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“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.”...

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“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

National Transfer Accounts

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

Andrew Mason 2010

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

National Transfer Accounts

Andrew Mason 2010

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.

National Transfer Accounts

Andrew Mason 2010

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.

National Transfer Accounts

Andrew Mason 2010

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?

National Transfer Accounts

Andrew Mason 2010

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

National Transfer Accounts

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

Andrew Mason 2010

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

National Transfer Accounts

Andrew Mason 2010

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

National Transfer Accounts

Andrew Mason 2010

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

National Transfer Accounts

Andrew Mason 2010

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

National Transfer Accounts

Andrew Mason 2010

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.

National Transfer Accounts

Andrew Mason 2010

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.

National Transfer Accounts

Andrew Mason 2010

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

Andrew Mason 2010

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

Andrew Mason 2010

Asset-reallocation system for children, average values Asset-based flows, 4 Public transfers, 23

Private transfers, 73

Note: Preliminary estimates that will be revised.

National Transfer Accounts

Andrew Mason 2010

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

National Transfer Accounts

Andrew Mason 2010

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

Andrew Mason 2010

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

National Transfer Accounts

Andrew Mason 2010

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.

National Transfer Accounts

Andrew Mason 2010

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

National Transfer Accounts

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

National Transfer Accounts

Andrew Mason 2010

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

Andrew Mason 2010

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

National Transfer Accounts

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!

National Transfer Accounts

Andrew Mason 2010

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

National Transfer Accounts

Andrew Mason 2010

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.

National Transfer Accounts

Andrew Mason 2010

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

National Transfer Accounts

Andrew Mason 2010

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

National Transfer Accounts

Andrew Mason 2010

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

National Transfer Accounts

Andrew Mason 2010

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

Andrew Mason 2010