N ational T ransfer A ccounts 1 Private Asset-based Reallocations: An Introduction Andrew Mason University of Hawaii and the East-West Center

NNational ational TTransfer ransfer AAccountsccounts11

Private Asset-based Private Asset-based Reallocations: Reallocations: An IntroductionAn Introduction

Andrew MasonAndrew Mason

University of HawaiiUniversity of Hawaii

and the East-West Centerand the East-West Center

National Transfer Accounts2

OutlineOutline

►Overview of Asset-based ReallocationsOverview of Asset-based Reallocations► Implementation with Illustrative ValuesImplementation with Illustrative Values►ConclusionsConclusions


Asset-based Reallocations:Asset-based Reallocations:Two MechanismsTwo Mechanisms► Assets generate interage flows in two ways:Assets generate interage flows in two ways:► Asset-incomeAsset-income

Assets yields positive asset income, an inflowAssets yields positive asset income, an inflow Debt yields negative asset income, an outflowDebt yields negative asset income, an outflow

► SavingSaving Acquiring an asset or disposing of debt, Acquiring an asset or disposing of debt,

generates an outflowsgenerates an outflows Disposing of an asset or acquiring debt, Disposing of an asset or acquiring debt,

generates an inflow. generates an inflow. ► Asset-based reallocations are incorporated Asset-based reallocations are incorporated

into NTA based on the flow constraintinto NTA based on the flow constraint


The Flow Account IdentityThe Flow Account Identity

► InflowsInflows Labor IncomeLabor Income Asset IncomeAsset Income Transfer InflowsTransfer Inflows

► OutflowsOutflows ConsumptionConsumption SavingSaving Transfer OutflowsTransfer 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


Forms of Assets and Asset Forms of Assets and Asset IncomeIncome► CapitalCapital

Yields capital income Yields capital income Examples: Equipment, commercial structures, vehicles, Examples: Equipment, commercial structures, vehicles,

inventories, homes.inventories, homes.► Financial assetsFinancial assets

All financial assets have a counterpart (counterpart of credit is All financial assets have a counterpart (counterpart of credit is debt, for example)debt, for example)

Yields property incomeYields property income Outflow for one unit and inflow for another unitOutflow for one unit and inflow for another unit For the economy (private, public and ROW combined) property For the economy (private, public and ROW combined) property

income and each component must sum to zero.income and each component must sum to zero.► Examples of property income: Interest, dividends, land rent, Examples of property income: Interest, dividends, land rent,

and royalties. and royalties. ► See UNSNA 1993 for a more complete and detailed discussion See UNSNA 1993 for a more complete and detailed discussion

of assets and asset incomeof assets and asset income


Use of Asset-based Use of Asset-based ReallocationsReallocationsFeatures of assets limit their use:Features of assets limit their use:

► Children do not own assets as a general rule.Children do not own assets as a general rule.► Capital can only be used to reallocate resources Capital can only be used to reallocate resources

from young ages to old ages.from young ages to old ages.► Because financial assets always have a counterpart, Because financial assets always have a counterpart,

demand must be matched by supply. If one age demand must be matched by supply. If one age group is a net debtor, for example, another age group is a net debtor, for example, another age group, the government, or the ROW must be a net group, the government, or the ROW must be a net creditor.creditor.

► Constraints on indebtedness limit the use of debt Constraints on indebtedness limit the use of debt for downward reallocations by young adults.for downward reallocations by young adults.


Possible Uses of ARPossible Uses of AR

► Lifecycle saving: accumulating assets Lifecycle saving: accumulating assets during the working ages to support during the working ages to support retirement.retirement.

► Saving to fund transfersSaving to fund transfers Saving to fund downward transfers (college Saving to fund downward transfers (college

saving plans)saving plans) Saving to fund transfers to elderly parentsSaving to fund transfers to elderly parents

► Bequest savingBequest saving Funding retirement using inheritancesFunding retirement using inheritances Saving to generate bequestsSaving to generate bequests

► Other saving models may have incidental Other saving models may have incidental effects on interage flows effects on interage flows


Lifecycle Saving for Lifecycle Saving for RetirementRetirementAge 45-64: Save labor income of $1000 per year plus all Age 45-64: Save labor income of $1000 per year plus all

asset income. asset income.

