Population aging and
intergenerational
transfers: a global perspective
Ronald Lee, University of California, Berkeley
Sept 26, 2011
University of Pennsylvania, Population Studies Center
My research funded by NIA R37 AG025247.
I am grateful to NTA country team members, Andy Mason, and
Gretchen Donehower for practically everything. Other NTA
funding: IDRC, UNFPA, EWC, CEDA, UNPD, EU
We are inherently social, and are sustained not only by our own efforts, but
also by transfers from those of others who support us directly or indirectly.
• We humans could not make it through life alone and unaided. Yes, we
work and support ourselves and accumulate assets for old age.
– But before we are old enough to work, it is our parents who provide for us out
of their earnings.
– And as the life cycle stage of old age expands, we rely more and more famiuly
or on tax payers to support us through government programs.
• Humans are inherently social, and are linked together both through
private relationships and through public programs.
– Often these links take the form of intergenerational transfers – flows of
income from one generation to another that do not pass through the market
and are something like gifts.
• In fact, at each age we make up the gap between our labor income and
our consumption in one of three ways:
– assets, including homes, equities, and credit markets;
– public transfers, including pensions, education, and health care;
– and private transfers to rear our children or support our parents or receive
support from them.
NTA is consistent with standard national accounts, but it adds the dimensions
of age and of transfers, both public and private
• National Transfer Accounts, or NTA for short, is a
new set of methods to estimate these asset and
transfer flows. NTA is consistent with standard
national accounts but it goes beyond them in two
important new ways.
– First, it estimates transfers within families and
households, between households, and through the
public sector.
– Second, it breaks down national accounts by age.
• Co-directed with Andy Mason
Starting point for National Transfer
Accounts (NTA)
• Cross-sectional age profiles of labor income
and consumption
• Based on existing surveys, demographic data,
administrative data. Adjusted to match totals
in National Income and Product Accounts.
• Many countries, each with own research
team.
• Centralized methods, quality control, training,
workshops. Compare different surveys, etc.
Ron Lee, UC Berkeley, Sept 26 2011
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Age profiles are
• Population averages at each age, combining
males females, including 0’s
• height of age profile adjusted to be consistent
with National Income and Product Account
totals (given pop age distr).
• For comparative purposes, standardize by
dividing each economy’s age profiles by
average labor income ages 30-49.
Ron Lee, UC Berkeley, Sept 26 2011
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Estimation of consumption by age
• Consumption
– Private expenditures imputed to individuals within each household
– Public in-kind transfers (e.g. education, health care)
• Household expenditures on health and education
– Regressed on household composition dummies.
– Coefficients are used to allocate household totals to individuals within
each household
• The balance of household consumption (“Other”) is allocated in
proportion to assumed equivalent adult consumer weights,
same across all countries:
– .4 for ages 0-4
– Increases linearly to 1.0 at age 20
• After calculation for each individual in each household, find
average across all individuals in population at each age.
Ron Lee, UC Berkeley, Sept 26 2011
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Labor Income
• Labor income includes
– Wages, salaries, fringe benefits before tax
– 2/3 of self employment income, unpaid family labor (1/3 to assets)
– Average includes 0’s.
Ron Lee, UC Berkeley, Sept 26 2011
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Ron Lee, UC Berkeley, Sept 26 2011
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Ron Lee, UC Berkeley, Sept 26 2011
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Ron Lee, UC Berkeley, Sept 26 2011
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Ron Lee, UC Berkeley, Sept 26 2011
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Ron Lee, UC Berkeley, Sept 26 2011
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Ron Lee, UC Berkeley, Sept 26 2011
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Ron Lee, UC Berkeley, Sept 26 2011
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US consumption (private plus public in-kind transfers), 1960,
1981 and 2007
(Ratio to average labor income ages 30-49).
1960
1981
2007
Public Education
1
1
1
Public
Health
Private Education
Private Health
Owned Housing
0.5
0.5
0.5
Private Other
0
0
0
10
20
30
40
50
60
70
80
90
Public Other
0
0
10
20
30
40
50
60
70
80
90
0
10
20
30
40
50
60
70
80
Source: US National Transfer Accounts, Lee and Donehower, 2011
Ron Lee, UC Berkeley, Sept 26 2011
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90
Aggregate (population weighted) age specific
consumption and labor income for Nigeria, 2003
250000
Naira (millions)
200000
150000
100000
50000
0
0
10
20
30
Consumption
40
50
60
Labor income
Ronald Lee & Andrew Mason 2011
70
80
90+
Economic Lifecycle of Germany 2003
Aggregate flows
50000
45000
Euros (millions)
40000
35000
30000
25000
20000
15000
10000
5000
0
0
10
20
30
Consumption
40
50
60
Labor income
Ronald Lee & Andrew Mason 2011
70
80
90+
Demographic transition and changing
support ratios
1) Fertility is high, mortality begins to decline, the
growth rate and proportion of children rises.
