Transfers and Assets in the Economic Lifecycle: NTA Evidence Economics Department Seminar Andrew Mason October 17, 2007
A Quick Overview of National Transfer Accounts (NTA) • NTAs provide aggregate measures of the economic lifecycle and economic flows across age • 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. • Accounts are governed by a flow identity.
The Flow Account Identity • Inflows
• Outflows
– Labor Income – Asset Income – Transfer Inflows
– Consumption – Saving – Transfer Outflows +
−
Y (a) + Y (a) + τ (a) = C (a) + S (a) + τ (a) 144424443 144424443 l
a
Inflows
Outflows
C ( a ) − Y l (a ) = Y a ( a ) − S ( a ) + τ + ( a ) − τ − ( a ) 14 4244 3 14 4244 3 14 4244 3 Lifecycle Deficit Asset-based Reallocations Net Transfers 144444244444 3 Age Reallocations
A Classification of NTA Reallocations. Asset-based Age Reallocations Capital and Other Non-Financial Assets
Public
Public infrastructure Public land and subsoil minerals
Private
Housing Consumer durables Factories, Farms Private land and sub-soil minerals Inventories
Credit
Transfers
Public debt Student loans Money
Public education Public health care Unfunded pension plans
Consumer credit
Familial support of children and parents Bequests Charitable contributions
Source: Mason, Lee et al. (forthcoming); adapted from Lee (1994).
Implementation • Research teams in 25 countries are constructing NT accounts. • Project directors are Ron Lee (CEDA, UCBerkeley) and Andy Mason (UH Econ and EWC) • Funded by National Institute on Aging, International Development Research Center, United Nations Population Fund, MacArthur Foundation, MEXT Academic Frontier grant to Nihon University Population Research Institute.
Issue: What is the role of assets in the economic lifecycle? • Conventional wisdom: accumulation of assets during the working years is an important means by which individuals provide for their retirement. • How important is retirement saving in the US and other industrialized countries? How important in developing countries? Do assets play other lifecycle roles that have been overlooked? These questions will be considered in light of new evidence based on National Transfer Accounts.
Warnings • • • •
Estimates are preliminary Cross-national comparisons Unclear whether age or cohort effects One point in time (not all countries have same year) – could be looking at year effects.
The Role of Assets in the Simple Lifecycle Model • Examples: Modigliani, Gordon Principles, Mankiw Intermediate Macroeconomics. • Storyline: Labor income is shifted to older ages by accumulating assets using surplus labor income. Retirement funded from asset-income and dis-saving. • Widely recognized that public transfers may crowd out lifecycle saving.
1.2
Labor Income
1
Saving
0.8
0.6
Consumption
0.4
0.2
Dissaving
0
20s
30s
40s
50s
60s
70s
Age Profiles of Labor Income and Consumption: averaged for Four Rich and Four Poor Countries (Relative to average labor income) 1.4
Rich: US, Japan, Sweden, Finland Poor: India, Indonesia, Philippines, Kenya
National Transfer Accounts data
1.2
Rich Ratio to av yl(30-49)
1
0.8
0.6
0.4
poor
0.2
0 1
4
7
10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 Age (+1)
Theory Meets Reality Aggregate Economic Lifecycle, Japan, 2004 12000
Yen (billions)
10000 8000 6000
78.8 trillion
4000
83.4 trillion
64.1 trillion
2000 0 0
10
20
Source: Ogawa et al. 2008.
30
40
50
60
70
80
90+
Theory Meets Reality Aggregate Economic Lifecycle, US, 2003 250
Dollars (billions)
200
1.4 trillion
150 100
2.1 trillion
50
1.5 trillion
0 0
10
20
30
40
50
60
Source: Lee, et al. 2007; Lee, Mason, and Lee. 2008.
70
80
90+
Theory Meets Reality Aggregate Economic Lifecycle, Philippines, 1999 70,000
Pesos (millions)
60,000 50,000
331 billion
40,000
960 billion
30,000 20,000
65.5 billion
10,000 0 0
10
20
30
Source: Racelis and Salas. 2007.
40
50
60
70
80
90+
Two Striking Features of LC • The lifecycle deficit of children is very large even in low fertility Japan – Quantity-quality tradeoff – Few children but high HK spending per child – Implications of large deficits discussed later
• Old age deficit is much greater in Japan and US as compared with Philippines – Age structure only? – Or are other factors important?
Old Age Deficit Normalized
Age Structure and Old Age Deficit 12 10 8 6 4
y = 21.134x - 2.2402 R2 = 0.9132
2 0 0
0.2
0.4
0.6
0.8
Pop 60+/Pop 30-59 LCD normalized on aggregate labor income/35.
Estimated elasticity of 1.54 • Economy aging more rapidly than population. • Many possible explanations, e.g., • Increased demand for leisure • Increased demand for health care • Political power of elderly.
