1. Ronald Lee January 15, 2009 Berkeley, CA NTA hands-on workshop
Thoughts on Uses of NTA
Ronald Lee
January 15, 2009
Berkeley, CA
NTA hands-on workshop

2. Plan I present some ideas
Support ratios (fiscal and general)
Fiscal projections (can be stochastic)
Intergenerational accounts (history and projs)
Economic growth and macro impact
Demand for wealth
Transfers vs assets
Fertility and human capital investment
Simulations/Optimal growth paths
NTA for subgroups
Are some policies too generous to elderly?
General discussion of possibilities, and suggestions for a single compelling index. Full GA=general bequest?
Also, hardcopy handout of some notes.

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4. How Population Aging Will Affect Government Budgets
The fiscal support ratio for year t is:
Population(x,t) weighted sum of taxes based on fixed age schedule of taxes, e.g. for 2000 ________________________________________
Population(x,t) weighted sum of benefits based on fixed age schedule of benefits e.g. for 2000
It shows the fiscal effects of changing population age distribution, e.g. as population ages, given the current program and price structure.

5. Fiscal Support Ratio Projections, 2000-2100

6. Fiscal Support Ratio Projections, 2000-2100
No pressure of population aging on state and local budgets – education dominates their budgets.

7. Fiscal Support Ratio Projections, 2000-2100
Major pressure on Federal budget, which covers public pensions (Social Security) and health care for the elderly (Medicare)

8. Given current program structure
Balancing federal budget at end of century requires
Cutting benefits by one third or
Raising taxes by 50%
As health care costs rise, larger adjustments will be necessary.

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10. Dependency and Support
Concern about pop aging is mostly about old age dependency.
Sharpest concerns for age-sensitive public sector programs
pensions
health care
Long term care
But should place these in broader context
Full range of public programs
Private consumption
Use shape of estimated profile I just showed.

11. Support Ratios
Effective labor is weighted sum of pop using labor income age profile.
Effective consumers is similar.
Ratio of effective labor to effective consumers is the “Support Ratio”.
Other things equal, consumption per effective consumer is proportional to the support ratio.

12. Population aging
First Dividend

13. 2008

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18. Fiscal Projections for USA
Support ratios do not take into account economic change:
productivity growth,
price changes for benefits,
planned changes in programs
Fiscal projections incorporate all of these, in addition to population change.

19. Mechanics of projections
Projected productivity growth shifts both the tax profiles and the benefit profiles
Productivity growth alters public pension cost profiles in ways that depend on the system’s rules
Costs of health care benefits are projected separately to reflect faster growth
Projected interest rates are used to update program debt or trust fund values
Demography, productivity, and interest rates can all be modeled and projected stochastically, leading to probabilistic budget projections.

20. Total govt expenditures double relative to GDP
26% rises to 52%

21. Expenditures on the elderly triple relative to GDP, from 8% to 26%

23. References for this lecture
Ronald Lee and Ryan Edwards (2002) "The Fiscal Effects of Population Aging in the US: Assessing the Uncertainties," James M. Poterba, ed., Tax Policy and Economy v.16 (NBER: MIT Press, 2002) pp

24. Stochastic fiscal projections
Obviously great uncertainty about these projections.
Useful to put probability intervals around them.
Approaches:
Time series analysis of inputs: Lee, Tuljapurkar, Edwards, Anderson, Miller
Random scenario (Lutz and collaborators)
Based on UN projections (Miller)

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26. Generational Accounts: Historical and Projected Future
How estimate historical accounts?
Use historical estimates of population age distributions.
Use control totals which are generally much simpler, e.g. for public education, because govt programs were limited.
Make assumptions about the shapes of age profiles, e.g. for education or pensions it is not hard.
In US, have IPUMS back to 1850.

27. Ref for this section
Bommier, Antoine, Ronald Lee, Timothy Miller, and Stephane Zuber (2004) “Who Wins and Who Loses? Public transfer accounts for US generations born ,” National Bureau of Economic Research Working Paper No , December 2004 (

28. Public Education Benefits Received by Age and Time (2004 US $) per Native Born Individual
Time (Calendar Year)
1850
1851 …
2004
2200 1 2
109
110

29. The changing age profiles of taxes and benefits in the US: 1900, 1930 and 2000
1850 80
% per capita gdp
1930
2000

30. Calculating NPV for generation born in year t
(x,s) = tax paid at age x in year s
β(x,s) = benefit received at age x in year s
l(x,t+x) = proportion of births in year t surviving to age x in year t+x.
NPV(t)= ∑e-rxl(x,t+x)[β(x,s+x) - (x,s+x)]
r=.03 in baseline. Also try .02, .05. Also historical, varying year to year.
NPV can be calculated from any age; here mostly at birth, i.e. age 0.

32. USA and France: A Comparison
NPVs for the US
NPVs for France

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34. Ronald Lee and Tim Miller, Chapter 7, New Americans
Social Security benefits plus Medicare
Ronald Lee and Tim Miller, Chapter 7, New Americans

35. Ronald Lee and Tim Miller, Chapter 7, New Americans

36. Ronald Lee and Tim Miller, Chapter 7, New Americans

37. Ronald Lee and Tim Miller, Chapter 7, New Americans

38. Ronald Lee and Tim Miller, Chapter 7, New Americans

39. Ronald Lee and Tim Miller, Chapter 7, New Americans

40. Ronald Lee and Tim Miller, Chapter 7, New Americans
Total Fiscal Impact by Age at Arrival and Educational Status of Immigrants
+$350,000 $0
-$250,000
Ronald Lee and Tim Miller, Chapter 7, New Americans

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43. Economic growth and macroeconomy
Human capital and fertility change.
Ramsey type dynamic optimization over the demographic transition, with NTA type transfers taken as given. Plan saving and consumption around this. Use approach like Auerbach-Kotlikoff Dynamic Fiscal Policy. Miguel Romero is working on.
NTA style growth approach

44. Most important points
Population aging drives increasing demand for wealth
Demand for wealth can be satisfied through transfer wealth, either public or private, or through assets.
Depending on which, population aging will generate more assets (domestic or abroad), or more transfer burden.
But there are also advantages to transfers, so above is just one element to consider in forming old age support policies.

