Population Aging, Intergenerational Transfers, and the Economy

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

2. Motivation • Three features of the economy • Economic lifecycle • Population age structure • Systems for shifting resources across age • Saving • Public transfer programs • Familial Support systems • Interaction influences economic performance and generational equity • Implications for economic and population policy National Transfer Accounts

3. Organization • Fundamental Ideas • Brief Review of Recent Research • Current Effort: National Transfer Accounts • Basic Concepts • Three Important Issues National Transfer Accounts

4. FundamentalsThe Economic Lifecycle Labor Income Consumption Note: Based on estimates for Costa Rica, Indonesia, Taiwan, and Thailand. National Transfer Accounts

5. Consumption-Loan Economy(Samuelson 1958) • Labor income only • All output is immediately consumed • Age reallocation system: Transfers only; no saving • Per capita age profiles of consumption and production are fixed • Population age structure varies National Transfer Accounts

6. Aggregate C and YLVery Young Population (US 1850) Deficit for childrenand the elderly exceeds surplus of workers. Consumption must decline. National Transfer Accounts

7. Aggregate C and YLVery Young Population (US 1850) Consumption drops by 25 percent. National Transfer Accounts

8. Aggregate C and YLLarge Working-age Pop (India 2040) Reduction of consumption of only 3% is needed. National Transfer Accounts

9. Aggregate C and YLOld Population (Japan 2080) Old population leads to 26% decline in consumption. National Transfer Accounts

10. First Demographic DividendEconomic Support Ratio National Transfer Accounts Source: Mason 2007.

11. Summary of Implications • Changes in the relative numbers of workers and consumers over the demographic transition leads to a demographic dividend. • Bloom and Williamson • Bloom, Canning, and Sevilla • Lee and Mason • The effect erodes as populations age. National Transfer Accounts

12. Introduce Capital • Economy with capital • Workers save during their working years • Rely on asset income and dis-saving during retirement. • For solving the old-age lifecycle problem, capital and transfers are close substitutes. • However, capital also has favorable effects on economic growth. National Transfer Accounts

13. What determines the lifecycle demand for capital? • Features of the economic lifecycle • Consumption by the elderly (now & future) • Labor income of the elderly (now & future) • Relative number of elderly: More elderly implies greater demand for lifecycle capital. National Transfer Accounts

14. Demand for wealthOld versus Young Population Young Population Old Population Yl Yl C C LC demand for wealth is negligible LC demand for wealth is large National Transfer Accounts

15. What determines the lifecycle demand for capital (continued)? • Support system for the elderly • Importance of the capital system • Familial and public transfer systems undermine capital accumulation National Transfer Accounts

16. II. Summary of Recent Research • Population, Saving, and Wealth • Changes in age structure are only partially responsible for high saving rates in Asia (LMM various; KM 2007). • Longer life expectancy led to a behavioral change that reinforced age structure effects (LMM various; KM 2007). • A decline in familial support for the elderly may have played an important role (LMM 2003). • Aging will lead to somewhat lower saving (LMM various) or not (KM 2007). • Longer life expectancy and aging are leading to a permanent increase in wealth (LMM various; KM 2007) National Transfer Accounts

17. II. Summary of Recent Research • Demographic Dividends • Changes in age structure produce two demographic dividends • First dividend • Concentration of population in working ages leads to more rapid economic growth; • Effect unwinds as populations age. • Second dividend: changes in age structure and increase in life expectancy lead to • More rapid economic growth • Permanently higher economic growth. Sources: Mason and Lee, various; Mason, various. National Transfer Accounts

18. Important Issues to be Explored • How does the economic lifecycle vary and why? • What systems do societies use to shift resources from surplus to deficit ages? • Why do the systems vary across countries and evolve over time? • What are the implications for economic performance? For generational equity? • What are the implications for economic policy? For population policy? National Transfer Accounts

19. III. National Transfer Accounts • Objective: • Develop and apply a comprehensive system of accounts that measures economic flows across age groups in a manner consistent with the System of National Accounts. • Conceptual foundation: • Lee (1994) but also Samuelson (1958), Diamond (1965), and Willis (1988). • Organization: • Collaboration between EWC/UH and UC-Berkeley. Core funding from NIA. Sub-projects supported by UNFPA and others. • Website: www.ntaccounts.org National Transfer Accounts