Whatever the reasons the demand for old-age reallocation systems is very substantial in old, mostly high-income countries.
I. Role of Assets and Transfers in Old-age
Old-age Reallocation System, Three Components Assets
Asset income + dis-saving = LCD; Net public transfer and net private transfers= 0.
1/3
Net private transfers = LCD; Asset-based reallocations and net public transfers= 0. Family Transfer
2/3
2/3 1/3
0 2/3
1/3
Net public transfers = LCD; Asset-based reallocations and net private transfers= 0. Public Transfer s
Old-age Reallocation Systems, Seven Counties, Recent Year Proportion of Old-age LC Deficit Funded by Assets and Transfers
Some Observations • Public transfers and asset-based or private transfers and asset-based. • Time series data (not presented) shows transition from public to private transfers in Taiwan and Japan. • Extent to which countries rely on assetbased transfers doesn’t correlate with aggregate saving rates.
Funding the Old-age Deficit Japan, 2004. For young elderly Major shift from asset-based reallocations to transfers
familial transfers are downward; for old elderly they are upward.
Funding the Old-Age Deficit, Heavy reliance on United States, 2004 asset-based Assets
reallocations and public transfers. Net family transfers downward.
65 66 67 68 69 70 7475 72 71 73 1/3 76 77787980 883 1 82 84 85 86 87 88 89 90+
2/3
2/3 1/3
Family Transfer
2/3
Source: Lee, Lee and Mason. 2008.
1/3
Public Transfer s
Funding the Old-Age Deficit, Finland, 2004 Net public transfers equal or lifecycle deficit. Assetbased reallocations are positive. Large downward transfers.
Assets
1/3 2/3
84 2/3 1/3
Family Transfer
79 88 82 89 78 87 83 86 73 81 77 69 72 75 66 68 67 70 71 76 65 74
2/3
1/3
90 Public Transfer s
Source: Risto and Vanne. 2008. Net public transfers = LCD
Funding the Old-Age Deficit, Chile, 1997 Assets
1/3 90+
2/3
65 89 66 88 87
1/3
Family Transfer
Source: Bravo and Holz. 2007
2/3
1/3
67 7372 71 2/3 74 70 69 68 75 86 76 77 8579 80 78 83 81 82 84
Public Transfer s
Funding the Old-Age Deficit, Thailand, 2004 No public transfers. Shift from asset-based to family transfers with age.
Assets
1/3
65 66 6771 68 70 69 72 73 2/3 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90+
Family Transfer
Source: Chawla. 2008.
1/3
2/3
2/3
1/3
Public Transfer s
Funding the Old-Age Deficit, Taiwan, 1998 Assets
1/3 2/3
65 1/3
81 83 84 85 86 87 88 89 90+
2/3
67 66 68 69 71 70 7675 79 80 78 77
73 72 74
82
Family Transfer
2/3
1/3
Source: Mason et al., forthcoming. www.ntaccounts.org.
Public Transfer s
Funding the Old-Age Deficit, Philippines, 1999 67
68 69
Both net public and net private transfers are downward.
Assets 70 71 72 73 74 75 76 77 78 2/3 79 8180 82 8483 85 86 87 88 89 90+
1/3
2/3 1/3
Family Transfer
2/3
Source: Racelis and Salas. 2007.
1/3
Public Transfer s
What might explain “shift” from assets to transfers with age? • Myopia: Elderly are running out of assets. • Poor annuity markets; transfer systems are insuring against longevity. • Cohort effect, e.g., old people had lower lifetime earnings and, hence, fewer assets. • Capital transfers; elderly are transferring assets to children and subsequently receiving compensating current transfers.
II. Roles of transfers and asset-based reallocations in supporting children • Direct support for children is overwhelmingly through public and private transfers • In some countries direct support of child deficit realized through credit transactions. School loans are an example. • Issue is the extent to which lifecycle deficit is funded indirectly through assets income or dis-saving (on the part of those making the transfers to children). • An important piece of evidence was highlighted above – the child deficit exceeds the lc surplus in many countries.
Comparison of LCD of Children to Lifecycle Surplus of Adults • Child deficit exceeds 70% of surplus in every country except China
• In Latin America and Southeast Asia child deficits are large and substantially exceed the adult surplus.
25.00
Lifecycle Surplus
• EA and West countries surplus exceeds child deficit except in the US and Taiwan
LC Surplus vs Child Deficit
Surplus > LCD
20.00
EA
15.00
Surplus < LCD
LA SEA
10.00
West
5.00 0.00 0.00
5.00
10.00
15.00
20.00
25.00
Child Deficit
Note. Surpluses and deficits are normalized on aggregate labor income/35.
