Macroeconomic Consequences of the Aging Baby Boom

Ronald LeeUC Berkeley

PAA Session “The Baby Boomers Turn 65”Thanks to Gretchen Donehower for help, to the National

Transfer Accounts project, and to NIA for support.

Ronald Lee, UC Berkeley, March 31, 2011 2

My plan

• No general equilibrium feedbacks; • For that, see Miguel Sanchez-Romero in

Session 29.• I will discuss some simple demographic

impacts, one at a time.

Ronald Lee, UC Berkeley, March 31, 2011 3

I. Baby Boom postponed population aging by 40 years

Ronald Lee, UC Berkeley, March 31, 2011 4

Calculated from SSA projections and hypothetical simulation.

Ronald Lee, UC Berkeley, March 31, 2011 5

Source: Calculated from Social Security Administration data and projections (2010 Trustees Report).

Gr rate 1.3%/yr1970-2010

Gr rate .4%/yr2010-2050

Ronald Lee, UC Berkeley, March 31, 2011 6

II. Rising consumption in old age and declining labor income in old

age exacerbated the consequences of population aging

Ronald Lee, UC Berkeley, March 31, 2011 7

US consumption (private plus public in-kind transfers), 1960, 1981 and 2007

(Ratio to average labor income ages 30-49).

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

2007

Public Other

Private Other

Owned HousingPrivate Health

PublicHealth

Public Education

Private Education

Source: US National Transfer Accounts, Lee and Donehower, 2011

Ronald Lee, Univ Calif at Berkeley, 2011 8

A half century of changing life cycle deficits (consumption – labor income)

Source: US National Transfer Accounts, Lee and Donehower, 2011

Ronald Lee, Univ Calif at Berkeley, 2011 9

The “life cycle deficit” is consumption – labor income. NTA estimates for the US in 2003

(Net Priv trans; net pub transfers; ABR=Asset Income – Saving)

-1

-0.5

0

0.5

1

1.5

2

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

Uni

ts o

f Avg

YL 3

0-49

Financing the Lifecycle DeficitComponents at Each Age

Pub Trans

ABR

Priv Trans

Ronald Lee, UC Berkeley, March 31, 2011 10

III. Population aging makes the support ratio decline

• Using age profiles from 2007 and a given population age distribution

Population X Labor incomeSupport Ratio

Population X Consumptionx xx x

Ronald Lee, UC Berkeley, March 31, 2011 11

0.82

0.84

0.86

0.88

0.90

0.92

0.94

0.96

0.98

1.00

2000 2010 2020 2030 2040 2050 2060 2070 2080

Supp

ort R

atio

(200

7=1.

0)

Year

The support ratio declines by 12.5% from 2007 to 2050, or by .3% per year

Ronald Lee, UC Berkeley, March 31, 2011 12

0.80

0.82

0.84

0.86

0.88

0.90

0.92

0.94

0.96

0.98

1.00

2000 2010 2020 2030 2040 2050 2060 2070 2080

Fisc

al su

ppor

t rati

o (2

007

=1.0

)

Year

The fiscal support ratio declines by 14.6% from 2007 to 2050, or by .37% per year

Ronald Lee, UC Berkeley, March 31, 2011 13

IV. We would have to work 8 years longer to offset the declining

support ratio in 2050 by this alone

Ronald Lee, UC Berkeley, March 31, 2011 14

0

2

4

6

8

10

2000 2010 2020 2030 2040 2050 2060 2070 2080

Year

s of Y

L Pr

ofile

Ext

ensi

on

Year

Years of Extension of YL Age ProfileFrom Peak to Maintain 2007 Support Ratio

Analysis uses 2007 age profiles to calculate the support ratio, called SR(2007), which has a peak at age 51. The population is based on SSA rates but estimated to have e0=84.5 years in 2050. Each year that the new population would generate a support ratio less than SR(2007), the age profile of labor income is extended from age 51 by repeating the peak value. This graph shows the cumulative 1-year extensions.

Analysis uses 2007 age profiles to calculate the support ratio, called SR(2007), which has a peak at age 51. The population is based on SSA rates but estimated to have e0=84.5 years in 2050. Each year that the new population would generate a support ratio less than SR(2007), the age profile of labor income is extended from age 51 by repeating the peak value. This graph shows the cumulative 1-year extensions.

