National Transfer Accounts: Introduction to Concepts Andrew Mason University of Hawaii and East-West Center

Acknowledgments Research for this paper was funded by parallel grants from the National Institutes of Health to Ronald Lee and Andrew Mason, NIA R37 AG and R01 AG025488; grants from MEXT.ACADEMIC FRONTIER to Nihon University Population Research Institutes, from the United Nations Population Fund (to NUPRI and EWC), from the MacArthur Foundation to EWC; and from IDRC to ECLAC, AERC, and EWC. The material presented here draws heavily on collaborative work with Ronald Lee and other researchers involved in the National Transfer Account project.

NTA is important because of the Population Age Transition Global phenomenon In the middle of the transition –Earlier: Share of children was increasing world-wide –Currently: Working-age population is increasing in most countries –Future: Growth in elderly population will dominate Changes are unprecedented Inevitable consequence of –Continuing gains in life expectancy –Low and very low fertility most important

Benefits of Population Aging Living longer and healthier lives is a great social achievement. By bearing fewer children, parents have been able to invest more in each child and raise standards of living for their children and for themselves. Greater life expectancy and changes in age structure may be leading to greater wealth, capital deepening, and higher wages. Smaller populations, possible only with low fertility and older populations, yield important environmental benefits. But...

Population aging presents some major challenges Decline in share of working age population will lead to slower economic growth Sustainability of transfer systems –Public sector: Number of taxpayers will decline relative to number of beneficiaries –Private sector: Number of working-age adults will decline relative to dependent children and elderly Reversal in transfer direction –In past transfers have always been downward – from adults to their descendants –Growth in public transfer systems and population aging are leading to increase in upward transfers –Straining the social contract between generations? Leading to generational equity?

Importance of National Transfer Accounts Goal: Develop policies that respond effectively to the population age transition Requirement: a comprehensive and deep understanding of the generational economy: –Social and economic institutions –Economic flows across age groups –System of public and private obligations

Organization National Transfer Accounts: Key Concepts –Economic lifecycle –Age reallocation systems Two illustrative applications –Economic support ratio and demographic dividends –Old age support system

NTA Concepts: Economic Lifecycle

Economic Lifecycle The economic lifecycle refers to the variation over our lifetime of our needs and our abilities Expresses itself in age variation in what we consume and what we produce In all contemporary societies we have extended periods at the beginning and the end of our lives, when we are consuming far more than we are producing.

Economic Lifecycle Per Capita, Japan, 2004 Labor income Consumption Source: Ogawa et al., forthcoming;

Source: Tung forthcoming.

Economic Lifecycle: Labor Income Labor income –Wages & salaries –Fringe benefits –Self-employment income –Pre-tax Profiles based on household surveys of wages and income Adjusted to match National Income and Product Accounts Reflects age variation in productivity, hours worked, unemployment, and labor force participation.

Economic Lifecycle: Consumption Consumption –Public and private –Education, health, and other Profiles based on surveys and administrative records Adjusted to match National Income and Product Accounts All estimates presented here are drawn from National Transfer Accounts Being constructed by research teams in 30 countries on six continents. Details available at

Important features of the economic lifecycle In all contemporary societies there are large per capita lifecycle deficits at both the young and old ages. The per capita child deficit is rising as fertility declines, more is invested in human capital, and entry into the labor force is delayed. The per capita old age deficit is rising as age at retirement has declined and spending on health care has increased. The aggregate economic lifecycle is dominated by changes in age structure.

Aggregate Economic Lifecycle, Philippines, 1999 Source: Racelis and Salas billion or 61% of labor income billion; 4% of labor income +331 billion Huge lifecycle deficit for children primarily because Philippines has a relatively young age structure. Consumption Labor income

Aggregate Economic Lifecycle, US, 2003 Source: Lee, et al. 2007; Lee, Mason, and Lee trillion; 30% of labor income +1.4 trillion -1.5 trillion; 21% of labor income In the US, the lifecycle deficits of the young and the old are similar, primarily reflecting US age structure. Consumption Labor income

