The Most Important Graph in the World: US Life Cycle Deficits, 1888-2003 Gretchen Donehower UC...

The Most Important Graph in the World:US Life Cycle Deficits, 1888-2003

Gretchen Donehower

UC Berkeley Department of Demography

September 27, 2006

Talk Outline

• Quick review of National Transfer Accounts project

• Introduce concepts, data and methods with current life cycle deficit age profiles (2003)

• Review life cycle deficits back to 1888

• Applications of age profiles and future research directions

National Transfer Accounts (NTA)

• www.ntaccounts.org

• National Income and Product Accounts (NIPA)– aggregate stocks and flows in an economy

• NIPA + age + transfer framework = NTA– who owns the stocks, who creates the flows?– how are flows transferred among individuals?

• Thanks NIA, thanks Ron!

Life Cycle Deficits, 2003123456789

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0

10000

20000

30000

40000

50000

60000

0 10 20 30 40 50 60 70 80 90

Do

llars

(U

S, 2

00

0)

Labor Income

Consumption

-20000

-10000

0

10000

20000

30000

40000

50000

0 10 20 30 40 50 60 70 80 90

Age

Do

llars

(U

S, 2

00

0)

Life CycleDeficit

Life Cycle Deficits, 2003123456789

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101112131415161718192021222324

0

10000

20000

30000

40000

50000

60000

0 10 20 30 40 50 60 70 80 90

Do

llars

(U

S, 2

00

0)

Labor Income

Consumption

-20000

-10000

0

10000

20000

30000

40000

50000

0 10 20 30 40 50 60 70 80 90

Age

Do

llars

(U

S, 2

00

0)

Life CycleDeficit

Age Age

29 57

Components of Labor Income, 2003

Labor Earnings

Self-Employment

Income

Fringe Benefits

0

20000

40000

0 10 20 30 40 50 60 70 80 90

Age

Do

llar

s (U

S,

2000

)

Components of Consumption, 2003

Public Other

Private Other

Private Durables

Private HealthPrivate Edu

Public Edu

Public Health

0

20000

40000

0 10 20 30 40 50 60 70 80 90

Age

Do

llar

s (U

S,

2000

)

Data

• Consumer Expenditure Surveys (CEX)• Non-institutional population only, for now• Early samples not nationally representative

– 1888: Industrial workers and their children– 1917: Industrial workers and their families

• Some profiles have to be estimated outside of household surveys– Public education consumption– Government-provided health care consumption

Missing Institutional Population

• Missing many elderly in nursing homes, and other institutionalized

• Their consumption of some things will be lower, others higher

• Probably not a big income profile impact

Institutionalized Proportion, by Age Group

19201940

1960

1980

2000

0

0.1

0.2

0.3

0-4

10-1

4

20-2

4

30-3

4

40-4

4

50-5

4

60-6

4

70-7

4

80-8

490

+

Age Group

Pro

port

ion

in I

nstit

utio

n

Source: IPUMS

Methods

• Two Parts:– Estimate the age shape– Adjust to NIPA “control totals”

• Age shape estimation:– Direct measurement (earnings)– Consumer weights (most private consumption)– Age regression (private education & health)– Proxy variable (fringe benefits)– External estimates (public education & health)

Labor Income and Consumption, 1888-2003

Age

Do

llar

s (

US

, 20

00)

1888

0

2000

4000

6000

8000

10000

0 20 40 60 80

1917

0

2000

4000

6000

8000

10000

12000

0 20 40 60 80

1935

0

2000

4000

6000

8000

10000

12000

14000

0 20 40 60 80

1960

0

5000

10000

15000

20000

25000

0 20 40 60 80

1981

0

10000

20000

30000

40000

50000

60000

0 20 40 60 80

2003

0

10000

20000

30000

40000

50000

60000

70000

0 20 40 60 80

Scaled Life Cycle Deficits, 1888-2003

Life Cycle Deficits

1888

-0.5

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Consumption

1888

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Labor Income

1888

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Graphs are all relative to average of Labor Income values for ages 40-45.

Scaled Life Cycle Deficits, 1888-2003

Life Cycle Deficits

1888

1917

-0.5

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Consumption

1888

1917

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Labor Income

1888

1917

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Graphs are all relative to average of Labor Income values for ages 40-45.