Age 65-90: Dis-save a constant amount in each year. Age 65-90: Dis-save a constant amount in each year.

-3000

-2000

-1000

0

1000

2000

3000

4000

45 50 55 60 65 70 75 80 85 90

Asset-based reallocations

Saving

Asset income


AR Patterns for Other UsesAR Patterns for Other Uses

► Saving to fund transfersSaving to fund transfers Saving by young adultsSaving by young adults AR inflows to adults with costly children or AR inflows to adults with costly children or

elderly parentselderly parents► Bequest savingBequest saving

Saving by working age adultsSaving by working age adults Limited dis-saving by older adultsLimited dis-saving by older adults

► Reliance on inheritanceReliance on inheritance Limited saving by working age adults Limited saving by working age adults Significant AR inflows at older ages (asset Significant AR inflows at older ages (asset

income from inherited assets). income from inherited assets).


Complexities in Interpreting Complexities in Interpreting AR PatternsAR Patterns► Age patterns reflect multiple objectives and Age patterns reflect multiple objectives and

influencesinfluences► Many theories describe lifetime behavior of a cohort; Many theories describe lifetime behavior of a cohort;

data are for a cross-section. data are for a cross-section. ► Behavior of any age group reflects its history. Older Behavior of any age group reflects its history. Older

age groups often have very different economic and age groups often have very different economic and demographic histories than younger age groups. demographic histories than younger age groups.

► Patterns may reflect important social changes Patterns may reflect important social changes (decline of extended family) or institutional change (decline of extended family) or institutional change (emergence of financial markets).(emergence of financial markets).

► AR for any year may reflect important time effects, AR for any year may reflect important time effects, e.g., a financial crisis or the implementation of a e.g., a financial crisis or the implementation of a new policy. new policy.


ImplementationImplementation

►Definitions and Aggregate Controls Definitions and Aggregate Controls (Relationship to UNSNA 1993)(Relationship to UNSNA 1993) Private sectorPrivate sector Asset incomeAsset income Saving Saving

►Constructing Age Profiles Constructing Age Profiles Lifecycle modelLifecycle model Bequests and other capital transfersBequests and other capital transfers Other modelsOther models


What does private mean?What does private mean?

► Private refers to all inflows to and outflows from the Private refers to all inflows to and outflows from the household sector, the corporate sector (financial household sector, the corporate sector (financial and non-financial), and non-profit institutions and non-financial), and non-profit institutions serving households (NPISHs).serving households (NPISHs).

► Public enterprise is part of the private sector.Public enterprise is part of the private sector. Operating surplus is private asset incomeOperating surplus is private asset income Dividends and other distributions by public enterprise to Dividends and other distributions by public enterprise to

the government are part of public asset income the government are part of public asset income ► Intersectoral flows between the private sector, the Intersectoral flows between the private sector, the

government and ROW are importantgovernment and ROW are important Public debt leads to private asset income (interest)Public debt leads to private asset income (interest) Foreign investment leads to flows between private and Foreign investment leads to flows between private and

ROWROW


Computing Asset IncomeComputing Asset Income

► Asset income consists of capital income and Asset income consists of capital income and property incomeproperty income

► Capital income is the return to capital net of Capital income is the return to capital net of depreciationdepreciation Three components of capital incomeThree components of capital income

► Operating surplus of corporationsOperating surplus of corporations► Capital’s share of mixed incomeCapital’s share of mixed income► Operating surplus of households (return to owner-occupied Operating surplus of households (return to owner-occupied

housing) and other consumer durables (if possible)housing) and other consumer durables (if possible) No exact counterpart in SNA because mixed income is not No exact counterpart in SNA because mixed income is not

allocated between return to capital and return to laborallocated between return to capital and return to labor Capital income is the estimated value net of subsidies and Capital income is the estimated value net of subsidies and

taxes on production. taxes on production.


