Macroeconomic Consequences
of the Aging Baby Boom
Ronald Lee
UC Berkeley
PAA Session “The Baby Boomers Turn 65”
Thanks to Gretchen Donehower for help, to the National
Transfer Accounts project, and to NIA for support.
My plan
• No general equilibrium feedbacks;
• For that, see Miguel Sanchez-Romero in
Session 29.
• I will discuss some simple demographic
impacts, one at a time.
Ronald Lee, UC Berkeley, March 31, 2011
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I. Baby Boom postponed
population aging by 40 years
Ronald Lee, UC Berkeley, March 31, 2011
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Calculated from SSA projections and
hypothetical simulation.
Ronald Lee, UC Berkeley, March 31, 2011
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Gr rate 1.3%/yr
1970-2010
Source: Calculated from Social Security Administration data and projections
(2010 Trustees Report).
Ronald Lee, UC Berkeley, March 31, 2011
Gr rate .4%/yr
2010-2050
5
II. Rising consumption in old age
and declining labor income in old
age exacerbated the consequences
of population aging
Ronald Lee, UC Berkeley, March 31, 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
Ronald Lee, UC Berkeley, March 31, 2011
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90
A half century of changing life cycle deficits
(consumption – labor income)
Source: US National Transfer Accounts, Lee and Donehower, 2011
Ronald Lee, Univ Calif at Berkeley, 2011
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The “life cycle deficit” is consumption – labor income.
NTA estimates for the US in 2003
(Net Priv trans; net pub transfers; ABR=Asset Income – Saving)
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 Calif at Berkeley, 2011
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III. Population aging makes the
support ratio decline
• Using age profiles from 2007 and a given
population age distribution
Population  x  X Labor income  x 
Support Ratio  
Population  x  X Consumption  x 
Ronald Lee, UC Berkeley, March 31, 2011
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The support ratio declines by 12.5% from 2007 to 2050, or
by .3% per year
1.00
Support Ratio (2007=1.0)
0.98
0.96
0.94
0.92
0.90
0.88
0.86
0.84
0.82
2000
2010
2020
2030
2040
2050
2060
2070
2080
Year
Ronald Lee, UC Berkeley, March 31, 2011
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The fiscal support ratio declines by 14.6% from 2007 to
2050, or by .37% per year
1.00
Fiscal support ratio (2007 =1.0)
0.98
0.96
0.94
0.92
0.90
0.88
0.86
0.84
0.82
0.80
2000
2010
2020
2030
2040
2050
2060
2070
2080
Year
Ronald Lee, UC Berkeley, March 31, 2011
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IV. We would have to work 8 years
longer to offset the declining
support ratio in 2050 by this alone
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Years of Extension of YL Age Profile
From Peak to Maintain 2007 Support Ratio
Years of YL Profile Extension
10
8
6
Analysis uses 2007 age profiles to calculate the support ratio,
called SR(2007), which has a peak at age 51. The population is
based on SSA rates but estimated to have e0=84.5 years in 2050.
Each year that the new population would generate a support
ratio less than SR(2007), the age profile of labor income is
extended from age 51 by repeating the peak value. This graph
shows the cumulative 1-year extensions.
4
2
0
2000
2010
2020
2030
2040
2050
2060
2070
2080
Year
Ronald Lee, UC Berkeley, March 31, 2011
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Paying for old age consumption by working longer: How much
would we have to shift out the labor income schedule to keep
the support ratio at the 2007 level?
YL Age Profiles
Extended to Maintain 2007 Support Ratio
70000
Analysis uses 2007 age profiles to
calculate the support ratio, called
SR(2007), which has a peak at age
51. The population is based on
SSA rates but estimated to have
e0=84.5 years in 2050. Each year
that the new population would
generate a support ratio less than
SR(2007), the age profile of labor
income is extended from age 51
by repeating the peak value. This
graph shows the resulting age
profiles of labor income.
60000
YL Profiles ($2007)
50000
40000
30000
2007
2050
20000
2085
10000
0
0
-10000
10
20
30
40
50
60
70
80
90
Age
Ronald Lee, UC Berkeley, March 31, 2011
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V. Rising net worth will also help
• People accumulate wealth over the life cycle
and end up holding a lot in old age, on
average.
Ronald Lee, UC Berkeley, March 31, 2011
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Net Worth ($000s)
Net Worth by Age of Household
Head in US, 2007, from Survey
of Consumer Finance
1200
1000
800
600
400
200
0
0-19 20-34 35–44 45–54 55–64 65–74 75+
Age
Source: Survey of Consumer Finance
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All else equal, population aging from 2007 to 2050
would increase net worth per person age 20-64 by 30%
Ronald Lee, UC Berkeley, March 31, 2011
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But in addition…
• Switch from unfunded pensions to prefunded
ones (more in 401Ks, for example) will mean
more rapid increase in net worth
• Longer life, if expected, may motivate increased
retirement saving, and institutional plans may
mandate it. If unexpected, may deplete assets.
• Lower fertility in last forty years may (??) mean
higher retirement savings relative to the Baby
Boomers’ parents.
Ronald Lee, UC Berkeley, March 31, 2011
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Increased net worth
• yields higher asset income, augmenting
income and tax revenues
• If invested in the US would raise productivity
of labor.
Ronald Lee, UC Berkeley, March 31, 2011
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VI. Are the Baby Boomers benefiting
unfairly through public sector transfers
at the cost of future generations?
• Reform of entitlement programs is going to
happen, and I hope it happens soon.
• Assume future Social Security and Medicare
budgets are balanced 50-50 by raising taxes and
by cutting benefits.
• We calculate the net present value of what each
generation pays in taxes and receives in benefits
from Social Security and Medicare (Bommier, Lee,
Miller and Zuber, 2010).
Ronald Lee, UC Berkeley, March 31, 2011
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Net Present Value at birth of Social Security and Medicare benefits
minus taxes paid, assuming future program budgets are balanced 50-50
by taxes and benefits.
Baby Boom
Generations
Source: Bommier , Lee, Miller and Zuber (2010) PDR
Ronald Lee, UC Berkeley, March 31, 2011
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Both they and younger generations benefited
greatly from public education, too.
• Education is received at start of life
• Far more valuable than same amount received
when old.
• Putting it all together, Baby Boomers get less
from transfers than older and younger
generations.
Ronald Lee, UC Berkeley, March 31, 2011
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Net Present Value at birth of Social Security, Medicare and Public
Education minus taxes paid, assuming future program budgets are
balanced 50-50 by taxes and benefits.
Baby Boom
Generations
Source: Bommier , Lee, Miller and Zuber (2010) PDR
Ronald Lee, UC Berkeley, March 31, 2011
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VI. Summary
• The Baby Boom postponed population aging for decades, but now
will greatly accelerate it, requiring rapid adjustments.
• Higher per capita consumption by the elderly makes population
aging more costly.
• The support ratio will drop by one eighth from 2007 to 2050, or by
.3% per year, a mild decline.
• To offset this decline up to 2050 would require postponing
“retirement” by 8 years! Fortunately, there are other poss.
• Population aging will raise net worth per worker and per capita.
• The Baby Boomers get less from public transfer programs then
younger or older generations if we consider public education in
addition to Social Security and Medicare.
Ronald Lee, UC Berkeley, March 31, 2011
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