OLG Perspective on Supporting Children • Three generations (ages) – Children (1) – Workers (2) – Retirees (3)
• Steady-state • Dynamic efficiency, but not golden rule
Dynamic Efficiency, not Golden Rule, Low Childrearing Costs • Aggregate consumption exceeds labor income • Economy as a whole has a lifecycle deficit • Return to capital exceeds to biological rate of interest n. • Funded pensions yield a higher rate of return than paygo pensions.
120 100 80
Yl C
60 40 20 0 1
2
3
2
3
60 40 20 0 -20 -40 -60 1
Deficit Surplus
Interage Flows: A: Lifecycle Saving Net transfers
Transfers by age 60 40 20 0 -20 -40 -60
Inflows Outflows 1
2
3
Asset-based flows by age Net asset-based inflows
Case A. Standard lifecycle • Transfers from generation 2 fund consumption by children • Remaining surplus is saved (asset-based outflow) • Inflows to age 3 will exceed outflows from age 2 because r>n.
60 40 20 0 -20 -40 -60
Inflows Outflows 1
2
3
Interage Flows: B: Mixed Old-age Reallocations Net transfers
Transfers by age 60 40 20 0 -20 -40 -60
Inflows Outflows 1
2
3
Asset-based flows by age Net asset-based inflows
Case B: Mixed reallocations • Transfers from generation 2 fund consumption by children • Remaining surplus divided between transfers to elderly and lc saving • Inflows to age 3 will equal transfers from generation 2 + asset-based flow. • Consumption is lower because of reliance on transfers. Here shown as lower consumption for generation 3.
60 40 20 0 -20 -40 -60
Inflows Outflows 1
2
3
Dynamic Efficiency, not Golden Rule, High Childrearing Costs • Aggregate consumption exceeds labor income • Economy as a whole has a lifecycle deficit • Return to capital exceeds the biological rate of interest n. • Funded pensions yield a higher rate of return than paygo pensions.
120 100 80
Yl C
60 40 20 0 1
2
3
2
3
60 40 20 0 -20 -40 -60 1
Deficit Surplus
Interage Flows: Bequests Net transfers
Transfers by age 60 40 20 0 -20 -40 -60
Inflows Outflows 1
2
3
Asset-based flows by age Net asset-based inflows
Case A • Transfers from generation 2 fund consumption by children • Given high level of child consumption, asset-based flows = 0 for generation 2. • Thus, S(2) = YA(2). However, if age group 2 only saves asset income, assets must be zero. Hence, S(2)=YA(2)=0. • Net asset-based flows are large and positive for age group 3. • Not lifecycle assets A(3,t) = S(2,t-1)=0. • Age group 3 must have inherited assets from parents.
60 40 20 0 -20 -40 -60
Inflows Outflows 1
2
3
Interage Flows: Bequests and Multigenerational Support of Children Net transfers
Transfers by age 60
Inflows Outflows
40 20 0 -20 -40 1
2
3
Asset-based flows by age Net asset-based inflows
Case B • Transfers from generation 2 and 3 fund consumption by children • Generation 2 saves a portion of its labor income (assetbased flows are negative) • Assets for generation 3 consist of lifecycle assets and bequests. • A portion of asset income received by generation 3 is consumed and a portion is transferred to grandchildren (or to parents who transfer to grandchildren).
75 50 25 0
Inflows Outflows
-25 -50 1
2
3
Interage Flows: Inter vivos Capital Transfers
S(2) = YA(2) > 0
• Net asset-based flows and transfers are identical to Case A, but more detailed information would reveal the differences.
Net transfers
Transfers by age 60 40 20 0 -20 -40 -60
Inflows Outflows 1
Net asset-based inflows
Case C • Transfers from generation 2 fund consumption by children • Generation 2 has capital transferred by generation 3. • Asset income from capital transfer can be used to fund transfers to children, own consumption, or saving. Net effect in this case is that:
2
3
Asset-based flows by age 60 40 20 0 -20 -40 -60
YA Saving 1
2
3
Inflows Outflows
Summary • Assets must be indirectly funding consumption by children. • Not just lifecycle assets, but existing assets that are transferred from one generation to the next. • One plausible mechanism: grandparents receive bequests and rely on asset-income to fund transfers to their grandchildren. • A second plausible mechanism: grandparents make capital transfers to the parents (at the time of marriage, for example). Parents rely on those transfers to support children. • In the first case, bequests are the means by which intergenerational capital transfers are achieved. • In the second case, inter vivos intergenerational capital transfers are important.
LCD, Transfers, and Asset-based Flows, Normalized aggregate values, US 2003 1.00
Inflows: asset income > saving > 0
0.80
Relative to Yl/35
0.60 0.40 0.20
Asset-based flows
LCD
0.00 -0.20 0
10
20
30
40
50
60
-0.40
-0.60 Inflows realized in -0.80 part through borrowing -1.00
Source: Lee, Lee and Mason. 2008.
transfers
Important Point At no age is saving coming out of labor income. Always from asset income.