Computing Asset Income Computing Asset Income (cont)(cont)► Property incomeProperty income

InterestInterest Other property incomeOther property income

► Dividends and similar distributionsDividends and similar distributions► Rent (returns to land, royalties on fossil fuels and other Rent (returns to land, royalties on fossil fuels and other

sub-soil minerals)sub-soil minerals)► Other less important componentsOther less important components

Important check on property income:Important check on property income:► For the economy as a whole property income and each For the economy as a whole property income and each

component (interest, dividends, rent, etc.) must sum to component (interest, dividends, rent, etc.) must sum to zero.zero.

► Private flows are non-zero and balanced by public flows Private flows are non-zero and balanced by public flows or ROW flows.or ROW flows.


Aggregate Controls:Aggregate Controls:Capital IncomeCapital Income►Operating surplus of corporations and Operating surplus of corporations and

NPISHsNPISHs►Capital’s share of mixed incomeCapital’s share of mixed income►Operating surplus of households Operating surplus of households

(imputed rent of owner-occupied (imputed rent of owner-occupied housing)housing)

►Taxes on products and production; Taxes on products and production; subsidiessubsidies


Sources of data and Sources of data and adjustmentsadjustments► Source: NIPASource: NIPA

Operating surplus for each sectorOperating surplus for each sector Mixed incomeMixed income Taxes on products and productionTaxes on products and production SubsidiesSubsidies

► AdjustmentsAdjustments Mixed income includes returns to labor; assume Mixed income includes returns to labor; assume

that 1/3 is a return is capital incomethat 1/3 is a return is capital income Taxes and subsidiesTaxes and subsidies

► Follow same procedures used elsewhereFollow same procedures used elsewhere► As a broad rule taxes on production net of subsidies are As a broad rule taxes on production net of subsidies are

allocated between capital income and labor income in allocated between capital income and labor income in proportion to their relative income shares.proportion to their relative income shares.


Capital income in TaiwanCapital income in TaiwanAn IllustrationAn Illustration

Capital Income and Components, Taiwan, 1998, NT$ MillionsCapital Income and Components, Taiwan, 1998, NT$ Millions

Capital incomeCapital income 2,878,451 2,878,451

Operating surplus, netOperating surplus, net 2,605,429 2,605,429

Operating surplus of corporations and NPISHs , Operating surplus of corporations and NPISHs , netnet 1,980,109 1,980,109

Operating surplus of households, netOperating surplus of households, net 625,320 625,320

Capital share of mixed income, netCapital share of mixed income, net 173,112 173,112

Other taxes less subsidies on productionOther taxes less subsidies on production 99,909 99,909


Aggregate Controls: Aggregate Controls: Property IncomeProperty Income► Property income is available in SNA by Property income is available in SNA by

sector and type of property incomesector and type of property income► Mapping of NIPA sectors NTA sectorsMapping of NIPA sectors NTA sectors

General government General government public public Households, NPISHs, corporations Households, NPISHs, corporations private private ROW ROW ROW ROW

► Exact classification of property income Exact classification of property income varies, but for NTA important to know:varies, but for NTA important to know: Interest, household and other separatelyInterest, household and other separately Other property income, i.e., all property income Other property income, i.e., all property income

other than interest combined.other than interest combined.


Property Income in TaiwanProperty Income in TaiwanAn ExampleAn ExampleProperty Income and Components, Taiwan, 1998, NT$ Property Income and Components, Taiwan, 1998, NT$

MillionsMillions

TotalTotal PrivatePrivate ROWROW PublicPublic

Property income, netProperty income, net 00 -172,192-172,192 -81,097-81,097 253,289253,289

Property income, Property income, inflowsinflows 3,883,8033,883,803 3,361,8633,361,863 127,902127,902 394,038394,038

Property income, Property income, outflowsoutflows -3,883,803-3,883,803 -3,534,056-3,534,056 -208,999-208,999 -140,748-140,748

