“The first question each of us must ask isn’t what’s good for me, but what’s good for the country our children inherit.” Barack Obama Generational Economy Speech George Mason University January 8, 2009
National Transfer Accounts
Key Findings from Population Aging and the Generational Economy Andrew Mason 7th Global NTA Meeting East-West Center June 11, 2010 Honolulu, HI
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Acknowledgments ► Draws
on Lee and Mason forthcoming Introduction
to Population Aging and the Generational Economy ► Indebted to researchers from 23 countries who contributed to the volume ►
Research for this paper was funded by parallel grants from the National Institutes of Health to Ronald Lee and Andrew Mason, NIA R37 AG025247 and R01 AG025488; grants from MEXT.ACADEMIC FRONTIER to Nihon University Population Research Institutes, from the United Nations Population Fund (to NUPRI and EWC), from the MacArthur Foundation to EWC; and from IDRC to ECLAC and AERC
National Transfer Accounts
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Global age transition ►
The global age transition is universal: 1. Increase in share of children 2. Increase in the working-age share 3. Increase in the share of elderly
► ►
Rapid for many middle- and low-income countries Countries are at different points of the global age transition
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Phases of global age transition Countries classified by age group (<25, 25-59, or 60+) with the largest absolute increase in population size
Number of Countries
250 200 60 + 25-59 Under 25
150 100 50
19 50 19 60 19 70 19 80 19 90 20 00 20 10 20 20 20 30 20 40
0
Source: Based on UN Population Prospects 2008.
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Population age structure, countries of the world, 2010 35 Japan
30
Percentage 60 and older
Germany 25
20
US Population 25-59<50% Russia
15 Population 25-59>50% 10
Brazil India
China
Nigeria 5
0 0
10
20
30
40
50
60
70
80
Percentage 0-24
Source: UN Population Division.
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Age structure and the economy ► How
are the world’s economies adjusting? ► What are the implications for: Economic growth Generational equity Sustainability of long-term commitments? ► What
policies should be implemented?
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This presentation ► Understand
how generational economies are adapting to changing age structure ► Based on cross-sectional estimates for 23 NTA countries ► Emphasis is on previously undocumented features of the generational economy ► Emphasis is on description and not causal interpretations ► Relies heavily on chapters from Population Aging
and the Generational Economy
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Andrew Mason 2010
Generational economy defined Generational economy n (1) the social institutions and economic mechanisms used by each generation or age group to produce, consume, share, and save resources; (2) the economic flows across generations or age groups that characterize the generational economy; (3) explicit and implicit contracts that govern intergenerational flows. National Transfer Accounts
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Produce and consume: The economic lifecycle ► Fundamental feature of generational economy ► Measure by comparing what people at each age
consume to what they produce through their labor ► Three distinct periods in all contemporary societies: Beginning: Lifecycle deficit Middle: Lifecycle surplus End: Lifecycle deficit
► Size
and age pattern of deficits and surplus depend on many factors
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Factors that influence lifecycle ► Income
and wealth ► Labor markets and availability of jobs ► Prices, interest rates, financial institutions ► Public policies ► Behavioral responses ► Population age structure
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Aggregate economic lifecycle, Brazil, 1996 Consumption and Production (billions)
14 Consumption 12
Production
Surplus Deficit
10 8 6 4 2 0 0
10
20
30
40
50
60
70
80
90+
Age
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Aggregate economic lifecycle, Germany, 2003 Consumption and Production (billions)
50 Production
45 40
Surplus
35
Deficit
30 25 Consumption
20 15 10 5 0 0
10
20
30
40
50
60
70
80
90+
Age
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Summary of aggregate lifecycle Younger
Older
Surplus
Deficit
Nigeria (2004) Philippines (1999) India (2004) Brazil (1996) Mexico (2004) Costa Rica (2004) Indonesia (2005) Chile (1997) China (1995) Taiwan (1998) Thailand (2004) Uruguay (2006) South Korea (2000) United States (2003) Finland (2004) Sweden (2003) Spain (2000) Austria (2000) Hungary (2005) Slovenia (2004) Germany (2003) Japan (2004) -0.6
From large child deficits to large oldage deficits
-0.4
-0.2
Children (0-24)
0
0.2
0.4
Working ages (25-59)
0.6
0.8
1
Old age (60+)
Note: All values expressed as a proportion of total labor income. Countries ordered using percentage of population under age 25.
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Transition in net lifecycle deficit 0.8
Aggregate LCD/Labor income
0.6
0.4
0.2
0 0 -0.2
-0.4
• Decline in net deficit as share of under 25 pop declines (and share of working-age pop increases) • Not yet clear how 3d of 10 phase 20 age transition will affect the net deficit • Country factors are important
Mx Br
Ng
Ph Cl US Jp De Es HuFi Au Sl Se 30
Tw
CR Id
Th
In
Kr Uy 40
50
60
70
Ch
Percentage under 25
Net deficit is sum of child and old-age lifecycle deficits and lifecycle surplus.
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Share and save: Age reallocation system ► Reallocation
system is the counterpart to the economic lifecycle ► System by which resources are shifted from one age group to another ► All intergenerational flows arise through some form of sharing or saving ► There are many variants of these economic forms that involve governments, families, non-profits, markets, etc. National Transfer Accounts
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The generational economy Lifecycle Deficit (billions)
150 ROW Transfers
100 50
IG Transfers
Deficit
Transfers
IG Transfers
Deficit
0 0
10
-50
20
30
40 Surplus
Asset-based Flows
-100 Assets
50
60
70
80
90+
Bequests
The generational economy and the young ► Asset-based
flows
Minor children: No credit or other assets Young adults: Student loans, credit cards, and other consumer debt ► Public
transfers
Public education system Publicly funded health care Other public goods and services ► Private
transfers
Familial, intra-household transfers from parents and perhaps grandparents National Transfer Accounts
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Asset-reallocation system for children, average values Asset-based flows, 4 Public transfers, 23
Private transfers, 73
Note: Preliminary estimates that will be revised.