Scaled Life Cycle Deficits, 1888-2003

Life Cycle Deficits

1888

1917

1935

-0.5

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Consumption

1888

1917

1935

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Labor Income

1888

1917

1935

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Graphs are all relative to average of Labor Income values for ages 40-45.

Scaled Life Cycle Deficits, 1888-2003

Life Cycle Deficits

1888

1917

1935

1960

-0.5

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Consumption

1888

1917

1935

1960

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Labor Income

1888

1917

1935

1960

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Graphs are all relative to average of Labor Income values for ages 40-45.

Scaled Life Cycle Deficits, 1888-2003

Life Cycle Deficits

1888

1917

1935

1960

1981

-0.5

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Consumption

1888

1917

1935

19601981

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Labor Income

1888

1917

1935

1960

1981

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Graphs are all relative to average of Labor Income values for ages 40-45.

Scaled Life Cycle Deficits, 1888-2003

Life Cycle Deficits

1888

1917

1935

1960

1981

2003

-0.5

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Consumption

1888

1917

1935

19601981

2003

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Labor Income

1888

1917

1935

1960

1981

20030

0.5

1

0 10 20 30 40 50 60 70 80 90

Graphs are all relative to average of Labor Income values for ages 40-45.

Scaled Life Cycle Deficits, 1888-2003

1888

1917

1935

1960

1981

2003

-0.5

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Age

Do

llars

Pe

r D

olla

r o

f L

abo

r In

com

e A

ge 4

0-4

5

Components of Labor Income1888

Labor Earnings

Self-Employm

ent

Fringe Benefits

0

0.5

1

0 10 20 30 40 50 60 70 80 90

1917

0

0.5

1

0 10 20 30 40 50 60 70 80 90

1935

0

0.5

1

0 10 20 30 40 50 60 70 80 90

1960

0

0.5

1

0 10 20 30 40 50 60 70 80 90

1981

0

0.5

1

0 10 20 30 40 50 60 70 80 90

2003

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Components of Consumption1888

0

0.5

1

0 10 20 30 40 50 60 70 80 90

1917

0

0.5

1

0 10 20 30 40 50 60 70 80 90

1935

0

0.5

1

0 10 20 30 40 50 60 70 80 90

1960

0

0.5

1

0 10 20 30 40 50 60 70 80 90

1981

0

0.5

1

0 10 20 30 40 50 60 70 80 90

2003

Public Other

Private Other

Private Durables

Private Health

Private EduPublic

Edu

Public Health

0

0.5

1

0 10 20 30 40 50 60 70 80 90

Summary of Changes

• Young– Size of deficits increased somewhat– Composition changed to more education

• Old – Consistently larger deficits over time– More health-related consumption, public and private

• Working Ages– Recently, fewer years making smaller surplus?

Summary Measures:Average Age of Profile

• Constant age distribution (US 1950 is used here)

• Recent strong increases in average ages of consuming AND producing.

Average Age of Labor Income and Consumption

Consumption

Labor Income

Difference

25

30

35

40

45

1880 1920 1960 2000

Year

Ave

rag

e A

ge

0

5

10

15

20

Dif

fere

nce

In A

vera

ge

Ag

es

Summary Measures:Age of Life Cycle Deficit Transitions

• From first to last age of surplus (labor income > consumption)

• Recent shrinking of time span to accumulate surplus

Ages of Intersection of Labor Income and Consumption Profiles

Early Age

Later Age

Difference

20

30

40

50

60

70

1880 1920 1960 2000

Year

Ag

e o

f In

ters

ecti

on

5

15

25

35

45

55

Dif

fere

nce

In A

ges

Paying for the Life Cycle Deficit

• Since 1929 at least, we have never paid for all of consumption with labor earnings

• So we must be using capital income and borrowing

• Even more in recent years?

Consumption/Labor Income(US Aggregate Totals)

0.8

1

1.2

1.4

1.6

1930 1940 1950 1960 1970 1980 1990 2000

What’s Next?

• Fine tuning estimates presented today• Cross-national comparison• Applications of consumption and labor income profiles

– Modeling economic change in the context of demographic change (demographic dividends)

– Budget projections

– How profiles respond to institutional change

• On to transfers and reallocations! (The really fun stuff…)