Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter.
Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.
OCR for page 77
4
Population Aging, Intergenerational
Transfers, and Economic Growth:
Asia in a Global Context1
Ronald Lee and Andrew Mason
C
ountries in Asia are at different points in the demographic transi-
tion. East Asian countries started earlier and are farther along, par-
ticularly Japan. The countries of South and Southeast Asia started
later and are at a middle stage (Mason, Lee, and Lee, 2010). The changes in
population growth rates and sizes over the transition are certainly impor-
tant, but here we focus particularly on the changes in population age
distributions and do not consider changes in the scale of the population.
Populations passing through the transition start with high propor-
tions of children and low proportions of elderly and eventually move
to the reverse situation: relatively few children and many elderly. In the
earliest part of the transition, the proportions of children often increase
because of declining infant and child mortality. In the middle of the transi-
tion, while fertility is declining, the proportions of the population in the
working ages rise over a half-century or so and total dependency ratios
fall. The resulting boost to per capita income growth is an important
component of the “demographic dividend.” However, as fertility bottoms
out and the growth of the working age populations slows, the population
ages as the ratio of elderly to working age rises. In the end, the proportion
1 Research for this chapter was funded by parallel grants from the National Institutes
of Health to Lee and Mason, NIA R37 AG025247 and R01 AG025488. We are grateful to
Gretchen Donehower and Turro Wongkaren for their help and to all the country research
teams in the National Transfer Account (NTA) project for use of their data. The researchers
are identified and more detailed information is available for many countries in working
papers on the NTA website: http://www.ntaccounts.org.
77
OCR for page 78
78 AGING IN ASIA
of the population in the working ages may be close to its level before the
transition began—but with the elderly traded for dependent children.
Children and the elderly are similar from an economic perspective,
because both groups have labor income that is small relative to their con-
sumption. They must rely on sources other than their labor to provide
for their material needs. However, children rely almost exclusively on
public and private transfers to provide for their net consumption needs,
while the elderly, in addition to these sources, may also rely on accumu-
lated assets to fund their consumption. These assets have an important
bearing on economic performance because they are a source of non-labor
income and, in addition, if invested in the domestic economy, they raise
its labor productivity. To the extent that the elderly rely on assets to fund
their old age consumption, the burden on workers (and taxpayers) is
reduced, and actual and anticipated population aging and longer life
can accelerate the accumulation of capital and boost economic growth.
To summarize, population aging has a negative effect on per capita con-
sumption through increased dependency and may also have a positive
effect through increased capital accumulation.
We will also suggest that lower fertility, the most important source of
population aging, is associated with higher human capital investments
per child. Thus, over the demographic transition, the quality and pro -
ductivity of workers rise at the same time that their numbers fall. This
change and the effects of population aging on physical capital provide
two powerful mechanisms for maintaining or increasing standards of
living despite the deterioration in the support ratio.
Estimates in this chapter are based on National Transfer Accounts
(NTAs), an international project that draws on the work of research teams
in 36 countries on six continents to estimate age profiles of key economic
flows across age (see http://www.ntaccounts.org). We will present data
for a subset of 23 countries, listed in Table 4-1, along with the dates to
which the NTA estimates refer.
NATIONAL TRANSFER ACCOUNTS: DATA AND METHODS
NTAs are composed of four broad economic flows: labor income,
consumption, transfers, and asset-based flows. Where appropriate, flows
are distinguished by whether they are public or private and by their
purpose (education, health, and other). The relationship among the flows
is captured by the flow constraint: The gap between consumption and
labor income must equal net transfers plus asset-based flows. Only a brief
overview of methods can be provided here. They are documented fully in
Lee and Mason et al. (2011) and Mason et al. (2009).
The age profiles of labor income and consumption provide a cross-
OCR for page 79
79
RONALD LEE and ANDREW MASON
TABLE 4-1 Annual Rate of Change of Support Ratio, 2010 to 2050,
Sorted by Rate
Economies (Code) Year Annual Change (%)
Austria (AT) 2000, Germany (DE) 2003, Japan (JP) 2004, –0.82 to –0.60
Slovenia (SL) 2004, South Korea (KR) 2000, Spain (ES) 2000,
Taiwan (TW) 1998
China (CN) 2002, Finland (FI) 2004, Hungary (HU) 2005, –0.42 to –0.25
Sweden (SE) 2003, Thailand (TH) 2004, US (US) 2003
Brazil (BR) 1996, Chile (CL) 1997, Costa Rica (CR) 2004, –0.21 to –0.01
Mexico (MX) 2004, Uruguay (UY) 2006
India (IN) 2004, Indonesia (ID) 2005, Philippines (PH) 1999 +0.07 to 0.31
Kenya (KE) 1994, Nigeria (NG) 2004 +0.56 to 0.76
SOURCE: Data from National Transfer Accounts database. See Lee and Mason (2011).
sectional characterization of the economic lifecycle at a point in time.2
Labor income is a comprehensive measure that includes the pretax income
of males and females, those in the labor force and those not (who enter as
zeros), and unpaid family workers.3 It includes wages, salaries, and fringe
benefits, as well as two-thirds of self-employment income, with the other
one-third counted as asset income. Consumption consists of private con-
sumption that is imputed to individuals within each household,4 as well
as all public consumption including public education, publicly provided
2 These age profiles are cross-sectional and do not accurately represent longitudinal life
cycle profiles. For example, it is often the case that the cross-sectional age profile rises over
time with productivity growth. In this case, a longitudinal age profile might continue to
rise throughout life rather than turning down at older ages as it does in the cross-section.
