of the population in the working ages – first demographic dividend. • Population aging leads to a decline in the share of the working ages, adversely affecting standards of living. • However, population aging also leads to an increase in the demand for lifecycle wealth. If this is met through increased saving and a rise in K/GDP, the result may be permanently higher standards of living – a second demographic dividend. • Critical issue – old age support system. National Transfer Accounts

31. IV. National Transfer Accounts: A System for Measuring Intergenerational Flows • NTAs provide aggregate measures of the economic lifecycle and intergenerational economic flows • Comprehensive approach: • All mechanisms for shifting resources from one age group to another are incorporated into the accounts. • Both public and private institutions are incorporated. The role of the family is emphasized. • NTA is consistent with and complementary to NIPA and GA. National Transfer Accounts

32. Important Features of NTA • NTA consists of 4 accounts • Flow Account measures the economic flows to and from each age group during a calendar or fiscal year. • Asset Transfer Account measures bequests and other asset transfers. • Wealth Revaluation Account measures the changes in wealth due to changes in asset prices, interest rates, and public policy. • Wealth Account measures the wealth associated with each flow – assets and transfer wealth. • Emphasis to date is on the flow account. • Flow account is governed by the flow identity. National Transfer Accounts

33. Inflows Labor Income Asset Income Transfer Inflows Outflows Consumption Saving Transfer Outflows The Flow Account Identity National Transfer Accounts

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35. The Elderly and Upward Intergenerational Flows • Three important sources • Private (familial) transfers • Public transfers • Asset-based reallocations (saving) • An Exercise: Locate your country and explain why. (Handout Old-age IG Flow Chart) National Transfer Accounts

36. Old-Age IG Flow Systems Saving Familial Transfers Public Transfers National Transfer Accounts

37. Old-Age IG Flow Systems Saving The Results Familial Transfers Public Transfers National Transfer Accounts

38. Familial transfers equally important in Thailand, Korea, and Taiwan (36-40%). Net familial transfers near zero in US, CR, and J. Large public transfers in CR and J. More reliance on assets in CR & US. Net public transfers to elderly are zero in Thailand; about 25% in Taiwan and Korea. National Transfer Accounts

39. Reliance on assets in old-age National Transfer Accounts

40. 65-year-olds 67% assets, 2% public, 32% private 85-year-olds 23% assets, 39% public, 38% private National Transfer Accounts

41. Asset-based reallocations and public transfers have increased over time; familial transfers have declined precipitously. NHI began in 1995; net public transfers increased. National Transfer Accounts

42. Summary • Intergenerational flows are large • Magnitude and direction of IG flows are changing in unprecedented ways • IG systems vary widely and are changing • Important implications for • Generational equity • Standards of living • Investment in human and physical capital • Fiscal sustainability National Transfer Accounts

43. Further Reading Conceptual Foundations Lee, R. (2003). “Demographic Change, Welfare, and Intergenerational Transfers: A Global Overview.” GENUSLIX(3-4): 43-70. Lee, R. D. (1994). The Formal Demography of Population Aging, Transfers, and the Economic Life Cycle. Demography of Aging. L. G. Martin and S. H. Preston. Washington, D.C., National Academy Press: 8-49. Willis, R. J. (1988). Life cycles, institutions and population growth: A theory of the equilibrium interest rate in an overlapping-generations model. Economics of Changing Age Distributions in Developed Countries. R. D. Lee, W. B. Arthur and G. Rodgers. Oxford, Oxford University Press. 106-38. Empirical Studies Bloom, D. E. and J. G. Williamson (1998). “Demographic Transitions and Economic Miracles in Emerging Asia.” World Bank Economic Review12(3): 419-56. Bloom, D. E. and D. Canning (2001). Cumulative Causality, Economic Growth, and the Demographic Transition. Population Matters: Demographic Change, Economic Growth, and Poverty in the Developing World. N. Birdsall, A. C. Kelley and S. W. Sinding. Oxford, Oxford University Press: 165-200. Kelley, A. C. and R. M. Schmidt (2007). Evolution of Recent Economic-Demographic Modeling: A Synthesis. Population Change, Labor Markets and Sustainable Growth: Towards a New Economic Paradigm. A. Mason and M. Yamaguchi. Amsterdam, Elsevier: 5-38. National Transfer Accounts

44. Further Reading (Cont) Simulation Studies Cutler, D. M., J. M. Poterba, et al. (1990). “An Aging Society: Opportunity or Challenge?” Brookings Papers on Economic Activity 1990(1): 1-56. Lee, R., A. Mason, et al. (2003). “From Transfers to Individual Responsibility: Implications for Savings and Capital Accumulation in Taiwan and the United States.” Scandinavian Journal of Economics105(3): 339-357. Mason, A. and R. Lee (2006). “Reform and support systems for the elderly in developing countries: capturing the second demographic dividend.” GENUSLXII(2): 11-35. NTA Fundamentals Mason, A., R. Lee, et al. (forthcoming). Population Aging and Intergenerational Transfers: Introducing Age into National Accounts. Developments in the Economics of Aging. D. Wise. Chicago, NBER and University of Chicago Press. Lee, R., S.-H. Lee, A. Mason (2008). Charting the Economic Lifecycle. Population Aging, Human Capital Accumulation, and Productivity Growth, a supplement to Population and Development Review 33. A. Prskawetz, D. E. Bloom and W. Lutz. New York, Population Council: 208-237. National Transfer Accounts

45. Acknowledgement Support for this project has been provided by the following institutions: • the John D. and Catherine T. MacArthur Foundation; • the National Institute on Aging: NIA, R37-AG025488 and NIA, R01-AG025247; • the International Development Research Centre (IDRC); • the United Nations Population Fund (UNFPA); • the Academic Frontier Project for Private Universities: matching fund subsidy from MEXT (Ministry of Education, Culture, Sports, Science and Technology), 2006-10, granted to the Nihon University Population Research Institute. National Transfer Accounts

46. The End National Transfer Accounts