Macroeconomic Consequences of the Aging Baby Boom

1. Macroeconomic Consequences of the Aging Baby Boom Ronald Lee UC Berkeley PAA Session “The Baby Boomers Turn 65” Thanks to Gretchen Donehower for help, to the National Transfer Accounts project, and to NIA for support.

2. My plan • No general equilibrium feedbacks; • For that, see Miguel Sanchez-Romero in Session 29. • I will discuss some simple demographic impacts, one at a time. Ronald Lee, UC Berkeley, March 31, 2011

3. I. Baby Boom postponed population aging by 40 years Ronald Lee, UC Berkeley, March 31, 2011

4. Calculated from SSA projections and hypothetical simulation. Ronald Lee, UC Berkeley, March 31, 2011

5. Gr rate 1.3%/yr 1970-2010 Gr rate .4%/yr 2010-2050 Source: Calculated from Social Security Administration data and projections (2010 Trustees Report). Ronald Lee, UC Berkeley, March 31, 2011

6. II. Rising consumption in old age and declining labor income in old age exacerbated the consequences of population aging Ronald Lee, UC Berkeley, March 31, 2011

7. US consumption (private plus public in-kind transfers), 1960, 1981 and 2007(Ratio to average labor income ages 30-49). Source: US National Transfer Accounts, Lee and Donehower, 2011 Ronald Lee, UC Berkeley, March 31, 2011

8. A half century of changing life cycle deficits (consumption – labor income) Source: US National Transfer Accounts, Lee and Donehower, 2011 Ronald Lee, Univ Calif at Berkeley, 2011

9. The “life cycle deficit” is consumption – labor income. NTA estimates for the US in 2003 (Net Priv trans; net pub transfers; ABR=Asset Income – Saving) Ronald Lee, Univ Calif at Berkeley, 2011

10. III. Population aging makes the support ratio decline • Using age profiles from 2007 and a given population age distribution Ronald Lee, UC Berkeley, March 31, 2011

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13. IV. We would have to work 8 years longer to offset the declining support ratio in 2050 by this alone Ronald Lee, UC Berkeley, March 31, 2011

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15. Paying for old age consumption by working longer: How much would we have to shift out the labor income schedule to keep the support ratio at the 2007 level? Ronald Lee, UC Berkeley, March 31, 2011

16. V. Rising net worth will also help • People accumulate wealth over the life cycle and end up holding a lot in old age, on average. Ronald Lee, UC Berkeley, March 31, 2011

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18. All else equal, population aging from 2007 to 2050 would increase net worth per person age 20-64 by 30% Ronald Lee, UC Berkeley, March 31, 2011

19. But in addition… • Switch from unfunded pensions to prefunded ones (more in 401Ks, for example) will mean more rapid increase in net worth • Longer life, if expected, may motivate increased retirement saving, and institutional plans may mandate it. If unexpected, may deplete assets. • Lower fertility in last forty years may (??) mean higher retirement savings relative to the Baby Boomers’ parents. Ronald Lee, UC Berkeley, March 31, 2011

20. Increased net worth • yields higher asset income, augmenting income and tax revenues • If invested in the US would raise productivity of labor. Ronald Lee, UC Berkeley, March 31, 2011

21. VI. Are the Baby Boomers benefiting unfairly through public sector transfers at the cost of future generations? • Reform of entitlement programs is going to happen, and I hope it happens soon. • Assume future Social Security and Medicare budgets are balanced 50-50 by raising taxes and by cutting benefits. • We calculate the net present value of what each generation pays in taxes and receives in benefits from Social Security and Medicare (Bommier, Lee, Miller and Zuber, 2010). Ronald Lee, UC Berkeley, March 31, 2011

22. Net Present Value at birth of Social Security and Medicare benefits minus taxes paid, assuming future program budgets are balanced 50-50 by taxes and benefits. Baby Boom Generations Source: Bommier, Lee, Miller and Zuber(2010) PDR Ronald Lee, UC Berkeley, March 31, 2011

23. Both they and younger generations benefited greatly from public education, too. • Education is received at start of life • Far more valuable than same amount received when old. • Putting it all together, Baby Boomers get less from transfers than older and younger generations. Ronald Lee, UC Berkeley, March 31, 2011

24. Net Present Value at birth of Social Security, Medicare and Public Education minus taxes paid, assuming future program budgets are balanced 50-50 by taxes and benefits. Baby Boom Generations Source: Bommier , Lee, Miller and Zuber (2010) PDR Ronald Lee, UC Berkeley, March 31, 2011

25. VI. Summary • The Baby Boom postponed population aging for decades, but now will greatly accelerate it, requiring rapid adjustments. • Higher per capita consumption by the elderly makes population aging more costly. • The support ratio will drop by one eighth from 2007 to 2050, or by .3% per year, a mild decline. • To offset this decline up to 2050 would require postponing “retirement” by 8 years! Fortunately, there are other poss. • Population aging will raise net worth per worker and per capita. • The Baby Boomers get less from public transfer programs then younger or older generations if we consider public education in addition to Social Security and Medicare. Ronald Lee, UC Berkeley, March 31, 2011