private asset-based reallocations andrew mason nta workshop june 2010
TRANSCRIPT
Private Asset-Based Reallocations
Andrew Mason
NTA Workshop
June 2010
Objectives
• Preliminaries
• Conceptual foundations for private asset-based flows
• NTA foundations: principles and methods
• Illustrative results
• Conclusions
• Assignment
Asset-based Reallocations Defined
• Asset-based reallocations are defined as the net flows to each age that arise from the existence of assets.
• Inflows consist of asset income and dis-saving.• Outflows consist of saving and negative asset
income, e.g., interest expense.• Asset-based reallocations are one of two
economic mechanisms for shifting resources across age.
The Flow Account Identity
• Inflows– Labor Income– Asset Income– Transfer Inflows
• Outflows– Consumption– Saving– Transfer Outflows
Inflows Outflows
( ) ( ) ( ) ( ) ( ) ( )l aY a Y a a C a S a a
Lifecycle Deficit Asset-based Reallocations Net Transfers
Age Reallocations
( ) ( ) ( ) ( ) ( ) ( )l aC a Y a Y a S a a a
Conceptual foundations
• Lifecycle saving model
• Credit and age reallocations
• NTA foundations– Willis 1988– Lee 1994
Lifecycle Saving Model
• LC saving model most closely associated with Modigliani.
• Simplest model– People are lifetime planners– Saving is governed by simple economic lifecycle
consisting of two periods: work and retirement. – People save during their working years and use that
saving to fund their retirement relying on asset income and dis-saving.
– No bequests. People know when they are going to die or rely on costless annuities to avoid accidental bequests.
Implications of LC Model
• Aggregate saving rates higher in growing economy (Modigliani).
• Implications of changes in age structure for saving and wealth (Tobin)
• Public PAYGO pension systems crowd out private saving (Feldstein)
• These issues have been explored using NTA concepts and estimates (Lee, Mason, and others).
BackgroundLC model controversies• Saving is motivated by bequests rather
than lifecycle needs (Kotlikoff)
• Irrelevant to developing countries which rely on familial support systems
• People do not engage in long-term planning (Attanasio, Carroll, Deaton and behavioral economists)
Credit and the Economic Lifecycle
• Credit can also be used to reallocate resources across age.
• Individuals can borrow at one age and repay at another.
• Credit and other financial flows always have a counterpart. – Domestic counterpart: persons of a different
age. – Foreign counterpart.
Credit and the Economic Lifecycle
• International differences in population age structure can lead to international financial flows (Taylor and Williamson 1994).
• Use of credit to fund retirement is limited because there is no generation that can serve as the natural domestic counterpart (Samuelson 1958).
• Credit can be used to fund limited consumption during early adult years. Borrow from workers and repay them when they are retirees. This provides a limited role for credit as a mechanism for funding pensions.
Relationship between NTA and Theory• NTA estimates do NOT assume any
particular behavioral theory.
• NTA is an accounting framework.
• NTA estimates are useful, however, for considering many of the issues that arise in the context of the lifecycle saving model and other theories about age reallocations.
Private Asset-based ReallocationsNTA principles and methods
Important Concepts
• Assets and asset flows– An economic asset is a store of value over which ownership
rights are enforced, individually or collectively, and from which the owner may derive economic benefits by holding it or using it over a period of time (UNSNA 1993, p 56).
– Asset flows consist of asset income and saving• Private asset-based flows
– Asset flows to and from households, corporations, and NPISHs.• Financial flows with public and private counterparts
– Interest on public debt is an outflow for government and an inflow for owners of government issued securities.
– The sale of government securities produces an inflow to the government (dis-saving) and an outflow from the party acquiring the government security.
Types of Private Assets
Types of Assets Examples
Non-financial assets
Produced assets Structures, vehicles, equipment; inventories; art, jewelry, etc.
