National Transfer Accounts:Introduction to Concepts

Andrew Mason

University of Hawaii

and East-West Center

Acknowledgments

• Research for this paper was funded by parallel grants from the National Institutes of Health to Ronald Lee and Andrew Mason, NIA R37 AG025247 and R01 AG025488; grants from MEXT.ACADEMIC FRONTIER to Nihon University Population Research Institutes, from the United Nations Population Fund (to NUPRI and EWC), from the MacArthur Foundation to EWC; and from IDRC to ECLAC, AERC, and EWC.

• The material presented here draws heavily on collaborative work with Ronald Lee and other researchers involved in the National Transfer Account project.

NTA is important because of thePopulation Age Transition

• Global phenomenon• In the middle of the transition

– Earlier: Share of children was increasing world-wide– Currently: Working-age population is increasing in

most countries– Future: Growth in elderly population will dominate

• Changes are unprecedented• Inevitable consequence of

– Continuing gains in life expectancy– Low and very low fertility most important

Benefits of Population Aging

• Living longer and healthier lives is a great social achievement.

• By bearing fewer children, parents have been able to invest more in each child and raise standards of living for their children and for themselves.

• Greater life expectancy and changes in age structure may be leading to greater wealth, capital deepening, and higher wages.

• Smaller populations, possible only with low fertility and older populations, yield important environmental benefits.

• But . . .

Population aging presents some major challenges

• Decline in share of working age population will lead to slower economic growth

• Sustainability of transfer systems– Public sector: Number of taxpayers will decline relative to

number of beneficiaries– Private sector: Number of working-age adults will decline

relative to dependent children and elderly• Reversal in transfer direction

– In past transfers have always been downward – from adults to their descendants

– Growth in public transfer systems and population aging are leading to increase in upward transfers

– Straining the social contract between generations? Leading to generational equity?

Importance of National Transfer Accounts

• Goal: Develop policies that respond effectively to the population age transition

• Requirement: a comprehensive and deep understanding of the generational economy:– Social and economic institutions– Economic flows across age groups– System of public and private obligations

Organization

• National Transfer Accounts: Key Concepts– Economic lifecycle – Age reallocation systems

• Two illustrative applications– Economic support ratio and demographic

dividends– Old age support system

NTA Concepts:Economic Lifecycle

Economic Lifecycle

• The economic lifecycle refers to the variation over our lifetime of our needs and our abilities

• Expresses itself in age variation in what we consume and what we produce

• In all contemporary societies we have extended periods at the beginning and the end of our lives, when we are consuming far more than we are producing.

Economic LifecyclePer Capita, Japan, 2004

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

0 10 20 30 40 50 60 70 80 90

Age

yen

Labor income

Consumption

Source: Ogawa et al., forthcoming; www.ntaccounts.org.

USA, 2003

Austria, 2000

Sweden, 2003

Germany, 2003

0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+ 0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+ 0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+ 0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+

Japan, 2004

Finland, 2004

Spain, 2000

Slovenia, 2004

0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+ 0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+ 0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+ 0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+

Taiwan, 1998

Korea, 2000

Hungary, 2005

Mexico, 2004

0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+ 0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+ 0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+ 0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+

Chile, 1997

Costa Rica, 2004

Uruguay, 1994

Brazil, 1996

0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+ 0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+ 0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+ 0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+

Thailand, 2004

Indonesia, 2005

China, 2002

Philippines, 1999

0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+ 0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+ 0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+ 0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+

India, 2004

Nigeria, 2004

Kenya, 1994

0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+ 0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+ 0

0.3

0.6

0.9

1.2

1.5

0 10 20 30 40 50 60 70 80 90+

0

1

2

1 11 21 31 41 51 61 71 81 91

YL

C

CF

CG

Source: Tung forthcoming.

Economic Lifecycle: Labor Income

• Labor income– Wages & salaries– Fringe benefits– Self-employment income– Pre-tax

• Profiles based on household surveys of wages and income

• Adjusted to match National Income and Product Accounts

• Reflects age variation in productivity, hours worked, unemployment, and labor force participation.