2) Fertility begins to decline (maybe 50 years later),
mort continues to decline. The proportion of
children declines. “Dividend phase”.
3) Fertility stabilizes at low level, mortality
continues to decline, population aging begins.
Ron Lee, UC Berkeley, Sept 26 2011
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Support ratios show changes in labor income
per consumer, based on current age profiles
• Multiply age profiles by past or projected
population age distributions to find hypothetical
total labor income and consumption.
• Support ratio = total hypothetical labor
income/total hypothetical consumption for each
year.
• Under some assumptions, consumption per
capita will be proportional to this support ratio.
Ron Lee, UC Berkeley, Sept 26 2011
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Ron Lee, UC Berkeley, Sept 26 2011
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Increase = .7%/yr
Decrease = -.4%/yr
Contrast = 1.1%
Ron Lee, UC Berkeley, Sept 26 2011
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Support ratios based on the average poor country
profiles and UN 2010 revision
Annual % Rate of change of support ratio
China
Trough to Peak
Peak to 2100
India
Nigeria
Costa Rica
0.67
0.37
0.27
0.67
-0.26 Ron Lee,
-0.17
-0.31
UC Berkeley,na
Sept 26 2011
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Support ratios based on the average rich country
profiles and UN 2010 revision
Rate of change of support ratio
Germany Japan
Spain
US
2010 to 2050
-0.66
-0.66
-0.78
-0.34 Sept 26 2011
Ron Lee, UC Berkeley,
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Conclusion from support ratios
Other things equal, population aging will lead to a
substantial decline in consumption relative to
current levels.
But will other things be equal?
The same forces that reduce the support ratio may
also promote investment in capital and human
capital.
Outcome depends on how old age consumption is
funded, extent of reliance on assets vs transfers.
Ron Lee, UC Berkeley, Sept 26 2011
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Investment in human capital may also
offset declining support ratios
• Population aging is caused mainly by low fertility.
• Quantity-Quality theory in economics suggests
that low fertility is associated with more
investment in human capital.
• NTA synthetic cohort measure of human capital
investment: Sum of spending on health and
education per child
– at ages 0 to 17 for health
– Ages 0-26 for education
• Do for both public and private spending
• Divided by average labor income to standardize
Ron Lee, UC Berkeley, Sept 26 2011
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Human capital spending per child (percent
of av annual labor income age 30-49)
Fertility and pubic plus private human-capital investment per child
(relative to labor income)
600%
SE
JP
SL
500%
TW
ES
400%
HU
DE
300%
KR
US
AT
FI
CR MX
BR
CN TH
UY
CL
PH
ID
200%
NG
IN
KE
100%
0%
0
1
2
3
4
5
Total fertility rate (children per woman)
Ronald Lee and Andrew Mason, 9/19/2011
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Time Series Relationship
7
6
Human capital spending
Estimated elasticities
Japan
-1.46
Taiwan
-1.40
United States -0.72
Taiwan 1977-2003
5
Japan 1984-2004
4
3
US 1960-2003
2
1
0
0
1
2
3
4
Total Fertility Rate
Ronald Lee and Andrew Mason, 9/19/2011
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How transfers are estimated
• Net intrahousehold transfers at each age in
each household are the difference between
income received (labor income, asset income
and public transfers) and consumption.
• Net interhousehold transfers are estimated
from direct survey questions.
• Currently bequests at death are not included!
A very important omission, to be remedied.
Ron Lee, UC Berkeley, Sept 26 2011
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Data for US (2003), per capita
The “life cycle deficit” is consumption – labor income.
Net Private transfers is intra + inter household
Net pub transfers is benefits received – taxes paid
ABR=Asset Income – Saving=asset income consumed or transferred
Financing the Lifecycle Deficit
Components at Each Age
2
Pub Trans
Units of Avg YL 30-49
1.5
1
ABR
0.5
0
Priv Trans
0
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
-0.5
-1
Ronald Lee, Univ of Calif at Berkeley
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Age Reallocations in Japan, 2004
Annual aggregate flows
6000
Yen (billions)
4000
2000
0
0
10
20
30
40
50
60
70
80
-2000
-4000
-6000
Public Transfers
Private Transfers
Asset-based Reallocations
Ronald Lee & Andrew Mason 2011
90+
Population aging and asset
accumulation
• People accumulate assets over their adult lives so
the elderly hold more assets than younger adults.
• In aging populations the proportion of elderly is
higher, so there are more assets per capita.
• If assets are invested domestically they raise
capital stocks and make labor more productive. In
any case, assets generate income.
• However, if people expect to be supported by
public or private transfers in old age, this effect is
muted.
