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Intergenerational Transfers in Broad Perspective

Intergenerational Transfers in Broad Perspective. Ronald Lee Demography and Economics University of California, Berkeley. 1. Intergenerational transfers in an evolutionary context. Parents in many species leave offspring after birth, with no parental care. Then:

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Intergenerational Transfers in Broad Perspective

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  1. Intergenerational Transfers in Broad Perspective Ronald Lee Demography and Economics University of California, Berkeley

  2. 1. Intergenerational transfers in an evolutionary context • Parents in many species leave offspring after birth, with no parental care. Then: • Over the life course, each individual can use only the food it forages for itself at each period and age • Rigid, restrictive budget constraint limits possibilities for development • Two alternatives for relaxing budget constraint of young • 1. Bequests: parent leaves offspring a capital endowment • paralyzed prey • a foraging territory • Large nutritious egg, etc. • 2. Inter vivos intergenerational transfers: with overlapping generations, continuing parental care and investment in offspring is an option, allowing for: • Postponement of nutritional independence • larger expenditures on growth and development • Pursuit of long term strategies with a high payoff, like brain development. • I will emphasize inter vivos intergenerational transfers. Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  3. The human evolutionary strategy: key features of contemporary hunter-gatherers • Long period of child dependency, with heavy adult investments • Short birth intervals relative to similar primates • Nonetheless overall fertility not high, due to late start. • A mother may have a number of dependent children at the same time. • This strategy is feasible only with economic contributions from other family members besides mother (cooperative breeders) • Father and other males • Grandmother and grandfather Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  4. Some data from Kaplan’s studies of three Amazon Basin Hunter-gatherer groups • Kaplan has constructed estimates from the raw data in two ways. • I am reporting on his work published in 1994 which I believe is correct. Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  5. Production and Consumption by Age Averaged Across Three Amazon Basin Hunter-Gatherer Groups (Daily Calories) Production Consumption Source: Calculated from Kaplan (1994), see Lee (2000). Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  6. Production and Consumption by Age Averaged Across Three Amazon Basin Hunter-Gatherer Groups (Daily Calories) Production Consumption Nutritional independence after age 20 Source: Calculated from Kaplan (1994), see Lee (2000). Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  7. Production and Consumption by Age Averaged Across Three Amazon Basin Hunter-Gatherer Groups (Daily Calories) Production Consumption Raising one child to maturity costs 10+ years of adult consumption Source: Calculated from Kaplan (1994), see Lee (2000). Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  8. Production and Consumption by Age Averaged Across Three Amazon Basin Hunter-Gatherer Groups (Daily Calories) Production Elderly remain net producers Consumption Source: Calculated from Kaplan (1994), see Lee (2000). Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  9. Production and Consumption by Age Averaged Across Three Amazon Basin Hunter-Gatherer Groups (Daily Calories) Production Consumption Population weighted average ages Ac = 24 yrs Ayl = 35 yrs Source: Calculated from Kaplan (1994), see Lee (2000). Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  10. Production and Consumption by Age Averaged Across Three Amazon Basin Hunter-Gatherer Groups (Daily Calories) Production Consumption The average calorie is consumed by someone 11 years younger than the producer: income flows downward, from older to younger. 24 35 Source: Calculated from Kaplan (1994), see Lee (2000). Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  11. 2. Intergenerational transfers in a modern context • As in past, transfers allow life course divergence of earnings and consumption. • young can be net consumers • Now old can also be net consumers – something “new” in last 10,000 years. • Terminology: I take intergenerational transfers to mean the same as inter-age transfers, not necessarily between discrete generations in the same family. Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  12. Stylized human life cycle for surviving individuals Output per person per year Labor earnings, y(x) + + Consumption, c(x) • - • - - - Age Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  13. How do these reallocations across age and time take place? • By institution, through the family, the market and the state (public sector) • By mechanism, through borrowing and lending, through investing in physical capital, and through transfers. Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  14. Resource Reallocation Across Age and Time Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  15. Resource Reallocation Across Age and Time Hunter-gatherers Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  16. How can we measure and interpret this rich variety of resource flows across age and time? • One strategy: measure each of these flows in detail, which requires: • Rich data from many sources • Strong assumptions, in some cases • But is surprisingly possible. • An alternative indirect strategy: estimate broad patterns of production and consumption, and infer the flows that must have occurred. • I will show methods and results for both approaches, time permitting, but start with second. Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  17. Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  18. Earnings decline rapidly in 50s and 60s Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  19. Consumption rises in old age Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  20. Pop wtd Average ages Ac = 41 yrs Ayl = 43 yrs Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  21. 4. Comparative Direction of Transfer Flows Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  22. 2050 +3 -2 United States [Lee & Miller] Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  23. What has caused these changes? • Population aging over demographic transition • Behavioral choices with rising wealth • Retirement age in US dropped from 74 in 1900 to 63 today; most of Europe is similar or more so. • Choice of privacy over co-residence for elderly • Choice of expensive medical interventions for chronic diseases of elderly • Institutional change, particularly the growth of massive public sector transfer programs. • Now examine public sector transfers in US Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  24. Resource Reallocation Across Age and Time Rest of my talk Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  25. Do public sector transfer programs redirect resources from children to elderly? • Two ways in which societal investment in children may have declined • Over the life cycle, reallocation across ages • allocations of resources to children by adults may be declining • Across generations, loss of life time wealth • Younger generations of today may be exploited by older generations through the public sector – unsustainable, transitory situation; “greedy geezers”. • I will discuss both in US context. Believe similar to other industrialized nations. Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  26. 5. The growth of public transfer programs in the US • Examine changing age patterns of major govt transfer programs • Education • Pensions • Health Care • Cross-sectional view Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  27. Spending on Public Education, Social Security and Medicare as % of GDP, Actual 1850-2000; Projected to 2050 Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  28. The changing age profiles of taxes and benefits in the US: 1850, 1930 and 2000 (cross-sectional) (Soc Sec, Educ, Medicare) 1850 0 80 Relative to per capita GDP 1930 2000 Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  29. The changing age profiles of taxes and benefits in the US: 1900, 1930 and 2000 (cross-sectional) (Soc Sec, Educ, Medicare) 1850 0 80 % per capita gdp 1930 Note enormous increase in benefits for the elderly 2000 Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  30. Public Sector Transfer Flows Reversed Direction in the 1970s, and Their Size Increased Relative to GDP (Soc Sec, Ed, Medicare) Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  31. Public Sector Transfer Flows Reversed Direction in the 1970s, and Their Size Increased Relative to GDP Length of arrow is difference in average ages of paying taxes, and getting benefits. Width is benefits as % GDP Area is transfer wealth as % GDP Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  32. Public Sector Transfer Flows Reversed Direction in the 1970s, and Their Size Increased Relative to GDP Programs will generate large transfer wealth by 2050 – 126% GDP (net of education). Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  33. 6. Intergenerational redistribution of these public sector transfers • Do public transfer programs permit the current elderly to live well at the unfair expense of today’s youth and tomorrow’s newborns? • “The living and well organized are taking money from the weak and unborn. Over the past few decades we have seen a gigantic transfer of wealth from struggling young families and the next generation to members of the AARP [Elderly].” (David Brooks, NYT, 2/5/05) • Schematic view: Transfer programs and generational windfall gains Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  34. Net Present Value of life time benefits minus taxes (NPV) by generation for upward transfers versus downward transfers First gens Upward, e.g. Soc Sec, Medicare NPV ($) Steady state < 0 Year of birth of generation When upward transfers start up, first generations get a windfall gain; later generations pay the price with negative NPVs. Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  35. Net Present Value of life time benefits minus taxes (NPV) by generation for upward transfers versus downward transfers First gens Upward, e.g. Soc Sec, Medicare NPV ($) Steady state < 0 Downward, e.g. Educ NPV ($) Steady state > 0 First gens Year of birth of generation Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  36. Net Present Value of life time benefits minus taxes (NPV) by generation for upward transfers versus downward transfers First gens Upward, e.g. Soc Sec, Medicare NPV ($) Steady state < 0 When downward transfers start up, the opposite happens: first generation loses, later ones gain. Downward, e.g. Educ NPV ($) Steady state > 0 First gens Year of birth of generation Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  37. Net Present Value at birth of expected life time benefits for Social Security, Medicare and Public Education as % of lifetime earnings, for generations born 1850 to 2090 Upward (pensions + Medicare) Total Downward (public educ) Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  38. Net Present Value at birth of expected life time benefits for Social Security, Medicare and Public Education as % of lifetime earnings, for generations born 1850 to 2090 One dollar of education is worth $12 in old age. Total Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  39. Generational redistribution is opposite to our expectations • Today’s young are the biggest winners, due to importance of public education. • Also their children • Even their grandchildren gain • Today’s elderly, age 57 to 74, are net losers (slightly). • As expected, those born in decades around 1900 are also big winners. • Almost all generations from 1880 through 2050 gain. But… • Eventually, generations after 2050 will suffer increasingly large losses. Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  40. 7. Financial Pressures of Population Aging • Hold age profiles of labor earnings and consumption constant at 2000 levels • Multiply by changing population age distribution over 21st century. • How would aggregate consumption need to change to maintain same ratio to labor earnings as in 2000? • Calculate the support ratio, adjusted to 1.0 for 2000. Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  41. General Support ratio for US, 2000 to 2100, 1.0 for 2000. Based on labor earnings and consumption profiles, plus projected pop age distr. Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  42. Support ratio for US, 2000 to 2100, normalized to 1.0 for 2000. Based on labor earnings and consumption profiles shown earlier, plus projected pop age distr. General Support ratio for US, 2000 to 2100, 1.0 for 2000. Based on labor earnings and consumption profiles, plus projected pop age distr. Initial slight increase, due to small cohorts turning 65 Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  43. Support ratio for US, 2000 to 2100, normalized to 1.0 for 2000. Based on labor earnings and consumption profiles shown earlier, plus projected pop age distr. General Support ratio for US, 2000 to 2100, 1.0 for 2000. Based on labor earnings and consumption profiles, plus projected pop age distr. Then population aging raises consumption costs faster than labor earnings, so consumption must fall – but only by 16%. Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  44. Support ratio for US, 2000 to 2100, normalized to 1.0 for 2000. Based on labor earnings and consumption profiles shown earlier, plus projected pop age distr. General Support ratio for US, 2000 to 2100, 1.0 for 2000. Based on labor earnings and consumption profiles, plus projected pop age distr. Average effect on consumption averages < -.2%/yr over century Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  45. We can also use this same exercise to calculate the average ages of consumption and earnings. Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  46. Average ages for Consumption and Labor Earning from the Same Data Av age of consumption Av age of labor earning Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  47. Average ages for Consumption and Labor Earning from the Same Data Direction of flows reverses in 2020, due solely to population aging Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  48. We can do similar calculations to find fiscal support ratio, based on taxes and benefits • Here show benefits by age, for several major programs and in total Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  49. Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

  50. Fiscal Support Ratio Projections, 2000-2100 Ronald Lee, Univ Calif, Berkeley; Sept 13, 2005

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