0

1000000

2000000

3000000

4000000

5000000

6000000

0 10 20 30 40 50 60 70 80 90

Age

yen

Economic Lifecycle: Consumption

• Consumption– Public and private– Education, health, and other

• Profiles based on surveys and administrative records

• Adjusted to match National Income and Product Accounts

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

4500000

0 10 20 30 40 50 60 70 80 90

Age

yen

• All estimates presented here are drawn from National Transfer Accounts

• Being constructed by research teams in 30 countries on six continents.

• Details available at www.ntaccounts.org.

Important features of the economic lifecycle

• In all contemporary societies there are large per capita lifecycle deficits at both the young and old ages.

• The per capita child deficit is rising as fertility declines, more is invested in human capital, and entry into the labor force is delayed.

• The per capita old age deficit is rising as age at retirement has declined and spending on health care has increased.

• The aggregate economic lifecycle is dominated by changes in age structure.

Aggregate Economic Lifecycle, Philippines, 1999

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

0 10 20 30 40 50 60 70 80 90+

Pes

os

(mil

lio

ns)

Source: Racelis and Salas. 2007.

-960 billion or 61% of labor

income

-65.5 billion; 4%

of labor income

+331billion

Huge lifecycle deficit for children primarily because Philippines has a relatively

young age structure.Consumption

Labor income

Aggregate Economic Lifecycle, US, 2003

0

50

100

150

200

250

0 10 20 30 40 50 60 70 80 90+

Do

llar

s (b

illi

on

s)

Source: Lee, et al. 2007; Lee, Mason, and Lee. 2008.

-2.1 trillion; 30% of labor

income

+1.4 trillion

-1.5 trillion; 21% of labor

income

In the US, the lifecycle deficits of the young and the old are similar, primarily reflecting US age structure.

Consumption

Labor income

NTA Concepts:Age Reallocation System

Age Reallocation System

• Age reallocation system is the counterpart of the economic lifecycle

• Economic system that shifts resources from one age group to another.

• Accounting: Fills the gap between consumption and labor income (flow constraint).

• All reallocations fall in two broad classes – Transfers

• Public transfers (cash and in-kind)• Private transfers (familial including intra-household)

– Asset-based reallocations• Asset income• Saving

The NTA Flow Account Identity

• Inflows– Labor Income– Asset Income– Transfer Inflows

• Outflows– Consumption– Saving– Transfer Outflows

Inflows Outflows

( ) ( ) ( ) ( ) ( ) ( )l aY x Y x x C x S x x

Lifecycle Deficit Net Transfers Asset-based Reallocations

Age Reallocations

( ) ( ) ( ) ( ) ( ) ( )l aC x Y x x x Y x S x

where x is age.

Components of Lifecycle Deficit, US 2003

-30000

-20000

-10000

0

10000

20000

30000

40000

50000

60000

70000

0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90

Age

US

$

Public Asset-Based Reallocations

Private Asset-Based Reallocations

Public Transfers

Private Transfers

Funding the Child Deficit

Net public transfers – public schools, value of public

goods allocated to children.

Net private transfers – intra-household transfers to children; largest in all

countries studied.

Asset-based flows – none for children, small for young

adults (mostly credit).

Components of Lifecycle Deficit, US 2003

-30000

-20000

-10000

0

10000

20000

30000

40000

50000

60000

70000

0 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90

Age

US

$

Public Asset-Based Reallocations

Private Asset-Based Reallocations

Public Transfers

Private Transfers

Funding the Old-age Deficit

Asset-based reallocations – asset income and dis-saving

from owner-occupied housing, private pension

funds, personal saving, etc.

Net public transfers – social programs (public pensions, health care, etc.), benefits

from general programs, less taxes paid.

Net private transfers – inter- and intra-household

transfers.

Application: Economic Support Ratio and Demographic

Dividends

A Simple Economic Model

( , )(1 )

C Y H K Ls

N L N

-- consumption per capita

-- saving rate

income per worker depends on ( , ) --

human capital (H) and physical capital (K)

-- workers per capita (support ratio)

C

Ns

Y H K

L

L

N

A Simple Economic Model: In Growth Terms

• Given the saving rate and the productivity the growth rate of consumption per capita has a one-to-one relationship to the growth rate of the support ratio.

( , )(1 )

[] is the rate of growth.

