Intergenerational Transfers in
Broad Perspective
Ronald Lee
Demography and Economics
University of California, Berkeley
1. Intergenerational transfers in an
evolutionary context
• Parents in many species leave offspring after birth, with no parental
care. Then:
– Over the life course, each individual can use only the food it forages for
itself at each period and age
– Rigid, restrictive budget constraint limits possibilities for development
• Two alternatives for relaxing budget constraint of young
– 1. Bequests: parent leaves offspring a capital endowment
• paralyzed prey
• a foraging territory
• Large nutritious egg, etc.
– 2. Inter vivos intergenerational transfers: with overlapping generations,
continuing parental care and investment in offspring is an option,
allowing for:
• Postponement of nutritional independence
• larger expenditures on growth and development
• Pursuit of long term strategies with a high payoff, like brain development.
• I will emphasize inter vivos intergenerational transfers.
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
The human evolutionary strategy: key
features of contemporary hunter-gatherers
• Long period of child dependency, with heavy adult
investments
• Short birth intervals relative to similar primates
• Nonetheless overall fertility not high, due to late start.
• A mother may have a number of dependent children at
the same time.
• This strategy is feasible only with economic contributions
from other family members besides mother (cooperative
breeders)
– Father and other males
– Grandmother and grandfather
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Some data from Kaplan’s studies of
three Amazon Basin Hunter-gatherer
groups
• Kaplan has constructed estimates from the
raw data in two ways.
• I am reporting on his work published in
1994 which I believe is correct.
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Production and Consumption
by Age Averaged Across Three Amazon Basin
Production and Consumption by Age
Hunter-Gatherer
Groups
(Daily
Calories)
for the Average
of Three
Amazonian
Hunter-gatherer Groups (Daily Calories)
8000
7000
Production
Production
6000
Calories
5000
4000
Consumption
Consumption
3000
2000
1000
0
0
10
20
30
40
50
Age
Source: Calculated from Kaplan (1994), see Lee (2000).
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
60
70
Production and Consumption
by Age Averaged Across Three Amazon Basin
Production and Consumption by Age
Hunter-Gatherer
Groups
(Daily
Calories)
for the Average
of Three
Amazonian
Hunter-gatherer Groups (Daily Calories)
8000
7000
Production
Production
6000
Calories
5000
4000
Consumption
Consumption
3000
2000
Nutritional independence
after age 20
1000
0
0
10
20
30
40
50
60
Age
Source: Calculated from Kaplan (1994), see Lee (2000).
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
70
Production and Consumption
by Age Averaged Across Three Amazon Basin
Production and Consumption by Age
Hunter-Gatherer
Groups
(Daily
Calories)
for the Average
of Three
Amazonian
Hunter-gatherer Groups (Daily Calories)
8000
7000
Production
Production
6000
Calories
5000
4000
Consumption
Consumption
3000
Raising one child to maturity
costs 10+ years of adult
consumption
2000
1000
0
0
10
20
30
40
50
Age
Source: Calculated from Kaplan (1994), see Lee (2000).
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
60
70
Production and Consumption
by Age Averaged Across Three Amazon Basin
Production and Consumption by Age
Hunter-Gatherer
Groups
(Daily
Calories)
for the Average
of Three
Amazonian
Hunter-gatherer Groups (Daily Calories)
8000
7000
Production
Production
6000
Calories
5000
4000
Elderly remain
net producers
Consumption
Consumption
3000
2000
1000
0
0
10
20
30
40
Age
Source:
Calculated
Kaplan
Ronald Lee,
Univ Calif,from
Berkeley;
2005
(1994), seeSept
Lee13,(2000).
50
60
70
Production and Consumption
by Age Averaged Across Three Amazon Basin
Production and Consumption by Age
Hunter-Gatherer
Groups
(Daily
Calories)
for the Average
of Three
Amazonian
Hunter-gatherer Groups (Daily Calories)
8000
7000
Production
Production
6000
Calories
5000
4000
Consumption
Consumption
3000
Population weighted average ages
2000
Ac = 24 yrs
1000
Ayl = 35 yrs
0
0
10
20
30
40
50
Age
Source: Calculated from Kaplan (1994), see Lee (2000).
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
60
70
Production and Consumption
by Age Averaged Across Three Amazon Basin
Production and Consumption by Age
Hunter-Gatherer
Groups
(Daily
Calories)
for the Average
of Three
Amazonian
Hunter-gatherer Groups (Daily Calories)
8000
7000
Production
Production
6000
Calories
5000
4000
3000
24
2000
1000
0
0
10
20
Consumption
Consumption
The average calorie is
consumed by
35
someone 11 years
younger than the
producer: income
flows downward, from
older to younger.
