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 2 I. Baby Boom postponed population aging by 40 years Ronald Lee, UC Berkeley, March 31, 2011 3 Calculated from SSA projections and hypothetical simulation. Ronald Lee, UC Berkeley, March 31, 2011 4 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 6 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 7 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 8 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 9 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 10 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 11 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 12 IV. We would have to work 8 years longer to offset the declining support ratio in 2050 by this alone Ronald Lee, UC Berkeley, March 31, 2011 13 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 14 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 15 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 16 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 Ronald Lee, UC Berkeley, March 31, 2011 17 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 18 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 19 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 20 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 21 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 22 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 23 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 24 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 25