Transfers, Capital, and Consumption over the

Demographic Transition: An International Comparison

Andrew MasonUniversity of Hawaii at Manoa

Ronald LeeUniversity of California

Acknowledgements

• Support – National Institutes of HealthNIA R01 AG025488 and AG025247

• Computational work – Diana Wongkaren, Turro Wongkaren, Pablo Lattes, Tim Miller, and Gretchen Stockmayer

Key Ideas

• Demographic transition is from high youth dependency to high old age dependency.

• During the transition, low dependency yields the first demographic dividend.

• Children and the elderly are similar in that neither work; however,

• Elderly contribute to economic growth by accumulating assets.

• This will lead to a second dividend.

Objective of Paper

• Use a simulation model that incorporates detailed empirical data to analyze how – the demographic transition– the importance of family support systems– public policy– features of the economic life cycle

• Influence asset demand, economic growth, and consumption

Theoretical Model

• Economic lifecycle dictates that adults support children and accumulate pension wealth

• Children are supported through a combination of public and familial transfers

• Pension wealth comes in two exhaustive, mutually exclusive forms– Pension transfer wealth (from younger and future

generations)– Assets

• Composition of pension wealth is determined by policy

Theoretical Model

• In the conventional lifecycle model, consumption at each age reflects tastes and individualistic lifetime budget constraint

• In this model, consumption at each age is governed by altruism across generations and general standards of living

Theoretical Model

• Closed form solution for the steady-state

• Dynamics– Solve for steady-state in 2300– Use backward recursion to solve for the paths

of assets, consumption, and other macroeconomic variables

– Work on a forward recursion solution is underway

Data

• UN Population Data– 1950-2050: World Pop Prospects 2005– 2050-2300: World Pop to 2300

• Economic lifecycle– Japan: Ogawa and Matsakura (2005)– South Korea: An and Gim (2006)– Thailand: Chawla (2006)– US and Taiwan: Lee, Lee, & Mason (2005)

Figure 2A. Per Capita Labor Incom e and Consum ption, Taiw an (1977)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90

AgeSource: See Lee, Lee and M ason (2005) for methods and data sources for these estimates.

Figure 2B. Per Capita Labor Incom e and Consum ption, US (2000)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90

Age

Source: See Lee, Lee and M ason (2005) for methods and data sources for these estimates.

Limitations of Current Analysis

• Methodology for simulating dynamic results requires further testing and evaluation.

• Model does not incorporate important feedbacks – Small open economy– Accumulation of assets does not lead to changes in

interest rates or changes in labor productivity– In future work this will be a key feature of the analysis

Analysis of Economic Lifecycles and Steady States

• Asset demand is increased by – Fertility decline – Increased life expectancy – More rapid economic growth – Lower interest rates – US type economic life cycle with high old age

consumption– Early retirement

• See paper for detailed calculations

Components of Lifecycle Wealth

( ) ( ) ( )

( ) ( ) ( )

( ) lifecycle wealth of all adults

( ) child transfer wealth of all adults

( ) lifecycle pension wealth of all adults

( ) transfer pension wealth of all adults

(

k p

p p

k

p

p

W t T t W t

W t T t A t

W t

T t

W t

T t

A

) assets of all adultst

Transfer policy

Pension policy:

Public transfers to children:

( ) ( ) / ( ) is exogenous and constant p pt T t W t

( ), the familial share of child costs,

is exogenous and constant. Remainder

is public cost (labor income taxed)

f t

Simulations

Population

Lifecycle

Age profiles

Transfer share

United States US 2000 0.35

Nigeria Taiwan 1977 0.65

Brazil US 2000 0.65

China Taiwan 1977 0.35

Interest rate 0.03

Productivity growth 0.015

Familial transfers to children 0.67

( )

Key Points

• For young populations, simulated assets and pension wealth are negative– Costs of children exceed resources of parents– Three possible outcomes

• Accumulate foreign debt to finance child costs• Reduce spending on children below the relative

level estimated for Taiwan in 1977 or the US in 2000

• Rely exclusively on transfer wealth to support old-age consumption

Key Points

• Fertility decline leads to greater wealth (huge differences in Tk/Y across countries in the plots)– Rise in support ratio leads to increased per capita

consumption at all ages and greater accumulation for retirement

– Aging of adult population more wealth– If fertility decline leads to a rise in spending on

children relative to adults• Assets will increase by less• Human capital may rise by more (video games or

education?)

Key Points

• Increased longevity and population aging lead to greater wealth– In US, ratio of assets to labor income

increases • Doubles between 1950 and 1970• Doubles again between 1990 and 2090

– In Brazil, ratio of assets to labor income increases by about 500% between 1950 and 2000

Key Points

• Effects on consumption are quite modest – Small open economy assumption; no capital

deepening effects, but large international capital flows and spill-overs to other countries

– In a closed economy, a doubling of K/Y raises labor income and consumption by 40%, so we expect much bigger effects in fuller model.

– Global aging will produce similar effects on a global scale.

In Conclusion

• If aging leads exclusively to expanded public and familial transfer programs, economy is a fixed pie divided among more consumers.

• If transfer programs are kept in check, aging leads to greater assets, a larger pie, and a second demographic dividend.

In Conclusion

• Does not mean that consumption will rise relative to productivity, but that it will decline by less than the decline in the support ratio.

• Consumption is lower per year of life, but lifetime consumption is higher