N ational T ransfer A ccounts Population Aging, Intergenerational Transfers, and the Economy Andrew Mason University of Hawaii – Manoa East-West Center

N ational T ransfer A ccounts 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

N ational T ransfer A ccounts Organization I. Fundamental Ideas II. Brief Review of Recent Research III. Current Effort: National Transfer Accounts ► Basic Concepts ► Three Important Issues

N ational T ransfer A ccounts Fundamentals The Economic Lifecycle Consumption Labor Income Note: Based on estimates for Costa Rica, Indonesia, Taiwan, and Thailand.

N ational T ransfer A ccounts 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

N ational T ransfer A ccounts Aggregate C and YL Very Young Population (US 1850) Deficit for childrenand the elderly exceeds surplus of workers. Consumption must decline.

N ational T ransfer A ccounts Aggregate C and YL Very Young Population (US 1850) Consumption drops by 25 percent.

N ational T ransfer A ccounts Aggregate C and YL Large Working-age Pop (India 2040) Reduction of consumption of only 3% is needed.

N ational T ransfer A ccounts Aggregate C and YL Old Population (Japan 2080) Old population leads to 26% decline in consumption.

N ational T ransfer A ccounts First Demographic Dividend Economic Support Ratio Source: Mason 2007.

N ational T ransfer A ccounts 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.

N ational T ransfer A ccounts 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.

N ational T ransfer A ccounts 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.

N ational T ransfer A ccounts Demand for wealth Old versus Young Population Young PopulationOld Population LC demand for wealth is negligible LC demand for wealth is large Yl C C

N ational T ransfer A ccounts 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

N ational T ransfer A ccounts 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)

N ational T ransfer A ccounts 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.

N ational T ransfer A ccounts 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?

N ational T ransfer A ccounts 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:

N ational T ransfer A ccounts Participating Countries ASIAChinaIndiaIndonesiaJapan Korea, S. PhilippinesTaiwanThailandEUROPEAustriaFranceHungarySloveniaSweden NORTH AMERICA United States LATIN AMERICA BrazilChile Costa Rica MexicoUruguayOCEANIAAustralia

N ational T ransfer A ccounts Age Group Transfer System Asset System Labor Income Consumption Transfers Saving & Interest expense Dis-saving & Interest income National Transfer Account Flows InflowsOutflows

N ational T ransfer A ccounts Age Group Public Transfers Taxes Pensions Public health care Public education National Transfer Flows: Transfer System InflowsOutflows Private Transfers Rest of the World Inter vivos transfers Inheritances Inter vivos transfers Bequests Transfers to ROW Transfers from ROW

N ational T ransfer A ccounts Age Group Capital Private Public Investment Dis-investment Profits National Transfer Flows: Asset System InflowsOutflows Credit Private Public ROW Net borrowing Interest income Net lending Interest expense

N ational T ransfer A ccounts The Flow Account Identity ► Inflows  Labor Income  Asset Income  Transfer Inflows ► Outflows  Consumption  Saving  Transfer Outflows

N ational T ransfer A ccounts 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.

N ational T ransfer A ccounts 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

N ational T ransfer A ccounts 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.

N ational T ransfer A ccounts 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 Note. US life table used for all countries.

N ational T ransfer A ccounts Tradeoff: Spending per Child and Number of Children, 13 Countries

N ational T ransfer A ccounts Tradeoff: Spending per Child and Number of Children, 13 Countries Jp US Ch Tw SK Th Sw Fr Indo Ur CR In Ph

N ational T ransfer A ccounts 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.

N ational T ransfer A ccounts Tradeoff: Spending per Elderly and Number of Elderly, 13 Countries

N ational T ransfer A ccounts Tradeoff: Spending per Elderly and Number of Elderly, 13 Countries Ur Jp US Fr Sw CR Tw Th Ch SK PhIn Indo

N ational T ransfer A ccounts 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?

N ational T ransfer A ccounts Old-Age Reallocation Systems Saving Public Transfers Familial Transfers Traditional society? Capital-based transformation Social welfare transformation

N ational T ransfer A ccounts Old-Age Reallocation Systems Saving Public Transfers Familial Transfers Mixed Strategies familial and saving familial and public saving and public

N ational T ransfer A ccounts Old-Age Reallocation Systems Saving Public Transfers Familial Transfers Public transfers and familial transfers are substitutes.