30
40
50
Age
Source: Calculated from Kaplan (1994), see Lee (2000).
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
60
70
2. Intergenerational transfers in a
modern context
• As in past, transfers allow life course
divergence of earnings and consumption.
– young can be net consumers
– Now old can also be net consumers –
something “new” in last 10,000 years.
• Terminology: I take intergenerational
transfers to mean the same as inter-age
transfers, not necessarily between discrete
generations in the same family.
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Stylized human life cycle for
surviving individuals
Output
per
person
per year
Labor
earnings, y(x)
+
+
Consumption,
c(x)
-
-
-
Age
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
How do these reallocations across
age and time take place?
• By institution, through the family, the
market and the state (public sector)
• By mechanism, through borrowing and
lending, through investing in physical
capital, and through transfers.
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Resource Reallocation Across Age and Time
Form of
Reallocation
Institution
Family
Market
Public Sector
Capital
House
Car
Consumer
Durables
Inventories
Education
Factories
Inventories
Farms
Social
Infrastructure
(Hospitals, Roads,
Airports, Govt.
Bldgs)
Transfers
Child Rearing
College Costs
Gifts
Bequests
Help to Elderly
Government Debt
Public Education
Medicaid,
Medicare
Social Security
Food Stamps
AFDC
Borrowing/
Lending
Familial Loans
Credit Markets
"Transfers" with (mortgages, credit
a quid pro quo
cards, bond issues)
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Government Loans
Resource Reallocation Across Age and Time
Form of
Reallocation
Institution
Family
Market
Public Sector
Capital
House
Car
Consumer
Durables
Inventories
Education
Factories
Inventories
Farms
Social
Infrastructure
(Hospitals, Roads,
Airports, Govt.
Bldgs)
Transfers
Child Rearing
College Costs
Gifts
Bequests
Help to Elderly
Government Debt
Public Education
Medicaid,
Medicare
Social Security
Food Stamps
AFDC
Huntergatherers
Borrowing/
Lending
Familial Loans
Credit Markets
"Transfers" with (mortgages, credit
a quid pro quo
cards, bond issues)
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Government Loans
How can we measure and interpret this rich variety
of resource flows across age and time?
• One strategy: measure each of these flows in
detail, which requires:
– Rich data from many sources
– Strong assumptions, in some cases
– But is surprisingly possible.
• An alternative indirect strategy: estimate broad
patterns of production and consumption, and
infer the flows that must have occurred.
• I will show methods and results for both
approaches, time permitting, but start with
second.
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
US Consumption and Labor Earning by Age in 2000
60,000
labor earnings
50,000
US $ (2000)
40,000
consumption
30,000
20,000
10,000
0
0
10
20
30
40
50
60
-10,000
Age
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
70
80
90
100
US Consumption and Labor Earning by Age in 2000
60,000
labor earnings
50,000
Earnings decline
rapidly in 50s and 60s
US $ (2000)
40,000
consumption
30,000
20,000
10,000
0
0
10
20
30
40
50
60
-10,000
Age
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
70
80
90
100
US Consumption and Labor Earning by Age in 2000
60,000
Consumption
rises in old age
labor earnings
50,000
US $ (2000)
40,000
consumption
30,000
20,000
10,000
0
0
10
20
30
40
50
60
-10,000
Age
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
70
80
90
100
US Consumption and Labor Earning by Age in 2000
60,000
labor earnings
50,000
US $ (2000)
40,000
consumption
30,000
Pop wtd Average ages
20,000
Ac = 41 yrs
10,000
Ayl = 43 yrs
0
0
10
20
30
40
50
60
-10,000
Age
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
70
80
90
100
4. Comparative Direction of
Transfer Flows
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
2050
+3
-2
United States [Lee & Miller]
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
What has caused these changes?
• Population aging over demographic transition
• Behavioral choices with rising wealth
– Retirement age in US dropped from 74 in 1900 to 63
today; most of Europe is similar or more so.
– Choice of privacy over co-residence for elderly
– Choice of expensive medical interventions for chronic
diseases of elderly
• Institutional change, particularly the growth of
massive public sector transfer programs.
• Now examine public sector transfers in US
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Resource Reallocation Across Age and Time
Form of
Reallocation
Institution
Family
Market
Public Sector
Capital
House
Car
Consumer
Durables
Inventories
Education
Factories
Inventories
Farms
Social
Infrastructure
(Hospitals, Roads,
Airports, Govt.