Interest, netInterest, net 00 218,625218,625 -121,713-121,713 -96,912-96,912

InflowsInflows 2,606,2302,606,230 2,487,2852,487,285 75,10875,108 43,83743,837

OutflowsOutflows -2,606,230-2,606,230 -2,268,661-2,268,661 -196,821-196,821 -140,748-140,748

Other property income, Other property income, netnet 00 -390,817-390,817 40,61640,616 350,201350,201

InflowsInflows 1,277,5731,277,573 874,578874,578 52,79452,794 350,201350,201

OutflowsOutflows -1,277,573-1,277,573 -1,265,395-1,265,395 -12,178-12,178 00


Intersectoral FlowsIntersectoral Flows

► A complete set of accounts requires data (or A complete set of accounts requires data (or estimates) of intersectoral flows of property estimates) of intersectoral flows of property income. income. Ex: Interest paid to ROW by the private sector. Ex: Interest paid to ROW by the private sector.

► Some information is often available:Some information is often available: Interest paid by government to ROW.Interest paid by government to ROW. Interest paid by the private sector on govt loans.Interest paid by the private sector on govt loans.

► Intersectoral flows can be approximated if Intersectoral flows can be approximated if direct estimates are not available.direct estimates are not available. AR spreadsheet calculates intersectoral flows by AR spreadsheet calculates intersectoral flows by

assuming that some flows are known and that assuming that some flows are known and that other flows are proportional to totals. other flows are proportional to totals.


Intersectoral Flows of InterestIntersectoral Flows of InterestAn Example from TaiwanAn Example from Taiwan

Intersectoral Flows of Interest, Taiwan, 1998, NT$ MillionIntersectoral Flows of Interest, Taiwan, 1998, NT$ Million

Inflows to:Inflows to:

Outflows Outflows from:from: PublicPublic PrivatePrivate ROWROW TotalTotal

PublicPublic -- 140,693 140,693 55 55 140,748 140,748

PrivatePrivate 39,352 39,352 2,154,256 2,154,256 75,053 75,053 2,268,661 2,268,661

ROWROW 4,485 4,485 192,336 192,336 -- 196,821 196,821

TotalTotal 43,837 43,837 2,487,285 2,487,285 75,108 75,108 2,606,230 2,606,230 Note: Outflows and inflows are both represented as positive values in this Note: Outflows and inflows are both represented as positive values in this

table.table.


Private SavingPrivate Saving

► NTA Saving is equivalent to private saving NTA Saving is equivalent to private saving net of depreciation in SNA.net of depreciation in SNA.

► Saving does not include some economic Saving does not include some economic flows that affect the value of assets owned: flows that affect the value of assets owned: Capital transfers, e.g., bequests, dowry, and Capital transfers, e.g., bequests, dowry, and

other large giftsother large gifts Holding gains, e.g., asset price changes, wars, Holding gains, e.g., asset price changes, wars,

and natural disastersand natural disasters

► A(t)= A(t-1) + S(t) + K transfers (t) + A(t)= A(t-1) + S(t) + K transfers (t) + Holding gains (t) for any cohortHolding gains (t) for any cohort


Age Profiles for Asset-based Age Profiles for Asset-based FlowsFlows►Difficult to assign asset-based flows to Difficult to assign asset-based flows to

individualsindividuals Assets are often jointly ownedAssets are often jointly owned Legal ownership and effective ownership Legal ownership and effective ownership

may differmay differ Limited information from surveysLimited information from surveys

► In NTA saving and asset-income are In NTA saving and asset-income are assigned to the age of the household assigned to the age of the household headhead


Determining Age Profiles for Determining Age Profiles for InterestInterest► Interest from business creditInterest from business credit

Many private credit transactions involve financial Many private credit transactions involve financial transactions between firms, e.g., between transactions between firms, e.g., between financial and non-financial institutions. financial and non-financial institutions.

Inter-age flows may not arise from these Inter-age flows may not arise from these transactions. NTA assumes that they do not. transactions. NTA assumes that they do not.

