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Transfers, Capital, and Consumption over the Demographic Transition: An International Comparison Andrew Mason University of Hawaii at Manoa Ronald Lee University of California Acknowledgements • Support – National Institutes of Health NIA 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) 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 W (t ) T (t ) W (t ) k p W (t ) T (t ) A(t ) p p W (t ) lifecycle wealth of all adults T k (t ) child transfer wealth of all adults W p (t ) lifecycle pension wealth of all adults T p (t ) transfer pension wealth of all adults A(t ) assets of all adults Transfer policy Pension policy: (t ) T (t ) / W (t ) is exogenous and constant p p Public transfers to children: (t ), the familial share of child costs, f is exogenous and constant. Remainder is public cost (labor income taxed) Simulations Population United States Nigeria Brazil China Lifecycle Age profiles US 2000 Taiwan 1977 US 2000 Taiwan 1977 Transfer share ( ) 0.35 0.65 0.65 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 oldage 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