Macroeconomic Consequences of the Aging Baby Boom
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Transcript of Macroeconomic Consequences of the Aging Baby Boom
Macroeconomic Consequences of the Aging Baby Boom
Ronald LeeUC 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.
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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.
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I. Baby Boom postponed population aging by 40 years
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Calculated from SSA projections and hypothetical simulation.
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Source: Calculated from Social Security Administration data and projections (2010 Trustees Report).
Gr rate 1.3%/yr1970-2010
Gr rate .4%/yr2010-2050
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II. Rising consumption in old age and declining labor income in old
age exacerbated the consequences of population aging
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US consumption (private plus public in-kind transfers), 1960, 1981 and 2007
(Ratio to average labor income ages 30-49).
0
0.5
1
0 10 20 30 40 50 60 70 80 90
1960
0
0.5
1
0 10 20 30 40 50 60 70 80 90
1981
0
0.5
1
0 10 20 30 40 50 60 70 80 90
2007
Public Other
Private Other
Owned HousingPrivate Health
PublicHealth
Public Education
Private Education
Source: US National Transfer Accounts, Lee and Donehower, 2011
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A half century of changing life cycle deficits (consumption – labor income)
Source: US National Transfer Accounts, Lee and Donehower, 2011
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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)
-1
-0.5
0
0.5
1
1.5
2
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
Uni
ts o
f Avg
YL 3
0-49
Financing the Lifecycle DeficitComponents at Each Age
Pub Trans
ABR
Priv Trans
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III. Population aging makes the support ratio decline
• Using age profiles from 2007 and a given population age distribution
Population X Labor incomeSupport Ratio
Population X Consumptionx xx x
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0.82
0.84
0.86
0.88
0.90
0.92
0.94
0.96
0.98
1.00
2000 2010 2020 2030 2040 2050 2060 2070 2080
Supp
ort R
atio
(200
7=1.
0)
Year
The support ratio declines by 12.5% from 2007 to 2050, or by .3% per year
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0.80
0.82
0.84
0.86
0.88
0.90
0.92
0.94
0.96
0.98
1.00
2000 2010 2020 2030 2040 2050 2060 2070 2080
Fisc
al su
ppor
t rati
o (2
007
=1.0
)
Year
The fiscal support ratio declines by 14.6% from 2007 to 2050, or by .37% per year
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IV. We would have to work 8 years longer to offset the declining
support ratio in 2050 by this alone
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0
2
4
6
8
10
2000 2010 2020 2030 2040 2050 2060 2070 2080
Year
s of Y
L Pr
ofile
Ext
ensi
on
Year
Years of Extension of YL Age ProfileFrom Peak to Maintain 2007 Support Ratio
Analysis uses 2007 age profiles to calculate the support ratio, called SR(2007), which has a peak at age 51. The population is based on SSA rates but estimated to have e0=84.5 years in 2050. Each year that the new population would generate a support ratio less than SR(2007), the age profile of labor income is extended from age 51 by repeating the peak value. This graph shows the cumulative 1-year extensions.
Analysis uses 2007 age profiles to calculate the support ratio, called SR(2007), which has a peak at age 51. The population is based on SSA rates but estimated to have e0=84.5 years in 2050. Each year that the new population would generate a support ratio less than SR(2007), the age profile of labor income is extended from age 51 by repeating the peak value. This graph shows the cumulative 1-year extensions.
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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?
-10000
0
10000
20000
30000
40000
50000
60000
70000
0 10 20 30 40 50 60 70 80 90
YL P
rofil
es ($
2007
)
Age
YL Age ProfilesExtended to Maintain 2007 Support Ratio
2007
2050
2085
Analysis uses 2007 age profiles to calculate the support ratio, called SR(2007), which has a peak at age 51. The population is based on SSA rates but estimated to have e0=84.5 years in 2050. Each year that the new population would generate a support ratio less than SR(2007), the age profile of labor income is extended from age 51 by repeating the peak value. This graph shows the resulting age profiles of labor income.
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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.
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0
200
400
600
800
1000
1200
0-19 20-34 35–44 45–54 55–64 65–74 75+
Net
Wor
th ($
000s
)
Age
Net Worth by Age of Household Head in US, 2007, from Survey
of Consumer Finance
Source: Survey of Consumer Finance
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All else equal, population aging from 2007 to 2050 would increase net worth per person age 20-64 by 30%
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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.
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Increased net worth
• yields higher asset income, augmenting income and tax revenues
• If invested in the US would raise productivity of labor.
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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).
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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
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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.
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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
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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.