► Interest from consumer creditInterest from consumer credit Individuals borrow and lend to realize age Individuals borrow and lend to realize age

reallocation objectives.reallocation objectives. Role in age reallocations is limited becauseRole in age reallocations is limited because

► Children cannot be held liable for debtsChildren cannot be held liable for debts► No natural private counterpart for funding retirement by No natural private counterpart for funding retirement by

accumulating credit during working years. accumulating credit during working years.


Determining Age Profiles for Determining Age Profiles for InterestInterest► Interest payments between firms Interest payments between firms

(corporations) do not generate net interage (corporations) do not generate net interage flows in NTA. flows in NTA. Age profile of inflows and outflows are identical.Age profile of inflows and outflows are identical. Interest flows between firms and public sector or Interest flows between firms and public sector or

ROW does lead to net interage flows.ROW does lead to net interage flows.► Interest payments between consumers and Interest payments between consumers and

firms do generate net interage flows.firms do generate net interage flows. Age profile of interest expense for consumers differs Age profile of interest expense for consumers differs

from the age profile of interest income for firms. from the age profile of interest income for firms. Consumer interest expense is approximated by Consumer interest expense is approximated by

interest outflows from households.interest outflows from households.


Sources for NTA Age Profiles Sources for NTA Age Profiles Profile from income and Profile from income and expenditure surveyexpenditure survey NTA ProfileNTA Profile

Property income (Interest, Property income (Interest, dividends, rental income)dividends, rental income)

Operating surplus (except Operating surplus (except households), property income households), property income inflows, property income inflows, property income outflows (except consumer outflows (except consumer interest)interest)

Self-employment income, Self-employment income, income from family businessincome from family business Mixed income (capital’s share)Mixed income (capital’s share)

Imputed rent from owner-Imputed rent from owner-occupied housingoccupied housing Operating surplus Operating surplus

Interest expenseInterest expense Consumer Interest OutflowConsumer Interest Outflow


Asset Income Profiles, Per Capita Values, Taiwan 2008

-50,000

0

50,000

100,000

150,000

200,000

250,000

0 7

14

21

28

35

42

49

56

63

70

77

84

Per capita interest expense

Per capita property income

Per capita mixed income (capital share)

Per capita operating surplus, household


Calculation of AR FlowsCalculation of AR Flows

► Per capita age profiles and population data Per capita age profiles and population data are used to calculate the age distribution of are used to calculate the age distribution of each class of asset income.each class of asset income.

► Age distributions are combined with Age distributions are combined with aggregate values to calculate asset income aggregate values to calculate asset income by age. by age.

► Saving by age is calculated as the residual, Saving by age is calculated as the residual, S(a)=T(a)+YA(a)-LCD(a); private saving is S(a)=T(a)+YA(a)-LCD(a); private saving is equal to total saving less public saving.equal to total saving less public saving.

► Check: S(a) must total to net private saving. Check: S(a) must total to net private saving.


Per Capita Private Asset-based Reallocations, US, 2003

-10,000.00

-5,000.00

0.005,000.00

10,000.00

15,000.00

20,000.0025,000.00

30,000.00

35,000.000 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85

90+

Asset-based Reallocations Asset income Saving


Per Capita Private Asset Income Components, US, 2003

0.00

10,000.00

20,000.00

30,000.00

40,000.00

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 8590+

Capital income Interest income, net Other property income, net


Per Capita Private Property Income, US, 2003

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

0 5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

80

85

90

+

Interest inflows Interest outflows

Other property income, inflows Other property income, outflows


Per Capita Private Interest, US, 2003

-4,000.00

-2,000.00

0.00

2,000.00

4,000.00

6,000.00

8,000.00

0 10 20 30 40 50 60 70 80 90+

Pe

r C

ap

ita

Va

lue

Interest, Net Consumer interest, net

Public interest, net Other interest, net


Per Capita Private Capital Income, US, 2003

0

5,000

10,000

15,000

20,000

25,000

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

Operating surplus, corps and NPISHs Operating surplus, hholds

Mixed income Taxes on production


Summary of Technical ProblemsSummary of Technical Problems

► Role of household headRole of household head Definitions vary across surveysDefinitions vary across surveys

► Most surveys use an economic definition, e.g., principal Most surveys use an economic definition, e.g., principal earner.earner.