46. Human capital and fertility change

47. Amount spent on HK is around 5 or 6 years of labor income, regardless of fertility.
A strong negative relationship, with a slope close to -1 (log-log).

48. Production and Human capital
Baseline Specifications
Human capital (HK)
Portion of wage, W(t), workers invest in their children is inversely related to their fertility, F(t)
Human capital of workers one period later is
HK(t+1) = h(F(t)) W(t)
Wage (W)
Wage is increasing in human capital
W(t) = g(HK(t))

49. Other sources of variation in fertility/HK choice
Pref for HK: Rate of return to HK; survival rates; consumption value of HK.
Price of HK due to medical technology, transportation improvements, etc.
Price of number: family allowances, fines for second child, changing access to effective contraceptives
Cultural influences on varying share of income allocated to total HK expenditures and on number.

50. Model—basic structure
Take fertility variations as given, trace out consequences for HK, w, consumption.
3 generations: children, workers, retirees; usual accounting identities.
No saving or physical capital.
HK drives wage growth; wage growth drives HK growth. (Lee and Mason 2008)

51. (demoraphic dividend)
Boom
(demoraphic dividend)
Fertility bust, but consumption remains high
Fertility recovers: modest effect on C/EA
Bottom line: Low fertility leads to higher consumption.
Human capital investment has moderated
the impact of fertility swings on standards of living.

52. During first dividend phase, consumption does not rise as much as support ratio.
The difference is invested in HK.
That is why ih later periods, consumption is proportionately higher than the support ratio.

53. Human Capital and fertility
Lee-Mason paper developing NTA relation between HK investment per child and Total Fertility Rate in survey year.
Cannot establish causality; here just assume that changing fertility drives changing HK.
Simple little model makes HK of kid depend on HK of parent generation.
Labor income depends on own HK
Elder generation supported by transfers.
Simulate out the effect of low fertility on consumption: does increased HK compensate for fewer workers per elderly?
Alexia has developed more sophisticated model building on this.

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55. NTA style growth approach

56. Here take a different approach – no optimization--emphasizes institutional setting
Assume
share of old age consumption supported by asset income stays constant over time.
altruistic sharing maintains the shape of the cross sectional consumption age profile.
Demography is known in advance.
Can solve recursively for unique growth path and asset holdings.

57. Two scenarios: high level of transfers to elderly (65%); or low level (35%)
Other assumptions
Productivity growth raises income age profile by 2% per year.
Open economy; rate of return on assets is 3%.
Aggregate saving is calculated to maintain asset share of old age consumption support.
Results will be shown relative to a 2% growth trajectory from prod gr.

58. Simulated Saving Rate, ASEAN (S.E. Asian countries), 1950-2050

59. Simulated Assets/Labor Income, ASEAN
Ratio of assets to labor income rises greatly in any case, but 3 or 4 times as much with low IG transfers.

60. Simulated Consumption, ASEAN
With low IG transfers, saving is higher from 1990 to 2020, reducing consumption.
Thereafter, it is higher.

61. These sorts of results are qualitatively like those from optimization approaches
Timing of swings differs
Level of savings rates differs
Capital/labor income ratios differ
Big picture is the same:
The demographic transition leads to a major increase in capital per worker.
The greater the role of transfers to the elderly, the smaller is the increase in capital intensity.
Eventually consumption rises with lower transfers, but initially it is lower.
Population aging leads to a decline in savings rates but an increase in capital intensity.

62. Other ideas
NTA for subgroups by race/ethnicity, educational attainment, or other. Discuss.
If elderly receive public transfers and then make large net private transfers to others, is this a problem? Or is this good?

63. A single compelling index
One possibility is B, the total bequest to a birth.
B is the sum of net public and gross private downward transfers per child, B = OC + HK + AIV + EOL
This is a longitudinal net present value at birth measure, which might be constructed from the cross-sectional accounts under appropriate assumptions. Compare to NPV of life time earnings, e.g.
Eventually perhaps it can be calculated longitudinally as we did for the main public transfers in the US and in France

64. B in the US for generation born in 2000 (rough, many assumps)
Use cross-section for 2000.
Assume transfers rise at 1.5% per year (prod gr)
Discount at 3%
Adjust public transfers for future budget balance (50-50 cut taxes, cut benefits)
Assume public debt = public capital

65. Value of B for US newborns in 2000 (NPV at birth)
NPV of Public Transfers (Pub Ed, Soc Sec and Medicare only) assuming budget is balanced by cutting taxes and benefits: +47K (assumes govt debt = value of pub capital)
Note key importance of public education!
NPV of Intervivos familial transfers received including consumption: 220K
Private end of life bequests: 27K
Total:   294K

66. B in context: US 2000
Relative to NPV of child’s life time earnings = 34%
Health and Education as a share of total bequest = 33%
Private as a share of B = 84%

67. Some questions for future work
How has B changed over 20th Cent?
Has it fallen with rise of transfers to elderly in second half of century?
Private transfers have surely fluctuated along with fertility, lower for baby boom gens, higher after.
Compare similar calculations across countries.

68. P is sum of gross upward transfers to adults, mainly to elderly (double counting with B, so caution needed)
Components of P
Familial transfers to elderly
Public transfers including

69. END