20. Participating Countries National Transfer Accounts

21. National Transfer Account Flows Labor Income Asset System Age Group Transfer System Dis-saving & Interest income Transfers Saving & Interest expense Transfers Consumption National Transfer Accounts Inflows Outflows

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

23. Detailed National Transfer Flow Account • Consumption: public and private for health, education, housing, and other. • Public transfers: in-kind (health, education, other) and cash (pensions and other). • Private transfers: intra-household for health, education, housing, and all other; inter-household for other. • Asset-based reallocations: Public and private investment; public and private credit/debt. • Domestic flows and flows to ROW. National Transfer Accounts

24. Approach to Estimation • National Income Accounts and other aggregate statistics are used as aggregate controls • Age profiles are based on nationally representative surveys, e.g., income and expenditure surveys, labor force surveys, health expenditure surveys, etc. • Common methodology documented on www.ntaccounts.org National Transfer Accounts

25. Issue 1: Lifecycle Deficit, Children • Does the lifecycle deficit per child increase as the number of children declines? • Becker quality-quantity tradeoff • If so, the decline in fertility will have a smaller effect on capital accumulation. • However, if consumption is higher because parents are spending more on education, then human capital will increase as the number of children declines. National Transfer Accounts

26. Per Capita Lifecycle Deficit, Japan 2004, Survival Weighted Child LCD 15.1 years of prime-adult labor Elderly LCD 10.5 years of prime-adult labor National Transfer Accounts Note. US 1985-89 life table used for all countries.

27. Tradeoff: Spending per Child and Number of Children, 13 Countries National Transfer Accounts

28. Tradeoff: Spending per Child and Number of Children, 13 Countries Jp US Ch Tw SK Th Sw Fr Indo Ur CR In Ph National Transfer Accounts

29. Issue 2: Lifecycle Deficit, Elderly • Does the lifecycle deficit per elderly decline as the number of elderly rises? • Preston and others argue yes – political power. • If so, the rise in the old-age population will have a larger effect on capital accumulation. National Transfer Accounts

30. Tradeoff: Spending per Elderly and Number of Elderly, 13 Countries National Transfer Accounts

31. Tradeoff: Spending per Elderly and Number of Elderly, 13 Countries Ur Jp US CR Fr Tw Th Ch Sw SK Ph In Indo National Transfer Accounts

32. Issue 3. Support Systems for the Elderly. • How do they differ across countries? • Do Asian countries rely more on familial transfers and Western countries more on public transfers? • Does the expansion of public systems crowd saving as hypothesized by Feldstein? • Or familial transfers? National Transfer Accounts

33. Old-Age Reallocation Systems Saving Capital-based transformation Social welfare transformation Traditional society? Familial Transfers Public Transfers National Transfer Accounts

34. Old-Age Reallocation Systems Saving Mixed Strategies 50-50 saving and public 50-50 familial and saving 50-50 familial and public Familial Transfers Public Transfers National Transfer Accounts

35. Old-Age Reallocation Systems Saving Public transfers and familial transfers are substitutes. Familial Transfers Public Transfers National Transfer Accounts

36. Old-Age Reallocation Systems Saving Feldstein: Public transfers to the elderly crowd out saving. Familial Transfers Public Transfers National Transfer Accounts

37. US elderly rely on asset-based reallocations and public transfers. National Transfer Accounts

38. Thai elderly rely on asset-based reallocations and on familial transfers. National Transfer Accounts

39. Costa Rica and Japan rely heavily on public transfers; no familial transfers. Taiwan has a relatively balanced support system. National Transfer Accounts

40. Conclusions • Decline in fertility may • Lead to more consumption by children reducing the effect on saving • Lead to more spending on education for children leading to second demographic dividend due to human capital investment. • Influence familial support systems in ways that have not yet been explored. National Transfer Accounts

41. Conclusions • Aging may lead to • Larger per capita lifecycle deficit reinforcing the effects of aging • The economic effect will be some unknown combination of the three: • Increase saving and economic growth • Increase the size of public programs and budget deficits; or • Increase the burden on families which support the elderly. National Transfer Accounts

