Transcript BrightonRock Insurance

Are we living beyond our means?
Some questions
Brussels - October 2008
Con Keating
1
The paper
• Uses cohort self-sufficiency to estimate savings requirements
• From consumption (public and private) and labour income age
cross-sections
• Across 4 European countries
• Decreasing mortality and retirement age effects are considered
• The findings: savings rates are lower than required to maintain
current (projected) consumption patterns
Income and Consumption profiles
• The paper notes that in these time, age and cohort effects are
commingled and regression based decomposition (Deaton) may be
unsatisfactory.
• Recent income and expenditure surveys are used in result.
• The paper then applies a uniform growth rate to these.
• There is a strong implicit assumption – that the relative consumption
pattern (profile) is maintained
• Which drives the affordability ratio decreases with growth (Table 7)
and the increasing required national savings rates of Table 8
• Two questions arise: How much have these profiles changed over
time? Would forecasts reflecting (any) historic changes offer greater
insight?
• Some room for more empirical work.
The set-up
• All capital produced is annuitised – Yaari 1965
• Which as noted by the paper implies consumption within the cohort
survivors.
• But is that reasonable? – what of infrastructure and improvements to
land – no public or private bequest.
• It seems that accounting for these effects would suggest worse
outcomes than are found.
Land
• By contrast, land is bequeathed from generation to generation
• With rents being allocated on a per capita basis
• Consistent with a representative set-up but is this in fact realistic?
• We might expect inter-generational wealth transfer to be Pareto
distributed
• The mean representative (this study) is then much better off than the
median
A conundrum
•
•
•
Average returns
France
Flow 4.00%
UK
Flow 4.04%
•
Are these really consistent with the (GDP) savings rates and open
economies?
+CG 4.14%
+CG 4.39%
4.6
4.4
4.2
Return
4
3.8
3.6
3.4
3.2
3
4
4.5
5
5.5
Savings Rate
6
6.5
7