NTA Concepts: Age Reallocation System

Age Reallocation System Age reallocation system is the counterpart of the economic lifecycle Economic system that shifts resources from one age group to another. Accounting: Fills the gap between consumption and labor income (flow constraint). All reallocations fall in two broad classes –Transfers Public transfers (cash and in-kind) Private transfers (familial including intra-household) –Asset-based reallocations Asset income Saving

A Classification of NTA Reallocations. Asset-based Age Reallocations Transfers Capital and Other Non-Financial AssetsCredit Public Public infrastructure Public land and sub- soil minerals Public debt Student loans Money Public education Public health care Unfunded pension plans Private Housing Consumer durables Factories, Farms Private land and sub-soil minerals Inventories Consumer credit Familial support of children and parents Bequests Charitable contributions Source: Mason, Lee et al. (2009); adapted from Lee (1994).

The NTA Flow Account Identity Inflows –Labor Income –Asset Income –Transfer Inflows Outflows –Consumption –Saving –Transfer Outflows where x is age.

Funding the Child Deficit Net public transfers – public schools, value of public goods allocated to children. Net private transfers – intra- household transfers to children; largest in all countries studied. Asset-based flows – none for children, small for young adults (mostly credit).

Funding the Old-age Deficit Asset-based reallocations – asset income and dis-saving from owner-occupied housing, private pension funds, personal saving, etc. Net public transfers – social programs (public pensions, health care, etc.), benefits from general programs, less taxes paid. Net private transfers – inter- and intra-household transfers.

Application: Economic Support Ratio and Demographic Dividends

A Simple Economic Model

A Simple Economic Model: In Growth Terms Given the saving rate and the productivity the growth rate of consumption per capita has a one-to-one relationship to the growth rate of the support ratio.

The Economic Support Ratio Definition: Effective workers/Effective consumers –Effective workers is weighted sum of population using labor income age profile to allow for variation in participation, hours worked, unemployment, and productivity. –Effective consumers is weighted to allow for age variation in needs. –Constructed using NTA estimates of consumption and labor income by age

Economic Support Ratio, Nigeria

Other things equal, population aging will lead to a substantial decline in consumption relative to current levels.

Summary of Support Ratio Many African countries have younger age structures than found elsewhere; hence, the support ratio starts at a very low level. Change over the age transition could be very large – around 40% or more. Many Asian and Latin American countries are in the final stages of their age transition. In Japan and Western countries economic support ratios are in decline. As a consequence, economic growth will be slower in the absence of compensating changes in the saving rate or productivity. Important issue is whether there are likely to be compensating changes and how will they be influenced by policy.

Application: Funding Old Age

Issues Do the elderly produce more of their consumption in some countries? How do the elderly fund their lifecycle deficit –Public transfers –Private transfers –Asset-based flows

Labor income in old age: 23 NTA countries Source: Lee and Mason forthcoming.

Support Systems for the Elderly Support systems vary widely in ways not closely connected to the level of development –Public transfers important in Latin America and Europe –Private, familial transfers are important in Asia (Japan excepted). –Reliance on assets varies widely. Importance: Excessive reliance on transfers in some countries undermine an important incentive for capital accumulation with potentially adverse implications for economic growth.

Representing the Old-age Support System: Triangle Graph Along a grid line, share of one component is constant; other two vary. Ex: Public transfers constant at 1/3. Value at corner of triangle means that elderly rely exclusively on that source – family transfers in this example. Each component funds 1/3 of the lifecycle deficit Outside the triangle: negative values. Here elderly have negative net transfers.

Funding the Lifecycle Deficit, 65 and older, NTA countries, recent year Net public transfers: Range from zero in Thailand and Philippines to over 2/3 in Germany, Finland, and Austria. Net private transfers: Positive only for 3 Asian economies; zero in Japan; negative elsewhere. Asset-based flows: Exceed 2/3 in four countries including US; Under 1/3 in Taiwan, Germany, Finland, and Austria. For US 65+, RA=70.5%; TG=38.3%; TF=-8.8%.

MX UY ♦ Europe & US ▲ Asia ■ Latin America Age 75-84

♦ Europe & US ▲ Asia ■ Latin America Age 85+