42. Conclusions • The support systems for the elderly are varied and do not conform to simple regional classifications. • The elderly in Costa Rica and Japan are relying on saving and public transfers. Have public programs crowded out familial transfers? • In Taiwan and Thailand, the familial support system is still important. National Transfer Accounts

43. The National Transfer Accounts project is a collaborative effort of East-West Center, Honolulu and Center for the Economics and Demography of Aging, University of California - Berkeley National Transfer Accounts

44. Taiwan Key Institution: The Institute of Economics, Academia Sinica, Taipei, Taiwan. Tung, An-Chi(actung), Country Leader Lai, Mun Sim (Nicole)(munsim) Liu, Paul K.C.(kliu) Andrew Mason Japan Key Institutions: Nihon University Population Research Institute and the Statistics Bureau of Japan, Tokyo, Japan. Ogawa, Naohiro(ogawa), Country Leader Matsukura, Rikiya(matukura) Fukui, Takehiro(jstat) Kondo, Makoto(kondo) Akasaka, Katsuya(akasaka) Nemoto, Kazuro(nemoto) Makabe, Naomi(makabe) Sato, Ryoko(rsato) Ogawa, Maki(mogawa) Murai, Minako(murai) Obayashi, Senichi(obayashi) Suzuki, Kosuke(Suzuki) National Transfer Accounts

45. Australia Key Institution: Australia National University Jeromey Temple, Country Leader Brazil Turra, Cassio(cturra), Country Leader Lanza Queiroz, Bernardo(lanza) Renteria, Elisenda Perez(elisenda) Chile Key Institution: United Nations Economic Commission for Latin America and the Carribean, Santiago, Chile Bravo, Jorge(jbravo2), Country Leader China Key Institution: China Center for Economic Research, Beijing, China. Ling, Li(Lingli), Country Leader Chen, Quilin(Chen) National Transfer Accounts

46. France Wolff, Francois-Charles(wolff), Country Leader Bommier, Antoine(bommier) Thailand Key Institution: Economics Department, Thammasat University. Phananiramai, Mathana(Mathana), Country Leader Chawla, Amonthep (Beet)(amonthep) Inthornon, Suntichai(Suntichai) India Key Institution: Institute for Social and Economic Change, Bangalore Narayana, M.R.(narayana), Country Leader Nanak Kakwani(kakwani) Ladusingh, L.(ladusingh) Mexico Key Institution: Consejo Nacional de Población Partida, Virgilio (virgilio), Country Leader Mejía-Guevara, Iván(ivan) National Transfer Accounts

47. Indonesia Key Institution: Lembaga Demografi, University of Indonesia, Jakarta, Indonesia. Maliki(maliki), Country Leader Wiyono, Nur Hadi(nhwiyono) Nazara, Suahasil(nazara) Chotib(chotib) Philippines Key Institution: Philippine Institute for Development Studies. Racelis, Rachel H.(Rachel), Country Leader Salas, John Michael Ian S.(Salas) Sweden Key Institution: Institute for Future Studies, Stockholm, Sweden. Lindh, Thomas(lindh), Country Leader Johansson, Mats(Mats) Forsell, Charlotte (charlotte) National Transfer Accounts

48. Uruguay Bucheli, Marisa(marisa), Country Leader Furtado, Magdalena(furtado) South Korea An, Chong-Bum (cban), Country Leader Chun, Young-Jun (yjchun) Lim, Byung-In (billforest) Kim, Cheol-Hee (Kimch) Jeon, Seung-Hoon (jsh1105) Gim, Eul-Sik (kuspia) Seok, Sang-Hun (good) Kim, Jae-Ho (ksud) National Transfer Accounts

49. Austria Key Institution: Vienna Institute of Demography Fuernkranz-Prskawetz, Alexia (alexia), Country Leader Sambt, Joze(joze) Costa Rica Key Institution: CCP, Universidad de Costa Rica Rosero-Bixby, Luis(lrosero), Country Leader Slovenia Sambt, Joze(joze), Country Leader National Transfer Accounts

50. United States Key Institution: Center for the Economics and Demography of Aging Lee, Ronald(ronlee), Country Leader Miller, Tim(tmiller) Ebenstein, Avi(ebenstei) Boe, Carl(cboe) Comelatto, Pablo(pabloc) Donehower, Gretchen(gstockma) Schiff, Eric(eric) Langer, Ellen(erlanger) National Transfer Accounts