Ronald Lee, UC Berkeley, March 31, 2011 15

Paying for old age consumption by working longer: How much would we have to shift out the labor income schedule to keep

the support ratio at the 2007 level?

-10000

0

10000

20000

30000

40000

50000

60000

70000

0 10 20 30 40 50 60 70 80 90

YL P

rofil

es ($

2007

)

Age

YL Age ProfilesExtended to Maintain 2007 Support Ratio

2007

2050

2085

Analysis uses 2007 age profiles to calculate the support ratio, called SR(2007), which has a peak at age 51. The population is based on SSA rates but estimated to have e0=84.5 years in 2050. Each year that the new population would generate a support ratio less than SR(2007), the age profile of labor income is extended from age 51 by repeating the peak value. This graph shows the resulting age profiles of labor income.

Ronald Lee, UC Berkeley, March 31, 2011 16

V. Rising net worth will also help

• People accumulate wealth over the life cycle and end up holding a lot in old age, on average.

Ronald Lee, UC Berkeley, March 31, 2011 17

0

200

400

600

800

1000

1200

0-19 20-34 35–44 45–54 55–64 65–74 75+

Net

Wor

th ($

000s

)

Age

Net Worth by Age of Household Head in US, 2007, from Survey

of Consumer Finance

Source: Survey of Consumer Finance

Ronald Lee, UC Berkeley, March 31, 2011 18

All else equal, population aging from 2007 to 2050 would increase net worth per person age 20-64 by 30%

Ronald Lee, UC Berkeley, March 31, 2011 19

But in addition…

• Switch from unfunded pensions to prefunded ones (more in 401Ks, for example) will mean more rapid increase in net worth

• Longer life, if expected, may motivate increased retirement saving, and institutional plans may mandate it. If unexpected, may deplete assets.

• Lower fertility in last forty years may (??) mean higher retirement savings relative to the Baby Boomers’ parents.

Ronald Lee, UC Berkeley, March 31, 2011 20

Increased net worth

• yields higher asset income, augmenting income and tax revenues

• If invested in the US would raise productivity of labor.

Ronald Lee, UC Berkeley, March 31, 2011 21

VI. Are the Baby Boomers benefiting unfairly through public sector transfers at

the cost of future generations?

• Reform of entitlement programs is going to happen, and I hope it happens soon.

• Assume future Social Security and Medicare budgets are balanced 50-50 by raising taxes and by cutting benefits.

• We calculate the net present value of what each generation pays in taxes and receives in benefits from Social Security and Medicare (Bommier, Lee, Miller and Zuber, 2010).

Ronald Lee, UC Berkeley, March 31, 2011 22

Net Present Value at birth of Social Security and Medicare benefits minus taxes paid, assuming future program budgets are balanced 50-50

by taxes and benefits.

Baby Boom Generations

Source: Bommier , Lee, Miller and Zuber (2010) PDR

Ronald Lee, UC Berkeley, March 31, 2011 23

Both they and younger generations benefited greatly from public education, too.

• Education is received at start of life• Far more valuable than same amount received

when old.• Putting it all together, Baby Boomers get less

from transfers than older and younger generations.

Ronald Lee, UC Berkeley, March 31, 2011 24

Net Present Value at birth of Social Security, Medicare and Public Education minus taxes paid, assuming future program budgets are

balanced 50-50 by taxes and benefits.

Baby Boom Generations

Source: Bommier , Lee, Miller and Zuber (2010) PDR

Ronald Lee, UC Berkeley, March 31, 2011 25

VI. Summary• The Baby Boom postponed population aging for decades, but now

will greatly accelerate it, requiring rapid adjustments.• Higher per capita consumption by the elderly makes population

aging more costly.• The support ratio will drop by one eighth from 2007 to 2050, or by

.3% per year, a mild decline. • To offset this decline up to 2050 would require postponing

“retirement” by 8 years! Fortunately, there are other poss.• Population aging will raise net worth per worker and per capita.• The Baby Boomers get less from public transfer programs then

younger or older generations if we consider public education in addition to Social Security and Medicare.