Andrew Mason University of Hawaii – Manoa East-West Center

1. Population Aging, Intergenerational Transfers, and the Economy: Introducing Age into National Accounts 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. A Simple Model • 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 (preceding slide) • Population age structure varies • Young: US 1850 • Middle-aged: India 2040 • Old: Japan 2050 National Transfer Accounts

6. Aggregate C and YLVery Young Population (US 1850) National Transfer Accounts

7. Aggregate C and YLVery Young Population (US 1850) National Transfer Accounts

8. Aggregate C and YLLarge Working-age Pop (India 2040) National Transfer Accounts

9. Aggregate C and YLOld Population (Japan 2080) National Transfer Accounts

10. First Demographic DividendEconomic Support Ratio Ratio of effective workers to effective consumers 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 to the Economic Model • 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 Note: Uses per capita consumption profiles shown above. National Transfer Accounts

15. What determines the lifecycle demand for capital (continued)? • Support system for the elderly • Public transfers • Familial transfers • Lifecycle saving • Public and familial transfers may crowd out lifecycle saving National Transfer Accounts

16. II. Summary of Recent Research • Population, Saving, and Wealth • Changes in age structure are partially responsible for high saving rates in Asia (LMM various; KM 2007). • Longer life expectancy led to 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). • 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 investment and more rapid economic growth • Permanently higher standards of living. 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, IDRC, MacArthur Foundation and others. • Website: www.ntaccounts.org National Transfer Accounts

20. Participating Countries National Transfer Accounts

21. Labor Income Consumption Source: Ogawa et al. 2007. National Transfer Accounts

22. National Transfer Accounts

23. Governments Families Charitable Organizations National Transfer Accounts

24. Accumulation and dis-accumulation of debt Accumulation and dis-accumulation of assets National Transfer Accounts

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

26. Flow Account Details • 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. • Flows to ROW: remittances, foreign investment, foreign aid. National Transfer Accounts

27. Approach to Estimation • National Income Accounts and other aggregate statistics are used as aggregate controls • Age profiles are estimated using 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

28. 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

29. Per Capita Lifecycle Deficit, Japan 2004, Survival Weighted National Transfer Accounts Note. US 1985-89 life table used for all countries.

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

31. 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

32. 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 may lead to a greater fiscal burden. National Transfer Accounts

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

34. 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

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

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

37. Old-Age Reallocation Systems Saving Public transfers and familial transfers are substitutes (Barro). Familial Transfers Public Transfers National Transfer Accounts

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

39. Reallocations as a share of lifecycle deficit of the elderly. National Transfer Accounts

40. Net public transfers downward Reallocations as a share of lifecycle deficit of the elderly. National Transfer Accounts

41. Net family transfers downward Net public transfers downward Reallocations as a share of lifecycle deficit of the elderly. National Transfer Accounts

42. Reallocations as a share of lifecycle deficit of the elderly. National Transfer Accounts

43. Combined net transfer downward Reallocations as a share of lifecycle deficit of the elderly. National Transfer Accounts

44. Familial transfers equally important in Thailand, Korea, and Taiwan (36-40%). Net familial transfers near zero in US, CR, and J. Large public transfers in CR and J. More reliance on assets in CR & US. Net public transfers to elderly are zero in Thailand; about 25% in Taiwan and Korea. National Transfer Accounts

45. Reliance on assets in old-age National Transfer Accounts

46. 65-year-olds 67% assets, 2% public, 32% private 85-year-olds 23% assets, 39% public, 38% private National Transfer Accounts

47. National Transfer Accounts

48. National Transfer Accounts

49. From ages 65 to 80, familial share varies little. Public rising and asset-based declining. After 80 familial share is rising and asset-based declining. National Transfer Accounts

50. Asset-based reallocations and public transfers have increased over time; familial transfers have declined precipitously. NHI began in 1995; net public transfers increased. National Transfer Accounts