N ational T ransfer A ccounts Old-Age Reallocation Systems Saving Public Transfers Familial Transfers Feldstein: Public transfers to the elderly crowd out saving.

N ational T ransfer A ccounts US elderly rely on asset-based reallocations and public transfers.

N ational T ransfer A ccounts Thai elderly rely on asset-based reallocations and on familial transfers.

N ational T ransfer A ccounts Costa Rica and Japan rely heavily on public transfers; no familial transfers. Taiwan has a relatively balanced support system.

N ational T ransfer A ccounts 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.

N ational T ransfer A ccounts 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.

N ational T ransfer A ccounts 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.

N ational T ransfer A ccounts 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 Lee, Ronald (ronlee), Co-Directorronlee Mason, Andrew (amason), Co-Directoramason Auerbach, Alan (auerbach)auerbach Miller, Tim (tmiller)tmiller Lee, Sang-Hyop (leesang)leesang Donehower, Gretchen (gstockma)gstockma Ebenstein, Avi (ebenstei)ebenstei Wongkaren, Turro (turro)turro Takayesu, Ann (takayesa)takayesa Boe, Carl (cboe)cboe Comelatto, Pablo (pabloc)pabloc Sumida, Comfort (comfort)comfort Schiff, Eric (eric)eric Stojanovic, Diana (diana)diana Langer, Ellen (erlanger)erlanger Chawla, Amonthep (beet) Pajaron, Marjorie Cinco (pajaron)pajaron

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

N ational T ransfer A ccounts Australia Key Institution: Australia National University Jeromey Temple, Country Leader Brazil Turra, Cassio(cturra), Country Leadercturra Lanza Queiroz, Bernardo(lanza)lanza Renteria, Elisenda Perez(elisenda)elisenda Chile Key Institution: United Nations Economic Commission for Latin America and the Carribean, Santiago, Chile Bravo, Jorge(jbravo2), Country Leaderjbravo2 China Key Institution: China Center for Economic Research, Beijing, China. Ling, Li(Lingli), Country LeaderLingli Chen, Quilin(Chen)Chen

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

N ational T ransfer A ccounts Indonesia Key Institution: Lembaga Demografi, University of Indonesia, Jakarta, Indonesia. Maliki(maliki), Country Leadermaliki Wiyono, Nur Hadi(nhwiyono)nhwiyono Nazara, Suahasil(nazara)nazara Chotib(chotib)chotib Philippines Key Institution: Philippine Institute for Development Studies. Racelis, Rachel H.(Rachel), Country LeaderRachel Salas, John Michael Ian S.(Salas)Salas Sweden Key Institution: Institute for Future Studies, Stockholm, Sweden. Lindh, Thomas(lindh), Country Leaderlindh Johansson, Mats(Mats)Mats Forsell, Charlotte (charlotte)charlotte

N ational T ransfer A ccounts Uruguay Bucheli, Marisa(marisa), Country Leadermarisa Furtado, Magdalena(furtado)furtado South Korea An, Chong-Bum (cban), Country Leadercban Chun, Young-Jun (yjchun)yjchun Lim, Byung-In (billforest)billforest Kim, Cheol-Hee (Kimch)Kimch Jeon, Seung-Hoon (jsh1105)jsh1105 Gim, Eul-Sik (kuspia)kuspia Seok, Sang-Hun (good)good Kim, Jae-Ho (ksud)ksud

N ational T ransfer A ccounts Austria Key Institution: Vienna Institute of Demography Fuernkranz-Prskawetz, Alexia (alexia), Country Leaderalexia Sambt, Joze(joze)joze Costa Rica Key Institution: CCP, Universidad de Costa Rica Rosero-Bixby, Luis(lrosero), Country Leaderlrosero Slovenia Sambt, Joze(joze), Country Leaderjoze

N ational T ransfer A ccounts United States Key Institution: Center for the Economics and Demography of Aging Lee, Ronald(ronlee), Country Leaderronlee Miller, Tim(tmiller)tmiller Ebenstein, Avi(ebenstei)ebenstei Boe, Carl(cboe)cboe Comelatto, Pablo(pabloc)pabloc Donehower, Gretchen(gstockma)gstockma Schiff, Eric(eric)eric Langer, Ellen(erlanger)erlanger

N ational T ransfer A ccounts The End Support: National Institutes of Health NIA, R01-AG NIA, R37-AG025247