Ron Lee, UC Berkeley, Sept 26 2011
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Shares of consumption not covered by labor income: Family Transfers, Public
Transfers and Asset income (part not saved) sum to 1.0
IN
Assets
Europe & US
Latin America
MX
PH
Asia
1/3
TH
US
2/3
KR
ES
JP
CR
2/3
1/3
TW
DE
BR
CL
CN
SI
AT
SE
Family
transfers
HU Public
2/3
1/3
Ron Lee, UC Berkeley, Sept 26 2011
transfers
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Elders In some countries rely 100% on public sector
transfers.
IN
Sweden
Austria
Hungary
Slovenia
Assets
Europe & US
Latin America
MX
PH
Asia
1/3
TH
US
2/3
Brazil
KR
ES
JP
CR
2/3
1/3
TW
DE
BR
CL
CN
SI
AT
SE
Family
transfers
HU Public
2/3
1/3
Ron Lee, UC Berkeley, Sept 26 2011
transfers
33
Elders In some Asian countries rely in part on family
transfers.
China
S. Korea
Taiwan
Thailand
IN
Assets
Europe & US
Latin America
MX
PH
Asia
But not Japan,
Philippines or India
1/3
TH
US
2/3
KR
ES
JP
CR
2/3
1/3
TW
DE
BR
CL
CN
SI
AT
SE
Family
transfers
HU Public
2/3
1/3
Ron Lee, UC Berkeley, Sept 26 2011
transfers
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But in more countries, elders actually make net
transfers to their children India
Austria
Mexico
US
Spain
Germany
IN
Assets
Europe & US
Latin America
MX
PH
Asia
While others are near zero
Philippines
Japan
Costa Rica
Chile
Slovenia
Hungary
1/3
TH
US
2/3
KR
ES
JP
CR
2/3
1/3
TW
Sweden
Uruguay
Brazil
Indonesia
DE
BR
CL
CN
SI
AT
SE
Family
transfers
HU Public
2/3
1/3
Ron Lee, UC Berkeley, Sept 26 2011
transfers
35
• When consumption of the elderly is funded
mainly out of public or private transfers, then
population aging just raises the transfer
burden on workers.
• No increased assets or capital per worker.
Ron Lee, UC Berkeley, Sept 26 2011
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In some countries, elders rely mainly on asset income.
India
Mexico
Philippines
Thailand
US
IN
Assets
Europe & US
Latin America
MX
PH
Asia
1/3
TH
US
2/3
KR
ES
JP
CR
2/3
1/3
TW
DE
BR
CL
CN
SI
AT
SE
Family
transfers
HU Public
2/3
1/3
Ron Lee, UC Berkeley, Sept 26 2011
transfers
37
• In countries like these, population aging raises
asset holdings per worker, and perhaps raises
labor productivity.
• Taxes and transfers are less necessary to fund
population aging.
Ron Lee, UC Berkeley, Sept 26 2011
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Conclusions
• Population aging is the inevitable last stage of the demographic
transition.
• In rich countries, the changing shape of the economic life cycle
amplifies the consequences of population aging.
• However, when elder consumption is funded through continuing
work or through assets, effects on younger people are reduced.
• Low fertility goes with increased investment in human capital.
• These changes accompanying population aging may largely offset
its costs.
• The challenges of population aging need not be overwhelming.
Ron Lee, UC Berkeley, Sept 26 2011
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Following Slides Were Not Used at
Penn
Ron Lee, UC Berkeley, Sept 26 2011
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The geographic coverage of NTA
NTA Members
Asia-Pacific
Americas
Europe
Africa
Australia
Argentina
Austria
Kenya
China
Brazil
Finland
Mozambique
India
Canada
France
Nigeria
Indonesia
Chile
Germany
Senegal
Japan
Colombia
Hungary
South Africa
Philippines
Costa Rica
Italy
South Korea
Jamaica
Slovenia
Taiwan
Mexico
Spain
Thailand
Peru
Sweden
Vietnam
United States
Uruguay
Lee and
Mason September 19, 2011
Aggregate Intrahousehold Transfer Flows To and From Age
Groups, relative to GDP, in Japan, Thailand and the US.
Thailand
Japan
Parent to
Child
Spouse to
Spouse
0-0
0-0
0-0
0-0
0-0
0-0
0-0
80
80
0-0
0-0
70
0-0
70
0-0
60
50
15
40
Child to
Parent
60
0-0
0
0
0-0
0-0
0-0
0-0
50
0-0
0-0
15
40
30
30
30
30
45
45
20
20
Transfers Received
(To Age)
0-0
60
10
75
Transfers Made
(From Age)
60
Transfers Received
(To Age)
10
75
Transfers Made
(From Age)
0
0
United States
0-0
0-0
0-0
0-0
80
0-0
0-0
70
60
0-0
0-0
0-0
0
50
15
40
0-0
0-0
30
30
45
20
Transfers Received
(To Age)
60
10
75
Transfers Made
(From Age)
0
Source: Lee and Donehower (2011), Chapter on private transfers.
Ron Lee, UC Berkeley, Sept 26 2011
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