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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
10111213141516171819202122232425123456789
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
Life Cycle Deficits, 2003123456789
10111213141516171819202122232425123456789
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…)