70
80
90+
Net transfer >> LC surplus.
LCD, Transfers, and Asset-based Flows, Normalized aggregate values, Japan 2004
Credit not important for young 1.00 0.80
0.40 0.20
-0.40 -0.60 -0.80 -1.00
Source: Ogawa et al. 2008.
90+
84
78
72
66
60
54
48
42
36
30
24
18
12
-0.20
6
0.00 0
In other respects, the picture is similar to the US.
Relative to Yl/35
0.60
1.00
0.50
84
90+
78
72
66
60
54
48
42
36
30
24
18
6
12
0.00 0
Relative to Yl/35
• Mexico and the Philippines have very large LCDs for children • Net transfers for adults far greater than lifecycle surplus • Asset-based flows are large positive
LCD, Transfers, and Asset-based Flows, Normalized aggregate values, Mexico 2004
-0.50
-1.00
LCD, Transfers, and Asset-based Flows, Aggregate values, Philippines 1999 1.2 1.0 0.8 0.6
LCD
0.4
Asset-based
0.2
84
78
72
66
60
54
Net Transfers
-0.6 -0.8
90 +
-0.4
48
42
36
30
24
18
6
0
12
0.0 -0.2
Normalized on total labor income/35.
Source: Mejia-Guevara. 2008; Racelis and Salas. 2007.
1.00 0.80 0.40 0.20
90+
84
78
72
66
60
54
48
42
36
30
24
18
6
-0.20
12
0.00
0
Relative to Yl/35
0.60
-0.40 -0.60 -0.80 -1.00
LCD, Transfers, and Asset-based Flows, Normalized aggregate values, Thailand, 1999 1.00 0.80 0.60 0.40 0.20
90+
84
78
72
66
60
54
48
42
36
30
24
18
12
-0.20
6
0.00
0
Relative to Yl/35
• S Korea and Thailand have similar LCDs for children seniors. • Thailand reallocation system similar to other countries. • Surplus is relative large in S Korea • S Korea has asset-based outflows (saving > asset income) for young adults – unusual.
LCD, Transfers, and Asset-based Flows, Normalized aggregate values, S Korea 2000
-0.40 -0.60 -0.80 -1.00
Source: www.ntaccounts.org; Chawla. 2008
Significance • Rethink the economic lifecycle, the importance of flows to children, and implications for accumulation and intergenerational equity. • Emphasis on bequests vis-à-vis lifecycle saving may be misplaced. Inter vivos intergenerational capital transfers may be much more important than realized. • Impact of financial crisis may not be concentrated on retirees. Effect on children may be much more important than realized.
Words of Caution • Estimates are preliminary and subject to revision. • Estimates are totals or per capita values. • Typical behavior (as judged by the median for example) may be very different. • Aggregates conceal an enormous amount of heterogeneity.
References Bravo, Jorge and Mauricio Holz (2007) "Inter-age transfers in Chile 1997: economic significance". Paper presented at the Conference on “Asia’s Dependency Transition: Intergenerational Transfers, Economic Growth, and Public Policy”, Tokyo, Japan, 1-3 November, 2007. Chawla, Amonthep (2008) "Macroeconomic Aspects of Demographic Changes and Intergenerational Transfers in Thailand." Ph.D. dissertation submitted to the University of Hawaii at Manoa. Lee, Ronald, Sang-Hyop Lee, and Andrew Mason (2007) "Charting the Economic Life Cycle," in Population Aging, Human Capital Accumulation, and Productivity Growth, Alexia Prskawetz, David E. Bloom, and Wolfgang Lutz, eds., a supplement to Population and Development Review vol. 33. (New York: Population Council). Mason, Andrew, Ronald Lee, An-Chi Tung, Mun Sim Lai, and Tim Miller (forthcoming) “Population Aging and Intergenerational Transfers: Introducing Age into National Income Accounts,” Developments in the Economics of Aging edited by David Wise (National Bureau of Economic Research: University of Chicago Press). Ogawa, Naohiro, Andrew Mason, Amonthep Chawla, and Rikiya Matsukura (2008) "Japan’s Unprecedented Aging and Changing Intergenerational Transfers". NTA Working Paper Racelis, Rachel H. and J.M. Ian S. Salas. “Measuring Economic Lifecycle and Flows Across Population Age Groups: Data and Methods in the Application of the National Transfer Accounts (NTA) in the Philippines.” Makati City: Philippine Institute for Development Studies, Discussion Paper Series No. 2007-12, October 2007. Vaittinen Risto and Reijo Vanne (2008) Intergenerational Transfers and Life-Cycle Consumption in Finland, Finnish Centre for Pensions Working Papers 2008:6.