Bldgs)
Transfers
Child Rearing
College Costs
Gifts
Bequests
Help to Elderly
Government Debt
Public Education
Medicaid,
Medicare
Social Security
Food Stamps
AFDC
Borrowing/
Lending
Familial Loans
Credit Markets
"Transfers" with (mortgages, credit
a quid pro quo
cards, bond issues)
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Government Loans
Rest of my talk
Do public sector transfer programs redirect
resources from children to elderly?
• Two ways in which societal investment in
children may have declined
– Over the life cycle, reallocation across ages
• allocations of resources to children by adults may be
declining
– Across generations, loss of life time wealth
• Younger generations of today may be exploited by older
generations through the public sector – unsustainable,
transitory situation; “greedy geezers”.
• I will discuss both in US context. Believe similar
to other industrialized nations.
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
5. The growth of public transfer
programs in the US
• Examine changing age patterns of major
govt transfer programs
– Education
– Pensions
– Health Care
• Cross-sectional view
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Spending on Public Education, Social Security and Medicare as % of GDP,
Actual 1850-2000; Projected to 2050
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
The changing age profiles of taxes and benefits in the US:
1850, 1930 and 2000 (cross-sectional) (Soc Sec, Educ,
Medicare)
1850
0
Relative to
per capita
GDP
80
1930
2000
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
The changing age profiles of taxes and benefits in the US:
1900, 1930 and 2000 (cross-sectional) (Soc Sec, Educ,
Medicare)
1850
0
% per
capita
gdp
80
1930
Note enormous
increase in
benefits for the
elderly
2000
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Public Sector Transfer Flows Reversed Direction in the 1970s, and
Their Size Increased Relative to GDP (Soc Sec, Ed, Medicare)
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Public Sector Transfer Flows Reversed Direction in the 1970s,
and Their Size Increased Relative to GDP
Length of arrow is difference in
average ages of paying taxes, and
getting benefits.
Width is benefits as % GDP
Area is transfer wealth as % GDP
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Public Sector Transfer Flows Reversed Direction in the 1970s,
and Their Size Increased Relative to GDP
Programs will generate large
transfer wealth by 2050 – 126%
GDP (net of education).
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
6. Intergenerational redistribution of
these public sector transfers
• Do public transfer programs permit the current
elderly to live well at the unfair expense of
today’s youth and tomorrow’s newborns?
• “The living and well organized are taking money
from the weak and unborn. Over the past few
decades we have seen a gigantic transfer of
wealth from struggling young families and the
next generation to members of the AARP
[Elderly].” (David Brooks, NYT, 2/5/05)
• Schematic view: Transfer programs and
generational windfall gains
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Net Present Value of life time benefits minus taxes (NPV) by
generation for upward transfers versus downward transfers
First gens
NPV ($)
Upward, e.g. Soc Sec,
Medicare
Steady state < 0
Year of birth of generation
When upward transfers start up, first generations get a windfall
gain; later generations pay the price with negative NPVs.
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Net Present Value of life time benefits minus taxes (NPV) by
generation for upward transfers versus downward transfers
First gens
Upward, e.g. Soc Sec,
Medicare
NPV ($)
Steady state < 0
Downward, e.g. Educ
NPV ($)
Steady state > 0
First gens
Year of birth of generation
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Net Present Value of life time benefits minus taxes (NPV) by
generation for upward transfers versus downward transfers
First gens
Upward, e.g. Soc Sec,
Medicare
NPV ($)
Steady state < 0
When downward transfers start up, the opposite
happens: first generation loses, later ones gain.
Downward, e.g. Educ
NPV ($)
Steady state > 0
First gens
Year of birth of generation
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Net Present Value at birth of expected life time benefits for Social
Security, Medicare and Public Education as % of lifetime earnings, for
generations born 1850 to 2090
Upward (pensions +
Medicare)
Total
Downward
(public educ)
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Net Present Value at birth of expected life time benefits for Social
Security, Medicare and Public Education as % of lifetime earnings, for
generations born 1850 to 2090
One dollar of education is worth
$12 in old age.
Total
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Generational redistribution is
opposite to our expectations
• Today’s young are the biggest
winners, due to importance of
public education.
– Also their children
– Even their grandchildren gain
• Today’s elderly, age 57 to 74,
are net losers (slightly).
• As expected, those born in
decades around 1900 are also
big winners.
