Population aging and intergenerational transfers: a macro- perspective Ronald Lee UC Berkeley August...

Population aging and intergenerational transfers: a macro-

perspective

Ronald LeeUC Berkeley

August 31, 2006University of Southern California

Colaborative work

• Andy Mason and I are co-Directors for this project, with NIA funding through parallel grants.

• Many collaborators on research teams in other countries.

Conceptual roots

• Samuelson’s classic article on consumption loan economy with overlapping generations

• Arthur and McNicoll

• Willis

• Lee and Bommier-Lee

References – downloadable from http://www.schemearts.com/proj/nta/web/nta/show/Working%20Papers

• Ronald Lee and Andrew Mason, “A Research Plan for the Macroeconomic Demography of Intergenerational Transfers”, January 2004.

• Antoine Bommier, Ronald Lee, Timothy Miller, and Stephane Zuber, “Who wins and who loses? Public transfer accounts for US generations born 1850 to 2090”, NBER working paper, December 2004.

• Andrew Mason, Ronald Lee, An-Chi Tung, Mun-Sim Lai, and Tim Miller, forthcoming. “Population Aging and Intergenerational Transfers: Introducing Age into National Accounts”, Economics of Aging Series, David Wise, ed. NBER and University of Chicago Press. NBER working paper.

• Ronald Lee, Sang-Hyop Lee, and Andrew Mason. “Charting the Economic Life-Cycle”, (forthcoming) NBER working paper

The economic life cycle: Labor earnings and consumption per

capita

Age

Output per person per year

Labor earnings, yl(x)

Consumption, c(x)

+ + ++ + +

-- - -

-- - - -

-- -

-- - - -

The NTA project estimates

• Average consumption and labor earnings by age for a number of countries

• The institutional arrangements and mechanisms by which surplus earnings in the middle years are reallocated to children and the elderly.

• Comparisons across countries and over time, and projections.

• Will analyze – Descriptive patterns by culture and insitutions – interaction with population aging– consequences for economic growth, – intergenerational equity.

3. Resource Reallocation Across Age and

Time by Institution and Mechanism Mechanism

Family or Household

Institution

Market Public Sector

Capital(saving, investing, dissaving)

HouseCarConsumer DurablesInventoriesEducation

Factories Inventories Farms

Social Infrastructure(Hospitals, Roads,Airports, Govt. Bldgs)

Transfers (like a gift, no expectation of later repayment)

Child RearingCollege CostsGiftsBequestsHelp to Elderly

Public EducationMedicaid, MedicareSocial SecurityFood StampsAFDC

Borrowing/Lending

Familial Loans"Transfers" with a quid pro quo

Credit Markets (mortgages, credit cards, bond issues)

Government Loans

Source: Lee, 1994

A little theoretical background to motivate empirical accounts

• How are earning and consumption at the individual level related to the aggregate economy?

• In what direction is income reallocated, up or down the age distribution?

• How do these reallocations generate a demand for wealth to achieve desired consumption path?

• In what ways can the demand for wealth be satisfied?

• I will discuss briefly for a simple case (golden rule).

Is income redistributed upwards or downward across age, on average?

• Caldwell has argued that “wealth flows” are upwards in traditional societies, from children to adults.

• Others have argued that wealth (income) flows downwards on net, from adults to children.

• Assess by calculating the average age at which a dollar (or calorie) is consumed in the population, and similarly at which one is produced, Ac and Ay.– Weight these age profiles by the share of the population at

each age.– If Ac < Ay, then consumption precedes production on

average, so income is redistributed downwards across ages, from old to young.

– If Ay < Ac then the reverse: the young are transferring to older individuals on average.

Stylized human life cycle for surviving individuals


AGE

y(x)

c(x)

AcAy

Here, average consumption is later than average production, so wealth flows upwards.

Average ages and direction of net flows


AGE

y(x)

c(x)

AcAyHow does average $ flow upward to older ages?

Transfers to the elderly?

Saving by young, dissaving by old?

Cumulated surplus or deficit W(x) (life cycle wealth)

Wealth, by age

W(x)

AGE

Labor earnings, y(x)

Consumption, c(x)

Wealth (+) or Debt (-), W(x)

Note that W(x) reaches min and max when y(x) crosses c(x) and they are equal.

Now calculate the average amount of wealth, W(x), per person in the pop


Output per person

AGE

y(x)

c(x)

W(x)

Population weighted average per capita wealth W in pop; could be pos or neg.

}W

Wealth and average ages

• If Ac>Ay then indivs want to hold onto some output for later consumption, or accumulate claims on later production. This means wealth, W, is on average positive in the population.

• If Ac<Ay then people want to consume before they produce, and must go into debt on average, so W is negative.

A nice result, due mainly to Willis

W = c(Ac – Ay) , where c = per capita cons

The aggregate demand for wealth in a golden rule steady state economy equals per capita consumption times the average ages of consumption minus earning

The Willis result graphically


Output per person

AGE

y(x)

c(x)

W(x)

Population weighted average per capita wealth W in pop; could be pos or neg. Here, pos.