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Generational economy: The working ages High expectations of the working ages
Meet own material needs Transfers to children Transfers to the elderly Save for retirement and a bequest for one’s descendants
Sandwich generation
Panini Generation
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The panini generation ► In
young countries, net transfers just to children exceed the lifecycle surplus ► In older countries, net transfers to children and the elderly exceed the lifecycle surplus ► In almost every country, working-age adults are relying heavily on assets to meet their own material needs and their familial and social obligations to other generations ► They are saving, but substantially less than the income earned from assets National Transfer Accounts
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Lifecycle Deficit (billions)
The generational economy: The working ages 150 Transfers
ROW Transfers
100 IG Transfers
50
IG Transfers
Deficit
Deficit
0 0
10
20
30
40
50
60
70
80
90+
Surplus
-50
Saving occurs during the working ages, but it is less than asset income in almost every country.
Asset-based Flows
-100 Assets
The older generation ► The
lifecycle deficit for the elderly reflects
Consumption by the elderly, public transfers, tastes, biology Labor income reflects retirement and tax policy, taxes for end of life leisure, income, health status, etc. In all countries, labor income at older ages is substantially less than consumption
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Labor income at older ages Labor income relative to consumption
2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00 55
60
65
70
75
80
85
90+
Age
Boxes mark +/- one standard deviation around the mean. Whiskers mark maximum and minimum values.
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Funding the lifecycle deficit: Persons 65 and older Assets
PH
MX
1/3 2/3
US
TH
UY
KR
ES JP 2/3 1/3
CR TW FI CL SE SI
CN
BR AT
Family Transfers
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2/3
1/3
Public Transfers
Andrew Mason 2010
Funding the lifecycle deficit: Persons 85 and older Assets
1/3 2/3 US
MX
ES UY
TH
1/3
KR PH Family Transfers
National Transfer Accounts
CN
2/3
CR
SI
TW
2/3
FI
CL JP 1/3
Public Transfers SE AT
Andrew Mason 2010
Summary of private transfers to the elderly ► Gross
flows decline with development ► Net flows complement others components of the reallocation system ► Familial transfers are of greater importance to the very old
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Funding old-age consumption: A cross-country comparison ► Great
variation in the importance of transfers and asset-based flows to those 65 and older ► Key tradeoff Transfers and asset-based flows Unclear whether an increase in transfers to the elderly crowds out lifecycle saving (Feldstein) or crowds in bequests (Barro) National Transfer Accounts
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Funding consumption, 65+: Synthetic cohort estimates Tradeoff is primarily between transfers and asset-based flows
Assets
1/3
Tradeoff between transfers and labor income is modest
2/3
Mx US Uy
1/3
Jp Hu Tw
Fi
Transfers
2/3
RK
At Se
Sl
CR
Cl
2/3
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1/3
Labor income
Andrew Mason 2010
What do transfers crowd out? ► ►
Preceding graph conceals possible effects of the support system on consumption A simple statistical analysis provides a useful DESCRIPTION of how four components−consumption, labor income, transfers, and asset-based flows−vary across countries
Yi , j j j i òi , j
where Y is C, AR, or Yl A one unit increase in transfers must be balanced by a one unit increase in consumption, a one unit decrease in asset-based flows, a one unit decrease in labor income, or some combination of the three. Seemingly unrelated regression problem for which OLS is appropriate, although it would be nice to have more than 13 observations!
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Results: Regression of NTA flows on net transfers for 65+, 13 countries Dependent variable
Coefficient
Standard error
Consumption
0.224
0.237
Labor income
-0.110
0.078
Asset-based flows
-0.666
0.183
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An important issue ► Are
asset-based flows lower in high-transfer settings because asset income is lower or because saving is higher? ► If asset income is lower, results would be consistent with high transfers leading to lower accumulation during the working years. ► If saving is higher, results would be consistent with higher transfers leading to higher bequests.
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Results: Regression of NTA flows on net transfers, 65+, 13 countries Dependent variable
Coefficient
Standard error
Saving
0.003
0.378
Asset income
-0.656
0.401
Nothing can be concluded based on these estimates–standard errors are HUGE! National Transfer Accounts
Andrew Mason 2010
Conclusions ► Population
aging is changing the generational economy Resources flowing to children have declined Net flows to children and elderly have reached historic lows in many countries Future will be dominated by increase in flows to the elderly
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Conclusions ► Child
support system
Children are supported through public and private transfers Obligations fall primarily on working-age adults Important variation in the importance of the public and private sector not discussed here
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Conclusions ► Support
system and the elderly
Countries differ widely Public transfers very important in Europe and many Latin American countries Familial transfers play an important redistributive role outside of the West ► Size
of public sector ► Age of the elderly
Importance of asset-based flows varies Strong tradeoff between transfers and asset-based flows
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Conclusions ► Working-age
generation
Great demands on those in the working ages Age transition has substantially eased those demands in Asia, Latin America and the Caribbean, and the West; this will be reversed over the coming decades Labor income is insufficient to meet the resource requirements of those in the working ages Working-age populations rely heavily on assets to meet their generational obligations National Transfer Accounts
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