• Almost all generations from
1880 through 2050 gain. But…
• Eventually, generations after
2050 will suffer increasingly
large losses.
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
7. Financial Pressures of
Population Aging
• Hold age profiles of labor earnings and
consumption constant at 2000 levels
• Multiply by changing population age
distribution over 21st century.
• How would aggregate consumption need
to change to maintain same ratio to labor
earnings as in 2000?
• Calculate the support ratio, adjusted to 1.0
for 2000.
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
General Support ratio for US, 2000 to 2100, 1.0 for 2000. Based on labor
earnings and consumption profiles, plus projected pop age distr.
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Support
General ratio
Support
for US,
ratio2000
for US,
to 2100,
2000normalized
to 2100, 1.0tofor
1.0
2000.
for 2000.
Based
Based
on labor
on labor
earnings
earningsand
andconsumption
consumptionprofiles
profiles,shown
plus projected
earlier, plus
popprojected
age distr.pop age distr.
Initial slight
increase, due to
small cohorts
turning 65
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Support
General ratio
Support
for US,
ratio2000
for US,
to 2100,
2000normalized
to 2100, 1.0tofor
1.0
2000.
for 2000.
Based
Based
on labor
on labor
earnings
earningsand
andconsumption
consumptionprofiles
profiles,shown
plus projected
earlier, plus
popprojected
age distr.pop age distr.
Then population aging raises
consumption costs faster than labor
earnings, so consumption must fall –
but only by 16%.
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Support
General ratio
Support
for US,
ratio2000
for US,
to 2100,
2000normalized
to 2100, 1.0tofor
1.0
2000.
for 2000.
Based
Based
on labor
on labor
earnings
earningsand
andconsumption
consumptionprofiles
profiles,shown
plus projected
earlier, plus
popprojected
age distr.pop age distr.
Average effect on consumption
averages < -.2%/yr over century
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
We can also use this same exercise
to calculate the average ages of
consumption and earnings.
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Average ages for Consumption and Labor Earning from the
Same Data
Av age of consumption
Av age of labor earning
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Average ages for Consumption and Labor Earning from the
Same Data
Direction of flows reverses in 2020,
due solely to population aging
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
We can do similar calculations to find fiscal
support ratio, based on taxes and benefits
• Here show benefits by age, for several
major programs and in total
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Fiscal Support Ratio Projections, 2000-2100
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Fiscal Support Ratio Projections, 2000-2100
No pressure of population aging on
state and local budgets – education
dominates their budgets.
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Fiscal Support Ratio Projections, 2000-2100
There is major pressure on the
Federal budget, which covers
public pensions (Social Security)
and health care for the elderly
(Medicare)
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Full-blown fiscal projections also
include projected changes in
relative costs of programs, such as
rising costs of health care
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Total govt
expenditures double
relative to GDP
26% rises to 52%
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Expenditures on the
elderly triple relative to
GDP, from 8% to 26%
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
But what will actually happen as
populations age?
• Fiscal support ratio tells what benefits we
could buy for given tax rate
• Population aging raises price of age-vector
of benefits, relative to after tax income
• Expect to substitute away from these
benefits as they get more expensive
• Reduce expenditures per elderly and per
child, but net effect unknown
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Past experience in OECD
consistent with this
• Gruber and Wise do cross-section time
series analysis since 1960
• 1% increase in proportion elderly
– Raises total expend on elderly by .5%
– Reduces expend per elderly by .5%
– No increase in total govt expends
– Reduction in other expends, including kids
• Lindert does similar analysis, reaches
similar conclusions, but less severe.
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
8. Discussion
• Originally strongly downward transfers to
children by all adults—age asymmetry.
• Now moved to symmetric life cycle
– Upward transfers through public sector
– Downward transfers within family
– Net effect is balance and symmetry
• As population ages, strong fiscal and life cycle
pressures from older populations may undercut
public and private investments in kids
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Standardized net production by age for US today, and the average
for three hunter-gatherer groups (Kaplan, Amazon Basin)
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
Are we shortchanging our children for
the sake of a pampered old age?
• Comparisons to our evolutionary past are
interesting, but cannot guide us today.
• Nonetheless, we should be aware of these
changes and their implications.
• Our individual and social choices about work,
consumption and leisure, and resources for
children and the elderly, should be informed and
thoughtful.
• We should consider the options proactively,
rather than leaving our existing institutions to
grind out their own answers in an aging world.
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005
END
Ronald Lee, Univ Calif, Berkeley;
Sept 13, 2005