Non-produced assets Land, mineral and energy resources
Financial assets and liabilities
Equity and investment funds Corporate shares
Loans and debt securities Mortgages, student loans, credit card debt, bonds, bills
Insurance, annuities, pensions Annuity entitlements, pension entitlements
OtherCurrency, financial derivatives
Types of Private Asset Income
Types of Assets Asset income inflow/outflow
Non-financial assets
Produced assets (Capital) Operating surplus; capital’s share of mixed income
Non-produced assets Rent
Financial assets and liabilities
Equity and investment funds Dividends received (inflow) and paid (outflow)
Loans and debt securities Interest received (inflow) and paid (outflow)
Insurance, annuities, pensions Class discussion
OtherVarious
Capital Income
• Three components of capital income measured relying on SNA– Net operating surplus of corporations– Net operating surplus of households– Capital’s share of net mixed income
• Important: all measures are net of depreciation. • Surplus of corporations and mixed income must be
adjusted to incorporate taxes on production and net subsidies
• Operating surplus is equal to the imputed rent of owner-occupied housing
• Capital’s share of mixed income is not reported in SNA. We assume 1/3 of mixed income is return to capital.
Age Profiles of Capital Income
• NTA based on assumption that all assets are held by the household head.
• Operating surplus of corporations: age profile of property income (dividends, interest and rent).
• Operating surplus of households: age profile of imputed rent of owner-occupied housing.
• Capital’s share of mixed income: age profile of income from business, farms, etc.
Property Income
• In UN SNA property income consists of:– interest– distributed income of corporations– reinvested earnings on direct foreign investment– property income to insurance holders, and– rent.
• Some components not always available. • Property income is different than capital income because
all property income has a counterpart, i.e., inflows and outflows are matched.
• Counterpart may be ROW. For residents property income inflows will differ from outflows by net property income of ROW.
Age Profiles of Property Income
• Inflows – All inflows go to the household head– Age profile of property income
• Outflows– Interest paid by households: interest expense
by age of household head. – All other outflows use age profile of property
income.
Asset Income Age Profiles
Private Saving
• Private saving is the balancing items in NTA (and national income accounts)
• Private saving at each age is calculated as:
( ) ( ) ( ) ( )
private saving
public asset-based reallocations( )
private asset income( )
lifecycle
( )
net
de
transfe
ficit( )
rs( )
f g f
f
g
f
s x x YA x LCD x
s
x
Y
x R
A x
L
RA
D x
A
x
C
Private Saving
• Private saving for children should be approximately zero because children are not household heads.
• Private saving not exactly zero for children because of approximation errors introduced through smoothing.
• Summed over all ages, private saving in NTA is equal to net national saving in SNA.
Illustrative Results
Overall pattern of asset-based flows (average of all countries)
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
18 28 38 48 58 68 78 88
Re
lati
ve
to
Yl(
30
-49
)
Net transfers
Asset-based reallocations
Lifecycle deficit
Overall pattern of asset-based flows (average of all countries)
• People at all adult ages are relying on asset-based flows.
• Elderly are funding deficit (lifecycle)
• Prime age adults funding net transfers.
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
18 28 38 48 58 68 78 88R
ela
tiv
e t
o Y
l(3
0-4
9)
Net transfers
Asset-based reallocations
Lifecycle deficit
Components of asset-based flows (average of all countries)
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
18 28 38 48 58 68 78 88
Rel
ativ
e to
Yl(
30-4
9)
Saving
Asset income
Asset-based reallocations
Components of asset-based flows (average of all countries)
-0.1
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
18 28 38 48 58 68 78 88
Rel
ativ
e to
Yl(
30-4
9)
Saving
Asset income
Asset-based reallocations
Some dis-saving at young adult ages
Saving increases with age, but never exceeds asset
income. Lifecycle
surplus is not saved. It funds
transfers.
Saving is high for elderly; no
dis-saving.
Role of assets in old-age support
90
85
807570
65
65
85
8075
70
90
1/3
1/3
1/3
2/3
2/3
2/3
Assets
PublicTransfers
FamilyTransfers
US
KR
Assets and old-age support
KoreaAsset-based flows
much less important for the
older-old.Familial transfers are making up the
difference.