AcAy

Here, average consumption is later than average production, so wealth flows upwards.

c

The area of the arrow = W, direction of arrow shows upward. This equals height of green line.

W, this aggregate demand for life cycle wealth, can be satisfied in two ways

• Holding capital K(x) (owning stocks, a house, family business)

• Through transfer wealth T(x) (expecting to receive more transfers in the future than you expect to give)

• Basic identity: W = K + T– K cannot be negative– T can be positive or negative, depending on average direction of

transfer flows over all.– Borrowing and lending cancels out in a closed economy.

A link to growth theory in case of “golden rule” or optimal aggregate

saving and consumption

• Population aging is due both to low fertility and to low mortality.

• Here focus on role of low fertility, causing low population growth rate, n.– How would lower n affect life cycle

consumption across steady state paths?

I will just assert some results

• For standard analysis with no age distribution, dc/dn = -k/c– Faster population growth leads to lower optimal per

capita consumption– Here, low fertility and population aging raises optimal

consumption, because we don’t need to save as much to equip new workers.

• Now introduce age: c(x), yl(x) are given age paths of consumption and earning.– What is effect of fertility and n on life cycle

consumption:

0

nxC x e l x c x dx

Result for population with age distribution

ln

ln

ln

ylc

d C kA A

dn cd C W k

dn c cd C T

dn c

In words:

The effect of low fertility on life cycle consumption can be positive, negative, or nill depending on sign and size of transfer wealth. With upward transfers (Soc Sec?), slow growth

and aging reduces life cycle consumption (even though per capita cons rises)

Caution: assumes we stay on path of optimal saving, and does not consider how pop aging will affect savings etc.

More complicated and realistic analyses involve additional factors

• Basic points carry over– Age patterns of consumption and earnings,

and direction of reallocations, matter to outcome.

– Whether reallocations are achieved through transfers or through individual saving and investment is also key.

– Reliance on upward transfers for support of elderly makes population very costly (familial support, unfunded public pensions).

An important conclusion about aging

• Population aging will lead to a substantial increase in the demand for wealth, due to increased share of the population at older wealth-holding ages

• In addition, longer life and lower fertility will raise the demand for wealth per elderly person.

• Combined, these mean that aggregate demand for wealth per capita and per worker should double or triple over the demographic transition.

• If this increased wealth takes form of capital rather than transfer wealth, population aging will boost productivity and consumption.

Now look at estimated average ages for some very different economic/cultural

regimes

• Estimated from different kinds of data

• Tell a consistent story

United States [Lee & Miller]-2

+3 2050

Lee, 2000, 2003 (see cv)

5. Estimated age profiles of production and consumption

• These come from NTA project

• Research by teams working in each country.

• Looks simple; actually a great deal of analysis lies behind them.

Indonesia, 1996

Source: Maliki, Nur Hadi Wiyono, Suahasil Nazara, and Chotib

Taiwan, 1998

Source: An-Chi Tung and Mun Sim Lai

Thailand, 1996

Source:, Amonthep (Beet) Chawla, Mathana Phananiramai, Suntichai Inthornon

Japan, 1999

Source: Naohiro Ogawa and Rikiya Matsukura

Costa Rica, 2004

Source: Luis Rosero-Bixby

Figure 2B. Per Capita Labor Income and Consumption, US (2000)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90

Age

Source: See Lee, Lee and Mason (2005) for methods and data sources for these estimates.

Amazing rise in consumption with age in the US

Source: See Lee, Lee and Mason (2005).

What causes the reversal of the direction of income shifting from down

to up?

• To what extent is it simply due to population aging?

• To what extent is it due to increased consumption by the elderly?

• To what extent is it due to reduced labor supply by the elderly (falling age at retirement)?

The role of population aging: Japan

Average Age of Labor Earning and Consumption in Japan, 1989 to 2004, Weighted by the Actual Population

Age Distribution

38

39

40

41

42

43

44

45

46

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Date

Ave

rag

e A

ge

(Yea

rs)

Source: Rikiya Matsukura and Naohiro Ogawa, Nihon University Population Research Institute (NUPRI).

Average Age of Consumption

Average Age of Labor Earnings

Average Age of Labor Earning and Consumption in Japan, 1989 to 2004, Weighted by a Constant Population Age Distribution (Lx for e0 of 2004)

38

39

40

41

42

43

44

45

46

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Date

Ave

rage

Age

(Y

ears

)

Conclude that almost all change in average ages is due to population aging rather than to changing shape of the age profiles.


