Transcript Transfers, Capital, and Consumption over the Demographic

Transfers, Capital, and
Consumption over the
Demographic Transition: An
International Comparison
Andrew Mason
University of Hawaii at Manoa
Ronald Lee
University of California
Acknowledgements
• Support – National Institutes of Health
NIA R01 AG025488 and AG025247
• Computational work – Diana Wongkaren,
Turro Wongkaren, Pablo Lattes, Tim Miller,
and Gretchen Stockmayer
Key Ideas
• Demographic transition is from high youth
dependency to high old age dependency.
• During the transition, low dependency
yields the first demographic dividend.
• Children and the elderly are similar in that
neither work; however,
• Elderly contribute to economic growth by
accumulating assets.
• This will lead to a second dividend.
Objective of Paper
• Use a simulation model that incorporates
detailed empirical data to analyze how
– the demographic transition
– the importance of family support systems
– public policy
– features of the economic life cycle
• Influence asset demand, economic
growth, and consumption
Theoretical Model
• Economic lifecycle dictates that adults support
children and accumulate pension wealth
• Children are supported through a combination of
public and familial transfers
• Pension wealth comes in two exhaustive,
mutually exclusive forms
– Pension transfer wealth (from younger and future
generations)
– Assets
• Composition of pension wealth is determined by
policy
Theoretical Model
• In the conventional lifecycle model,
consumption at each age reflects tastes
and individualistic lifetime budget
constraint
• In this model, consumption at each age is
governed by altruism across generations
and general standards of living
Theoretical Model
• Closed form solution for the steady-state
• Dynamics
– Solve for steady-state in 2300
– Use backward recursion to solve for the paths
of assets, consumption, and other
macroeconomic variables
– Work on a forward recursion solution is
underway
Data
• UN Population Data
– 1950-2050: World Pop Prospects 2005
– 2050-2300: World Pop to 2300
• Economic lifecycle
– Japan: Ogawa and Matsakura (2005)
– South Korea: An and Gim (2006)
– Thailand: Chawla (2006)
– US and Taiwan: Lee, Lee, & Mason (2005)
Limitations of Current Analysis
• Methodology for simulating dynamic results
requires further testing and evaluation.
• Model does not incorporate important feedbacks
– Small open economy
– Accumulation of assets does not lead to changes in
interest rates or changes in labor productivity
– In future work this will be a key feature of the analysis
Analysis of Economic Lifecycles
and Steady States
• Asset demand is increased by
– Fertility decline
– Increased life expectancy
– More rapid economic growth
– Lower interest rates
– US type economic life cycle with high old age
consumption
– Early retirement
• See paper for detailed calculations
Components of Lifecycle Wealth
W (t )  T (t )  W (t )
k
p
W p (t )  T p (t )  A(t )
W (t )  lifecycle wealth of all adults
T k (t )  child transfer wealth of all adults
W p (t )  lifecycle pension wealth of all adults
T (t )  transfer pension wealth of all adults
p
A(t )  assets of all adults
Transfer policy
Pension policy:
 (t )  T (t ) / W (t ) is exogenous and constant
p
p
Public transfers to children:
 (t ), the familial share of child costs,
f
is exogenous and constant. Remainder
is public cost (labor income taxed)
Simulations
Population
United States
Nigeria
Brazil
China
Lifecycle
Age profiles
US 2000
Taiwan 1977
US 2000
Taiwan 1977
Transfer share
( )
0.35
0.65
0.65
0.35
Interest rate
0.03
Productivity growth
0.015
Familial transfers to children 0.67
Key Points
• For young populations, simulated assets
and pension wealth are negative
– Costs of children exceed resources of parents
– Three possible outcomes
• Accumulate foreign debt to finance child costs
• Reduce spending on children below the relative
level estimated for Taiwan in 1977 or the US in
2000
• Rely exclusively on transfer wealth to support oldage consumption
Key Points
• Fertility decline leads to greater wealth (huge
differences in Tk/Y across countries in the plots)
– Rise in support ratio leads to increased per capita
consumption at all ages and greater accumulation for
retirement
– Aging of adult population  more wealth
– If fertility decline leads to a rise in spending on
children relative to adults
• Assets will increase by less
• Human capital may rise by more (video games or
education?)
Key Points
• Increased longevity and population aging
lead to greater wealth
– In US, ratio of assets to labor income
increases
• Doubles between 1950 and 1970
• Doubles again between 1990 and 2090
– In Brazil, ratio of assets to labor income
increases by about 500% between 1950 and
2000
Key Points
• Effects on consumption are quite modest
– Small open economy assumption; no capital
deepening effects, but large international
capital flows and spill-overs to other countries
– In a closed economy, a doubling of K/Y raises
labor income and consumption by 40%, so we
expect much bigger effects in fuller model.
– Global aging will produce similar effects on a
global scale.
In Conclusion
• If aging leads exclusively to expanded
public and familial transfer programs,
economy is a fixed pie divided among
more consumers.
• If transfer programs are kept in check,
aging leads to greater assets, a larger pie,
and a second demographic dividend.
In Conclusion
• Does not mean that consumption will rise
relative to productivity, but that it will
decline by less than the decline in the
support ratio.
• Consumption is lower per year of life, but
lifetime consumption is higher