United StatesAsset-based flows
much less important for the
older-old.Public transfers
are making up the difference.
SI
AT
ES
FI
SE
US
JP
TH
1/3
1/3
1/3
2/3
2/3
2/3
Assets
PublicTransfersFamily
Transfers
MX
UY
CL
TWCR
CN
SIKR
Age 65-74
♦ Europe & US ▲ Asia ■ Latin America
Cross-country comparison, persons 65-74.
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
Cross-country comparison, persons 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
Cross-country comparison, persons 85+.
Age profiles of asset income and saving
Asset-based reallocations, per capita values, high-income countries
-0.1
-0.05
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0 20 40 60 80 100No
rma
lize
d o
n Y
l(3
0-4
9)
Saving
Asset income
Asset-based reallocations
Asset-based reallocations, per capita, middle-income countries
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
0 20 40 60 80 100
No
rma
lize
d o
n Y
l(3
0-4
9)
Saving
Asset income
Asset-based reallocations
Note that scale is very different than for high income countries. Values are much greater in
middle-income countries.
Concluding Observations
• Saving profile in NTA– Similar to other commonly constructed age
profiles which report saving rates by age of household head
– NTA measure of saving is broader• Private saving is used by assigning corporate
saving to households• Usually saving profiles are based on household
saving
Concluding observations
• Use of household head’s age– Asset income and saving profiles do not fully capture
within household details• Young adults may be accumulating wealth while living in
households of their parents• Older adults may retain ownership of assets while living in a
household headed by adult offspring
– Implications of this approach can be analyzed to some extent using estimates of private intra-household transfers that are saved. But these results depend on model of intrahousehold transfers.
Concluding Observations
• Saving provides a partial picture about how assets evolve over time– Bequests– Other capital transfers
• Dowry, bride price and similar arrangements in rich countries• Transition in household headship
– Changes in asset prices
• High asset income of young and middle-aged adults relative to saving suggests that these mechanisms are important.
Concluding Observations
• Reality of asset-based flows is much more complex that economic models and pre-conceptions
• Elderly do rely on assets in retirement except where public transfer programs are very substantial or in transition economies (China)
• Elderly do not appear to dis-save, however. In fact, there saving rates are very high.
• Prime age adults are relying heavily on assets. Their labor income is insufficient to fund their own consumption plus net transfers to other generations.
• Asset-based flows are very important in lower income countries.
Assignment
• Construct asset-based flows for your country using RA.v2.xls.
• Required inputs– Aggregate controls– Age profiles of asset income– NTA estimates of LCD and net transfers
• Illustrative example for Germany is available on the website.
Mahalo
Further ReadingsEssentialNTA ManualFurther ReadingSamuelson, P. 1958. "An Exact Consumption Loan Model of Interest with or without the
Social Contrivance of Money", in Journal of Political Economy,Vol. 66.Tobin, J. 1967. Life Cycle Saving and Balanced Economic Growth. in W. Fellner (ed.)
Ten Economic Studies in the Tradition of Irving Fisher. New York, Wiley.Willis, R. J. 1988. Life cycles, institutions and population growth: A theory of the
equilibrium interest rate in an overlapping-generations model. in R. D. Lee, W. B. Arthur, G. Rodgers (eds.) Economics of Changing Age Distributions in Developed Countries. Oxford, Oxford University Press.
Lee, R. D. 1994. The Formal Demography of Population Aging, Transfers, and the Economic Life Cycle. in L. G. Martin, S. H. Preston (eds.) Demography of Aging. Washington, D.C., National Academy Press.
Feldstein, M. 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation", in Journal of Political Economy,Vol. 82, No. 5.
Attanasio, O. P., Weber, G. 2010. "Consumption and saving: Models of intertermporal allocation and their implications for public policy", in NBER Working Paper,Vol. 15756.