Average Age of Consumption

Average Age of Labor Earnings

Average Ages of Consumption and Labor Earnings in Japan, Actual for 2004 and Projected Based on

Changing Popiulation Age Distribution up to 2025

40

42

44

46

48

50

52

54

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

Date

Ave

rage

Age

(ye

ars)

Av Age of Consumption

Av Age of Labor Earnings


Crosses around now, and continues upward

The role of changing shape of consumption and earning: US

• For the US, we have some CEX type surveys of special subpopulations at a few dates– 1888: Industrial workers and their children– 1917: Industrial workers and their children– 1935: Urban Families with Native-Born Head– 1960, 1980, 1990, 2002: US Households

• Analyzed (with great care and ingenuity) by Avi Ebenstein and Gretchen Donehower

More on the historical data

• Profiles have been adjusted to national control totals

• Limitations– These do not include public in-kind transfers,

only private. – Because of varying sample limitations, not

strictly comparable before 1980. But let’s take a look anyway…

1888 (Industrial Workers and Their Children)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

0 20 40 60 80

Labor Earnings Current Private Consumption

Source: estimates by Avi Ebenstein and Gretchen Donehower

1917 (Industrial Workers and Their Children)

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

0 20 40 60 80



1935 (Urban Families with Native-Born Head)

0

2000

4000

6000

8000

10000

12000

0 20 40 60 80



1960 (US Households)

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

0 20 40 60 80




0

5000

10000

15000

20000

25000

30000

35000

0 20 40 60 80




0

5000

10000

15000

20000

25000

30000

35000

40000

0 20 40 60 80


In 1990, we see that consumption is rising until age 60, and then is flat until 80.



0

5000

10000

15000

20000

25000

30000

35000

40000

0 20 40 60 80


This pattern has become even stronger in 2002. Private consumption is about 50% higher in old age than in early 20s.


Average Age of Earning and Private Current Consumption (Weighted by Actual National

Population in each year)

25

30

35

40

45

1880 1900 1920 1940 1960 1980 2000

Av age of private cons

Av age of earnings


In historical US, private consumption shifts strongly towards older ages. Why?

• Decline in coresidence? Could go either way.• Rising private health spending in old age?• Rise of public sector transfers, private pensions,

and improved financial institutions?• Decline in family solidarity, rise in selfishness?

• Will this happen in other countries? Any signs of it?

What institutions and mechanisms provide the flows that support these

consumption patterns? • Source by age

– Inter vivos familial transfers– Bequests– Public transfers– Assets (credit and capital)

Figure 5b. Components of Individual Age Reallocations, Taiwan, 1998

-400

-300-200

-100

0

100200

300

400

500600

700

0 10 20 30 40 50 60 70 80 90+

Age

Rea

llo

cati

on

s ($

NT

th

ou

san

ds)

.

Bequests Inter Vivos Transfers Public Transfers Asset Reallocation

Total Inflows

Total Outflows

Mason, Lee, Tung, Mun-Sim Lai, and Miller (2005)

Figure 6b. Components of Individual Age Reallocations, US, 2000

-40

-30

-20

-10

0

10

20

30

40

50

60

70

0 10 20 30 40 50 60 70 80 90+

Age

Rea

llo

cati

on

s ($

US

th

ou

san

ds)

.

Bequests Inter Vivos Transfers Public Transfers Asset Reallocation

Total Inflows

Total Outflows

Mason, Lee, Tung, Mun-Sim Lai, and Miller (2005)

How the elderly fund consumption

Figure 1. How the Elderly Finance Consumption in the US and Taiwan (Age 65+)

35.323.3

61.842.5

-14.6 -14.1

4.4 33.2

15.113.1

-40

-20

0

20

40

60

80

100

120

140

USA (2000) Taiwan (1998)Perc

en

tag

e o

f C

on

su

mp

tio

n .

Public Transfers

Inter Vivos Transfers

Work

Bequests

Asset Reallocations

Mason, Lee, TungMun-Sim Lai, and Miller (2005)

An illustration of what can be done with historical depth and

projections

Net Present Values of Benefits minus Taxes for Generations

• Includes only Public Educ, Social Sec, and Medicare

• NPVs calculated based on – estimates and projections of age specific taxes paid

and benefits received, 1850-2200– Current program structure for benefits– Budgets balanced 50-50 by cutting benefits and

raising taxes– Discounted at 3% real– actual or projected survival

Net Present Value of life time benefits minus taxes (NPV) by generation for upward transfers versus downward transfers

Upward, e.g. Soc Sec, Medicare

Downward, e.g. Public Education

NPV ($)

NPV ($)

Year of birth of generation

First gens

First gens

Steady state < 0

Steady state > 0

Start-up

Net Present Value at birth of expected life time benefits for Social Security, Medicare and Public Education as % of lifetime earnings, for generations born 1850 to 2090

Total

See Bommier, Lee, Miller and Zuber

NPV calculated for each generation in year 2000, forward from age in 2000 (not from birth), with budget balanced by raising taxes (blue), cutting benefits (red), or 50-50 (black)

Every generation alive today does better with tax increases than with benefit cuts.

• Everyone alive today is better off if we just raise taxes to balance budget rather than cut benefits.

• For those born after 2040, this policy is increasingly catastrophic, but no voters for many decades will have self interest in cutting benefits.

Population aging and intergenerational transfers: a macro- perspective Ronald Lee UC Berkeley August...

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