► Some surveys use a self-reported head concept.Some surveys use a self-reported head concept. Non-head members have asset-based flows that are Non-head members have asset-based flows that are

assigned to the headassigned to the head Estimates of asset-based mitigate these problemsEstimates of asset-based mitigate these problems

► Assignment of operating surplusAssignment of operating surplus Household surveys include only the distributed earnings of Household surveys include only the distributed earnings of

corporations.corporations. Methodology assumes that retained earnings has the same Methodology assumes that retained earnings has the same

age profile as non-retained earnings. age profile as non-retained earnings. ► Estimates at upper ages may be unreliable due to Estimates at upper ages may be unreliable due to

small number of observations. small number of observations.


Issues to Explore with Issues to Explore with Asset-based Reallocations Asset-based Reallocations ► Do the elderly rely on assets to fund their Do the elderly rely on assets to fund their

retirement years?retirement years? Asset incomeAsset income Dis-savingDis-saving

► Is the importance of asset-based reallocations Is the importance of asset-based reallocations changing over time? If so, why?changing over time? If so, why? Changes in public transfer policy?Changes in public transfer policy? Decline in the extended family?Decline in the extended family? Changes in financial systems, interest rates, etc.?Changes in financial systems, interest rates, etc.?

► How are current generations of prime-age adults How are current generations of prime-age adults behaving?behaving? Are their saving enough to meet their future retirement Are their saving enough to meet their future retirement

needs?needs? Are they accumulating too much debt to finance education, Are they accumulating too much debt to finance education,

purchases of homes, and other consumer durables?purchases of homes, and other consumer durables?


Issues (continued)Issues (continued)

► How important are bequests and other How important are bequests and other capital transfers relative to lifecycle saving?capital transfers relative to lifecycle saving?

► Do asset-based reallocations serve other Do asset-based reallocations serve other important roles? Do people rely on assets to important roles? Do people rely on assets to support their children, for example? support their children, for example?

► How is population aging interacting with How is population aging interacting with asset-based reallocations to influence asset-based reallocations to influence important macroeconomic trends? important macroeconomic trends?

► How is the financial crisis affecting support How is the financial crisis affecting support systems and the economic circumstances of systems and the economic circumstances of different generations? different generations?


ConclusionsConclusions

► Private asset-based reallocations bear on Private asset-based reallocations bear on many issues.many issues. Importance to solving lifecycle problemsImportance to solving lifecycle problems Implications for intergenerational equityImplications for intergenerational equity Effects on macroeconomic performanceEffects on macroeconomic performance

► Interpret with careInterpret with care Difficult to measureDifficult to measure Outcomes reflect complex behavior and historical Outcomes reflect complex behavior and historical

patterns that differ widely across cohortspatterns that differ widely across cohorts


AcknowledgementAcknowledgement

Support for this project has been provided by the Support for this project has been provided by the following institutions:following institutions:

► the John D. and Catherine T. MacArthur Foundation; the John D. and Catherine T. MacArthur Foundation; ► the National Institute on Aging: NIA, R37-AG025488 the National Institute on Aging: NIA, R37-AG025488

and NIA, R01-AG025247; and NIA, R01-AG025247; ► the International Development Research Centre the International Development Research Centre

(IDRC);(IDRC);► the United Nations Population Fund (UNFPA); the United Nations Population Fund (UNFPA); ► the Academic Frontier Project for Private Universities: the Academic Frontier Project for Private Universities:

matching fund subsidy from MEXT (Ministry of matching fund subsidy from MEXT (Ministry of Education, Culture, Sports, Science and Technology), Education, Culture, Sports, Science and Technology), 2006-10, granted to the Nihon University Population 2006-10, granted to the Nihon University Population Research Institute.Research Institute.

NNational ational TTransfer ransfer AAccountsccounts3939

The EndThe End

Documents

N ational T ransfer A ccounts 1 Private Asset-based Reallocations: An Introduction Andrew Mason University of Hawaii and the East-West Center