C Y H K Lgr gr s gr gr

N L N

gr

The Economic Support Ratio

Definition: Effective workers/Effective consumers– Effective workers is weighted sum of population using

labor income age profile to allow for variation in participation, hours worked, unemployment, and productivity.

– Effective consumers is weighted to allow for age variation in needs.

– Constructed using NTA estimates of consumption and labor income by age

0

0

ˆ,Effective WorkersSupport Ratio(t) =

Effective Consumers ˆ,

lPop x t y xt

t Pop x t c x

Economic Support Ratio, Nigeria

0.500

0.550

0.600

0.650

0.700

0.750

0.800

0.850

0.900

1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 2180

Su

pp

ort

Rat

io

Support ratio increases by 35% Support ratio declines by 15%

Support Ratios for Five Less Developed Countries, 1950-2100, Based on UN population projections and average LDC age profiles from NTA

India

Brazil Niger

ChinaS. Korea

0.5

0.6

0.7

0.8

0.9

1

1950 1970 1990 2010 2030 2050 2070 2090

Year

Eff

ecti

ve

Pro

du

cers

Per

Co

nsu

mer

2007

Summary of Support Ratio

• Many African countries have younger age structures than found elsewhere; hence, the support ratio starts at a very low level. Change over the age transition could be very large – around 40% or more.

• Many Asian and Latin American countries are in the final stages of their age transition.

• In Japan and Western countries economic support ratios are in decline. As a consequence, economic growth will be slower in the absence of compensating changes in the saving rate or productivity.

• Important issue is whether there are likely to be compensating changes and how will they be influenced by policy.

Application: Funding Old Age

Issues

• Do the elderly produce more of their consumption in some countries?

• How do the elderly fund their lifecycle deficit– Public transfers– Private transfers– Asset-based flows

Labor income in old age: 23 NTA countries

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

55 60 65 70 75 80 85 90+

Age

Lab

or

inco

me

rela

tive

to

co

nsu

mp

tio

n

Source: Lee and Mason forthcoming.

Support Systems for the Elderly

• Support systems vary widely in ways not closely connected to the level of development– Public transfers important in Latin America and

Europe– Private, familial transfers are important in Asia (Japan

excepted). – Reliance on assets varies widely.

• Importance: Excessive reliance on transfers in some countries undermine an important incentive for capital accumulation with potentially adverse implications for economic growth.

Representing the Old-age Support System: Triangle Graph

00000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000000

1/3

1/3

1/3

2/3

2/3

2/3

Assets

PublicTransfers

FamilyTransfers

Along a grid line, share of one component is constant; other two vary. Ex: Public transfers constant at 1/3.

Value at corner of triangle means that elderly rely

exclusively on that source – family transfers in this

example.

Each component funds 1/3 of the lifecycle deficit

Outside the triangle: negative

values. Here elderly have negative net

transfers.

Uruguay

Germany

USThailand

Taiwan

S. Korea

Philippines

Mexico

Finland

JapanCosta Rica

Austria

1/3

1/3

1/3

2/3

2/3

2/3

Assets

PublicTransfers

FamilyTransfers

Funding the Lifecycle Deficit, 65 and older, NTA countries, recent year

Net public transfers: Range from zero in Thailand and Philippines to over 2/3 in Germany, Finland, and Austria.

Net private transfers: Positive only for 3 Asian economies; zero in Japan; negative elsewhere.

Asset-based flows: Exceed 2/3 in four countries including US; Under 1/3 in Taiwan, Germany, Finland, and Austria.

For US 65+, RA=70.5%; TG=38.3%;

TF=-8.8%.

AT

ES

FI

SE

US

1/3

1/3

1/3

2/3

2/3

2/3

Assets

PublicTransfers

FamilyTransfers

TH

CLCN

CR SI

JPKR

TW

PH

MX

UY

♦ Europe & US ▲ Asia ■ Latin America

Age 75-84

AT

ES

FI

SE

US

PH

1/3

1/3

1/3

2/3

2/3

2/3

Assets

PublicTransfers

FamilyTransfers

CN

TH

TW

KR

SI

UY

JP

CL

CR

MX

♦ Europe & US ▲ Asia ■ Latin America

Age 85+