Longitudinal profiles can be approximated by introducing an assumed rate of productivity
growth. When data for calculating repeated cross-sections are available, as they are in a
number of countries, empirical longitudinal profiles can be estimated. Here we restrict our
attention to the cross-sectional age profiles.
3 The National Transfer Accounts are currently unisex, and all results presented here are
averages across the sexes. It would be straightforward to estimate labor income separately
for men and women, but because so much of women’s work is in home production that falls
outside National Income and Product Accounts, doing so would give a misleading picture
of production differences by gender and therefore of net transfers between men and women.
In order to introduce gender into the accounts, it would be necessary to draw on time use
studies to estimate and monetize home production. We have begun preliminary work along
these lines, but cannot address these issues here.
4 For private consumption expenditures, the basic approach is to allocate health and educa-
tion expenditures to household members using information in the survey, either directly or
using regressions, while the remainder of household expenditures is allocated in proportion
to equivalent adults consumption weights equal to .4 for ages 0–4, rising linearly until 1.0
at age 20, and 1.0 thereafter.
OCR for page 80
80 AGING IN ASIA
health care and long-term care, and other forms of public consumption
(evaluated at cost of provision).
Transfers and asset-based reallocations are the complement of the
economic lifecycle. Transfers consist of both public and private transfers.
Public transfer inflows consist of cash transfers, such as pensions or fam -
ily assistance, and in-kind transfers, equivalent to public consumption.
Public transfer outflows are equal to the taxes paid by each age group
to fund public transfer inflows. Net public transfers are the difference
between public transfer inflows and outflows. Private transfers consist
of inter-household transfers, including private transfers to and from the
rest of the world, and intra-household transfers, in other words, transfers
between co-resident household members.
Asset-based flows are defined as asset income less saving. Asset
income includes the returns to capital held by corporations, partnerships,
and individuals, including the return to owner-occupied dwellings. Asset
income also includes property income— dividends, rent, and interest
income and expense. Borrowing, lending, and repayment of loans are
also included here. Saving is equivalent to net national saving. Public and
private asset income and net saving are estimated, but only the combined
values are presented here.
Per capita flows are calculated as population averages over all indi-
viduals at a given age, both males and females. For purposes of compari -
son, we divide each country’s age profile of labor income and consump -
tion by the average level of labor income for that country at ages 30–49,
ages chosen to avoid masking the effects on profiles of decisions about
schooling and retirement. Aggregate flows are calculated as the product
of per capita flows and population at each age.
NTAs are estimated using existing cross-sectional surveys, National
Income and Product Accounts (NIPAs), and public-sector administrative
data. The age profiles of private flows such as consumption and trans-
fers are estimated using nationally representative household surveys of
income, consumption, and the labor force. The profiles for Japan, for
example, are based on the 2004 National Survey of Family Income and
Expenditure, for India on the 2004 India Human Development Survey
(IHDS), and for China on the 2002 China Household Income Project
(CHIP). Public flows estimates are based on a combination of household
surveys and public administrative records and reports. For example, age-
specific estimates for public education make use of national public educa-
tion spending for primary, secondary, and tertiary levels combined with
age-specific enrollment rates.
Initial estimates of per capita NTA age profiles are not necessarily
consistent with their macroeconomic counterparts from NIPAs. Thus, per
capita profiles are scaled, adjusted by a factor that is constant across age,
OCR for page 81
81
RONALD LEE and ANDREW MASON
to ensure that aggregate profiles are consistent with NIPAs. This procedure
assumes that errors in estimates are proportionately the same at each age.
This mode of construction ensures that the general level of the NTA
profiles, if not every detail of shape, will be as accurate as NIPAs. Of
course, there may be quality problems with the NIPAs themselves, but
it is beyond the scope of the NTA project to try to improve NIPAs. For
some quantities, such as intrahousehold transfers, there is no counterpart
in NIPAs, but by construction these transfers must sum to zero for each
household. For interhousehold transfers, the control total is the NIPA
number for net transfers with the rest of the world, which allows for
remittances, for example.
We want to emphasize that these are cross-sectional profiles, and hence
they are influenced by differences across cohorts, such as differences in
educational attainment, wealth, and attitudes, as well as differences that
can be attributed to aging per se.
ECONOMIC ACTIVITY OVER THE LIFECYCLE
The estimated profiles of consumption and labor income are shown in
Figure 4-1. Panel A shows the per capita profiles for the four poorest NTA
countries outside Asia and likewise for the four richest NTA countries
outside Asia. Children begin productive economic activity at a younger
age in the poor than in the rich countries, and their labor income is higher.
At advanced ages, labor income begins to decline earlier in the poor coun-
tries. Near age 60, labor income drops precipitously in rich countries, due
in part to the incentives and opportunities provided by public-sector pen-
sion programs (Costa, 1998; Gruber and Wise, 1999, 2001). Labor income
is lower in the rich countries than the poor from the early 60s until age 85
or so. The greater labor income at the extremes of the age distribution is
a characteristic feature of the poor countries.
There are also striking differences between the consumption age pro-
files in the poor and rich countries. In the rich countries, there is a charac -
teristic bulge in consumption by children and youth, reflecting the heavy
investment per child in human capital. It is equally striking that in the
poor countries, consumption is quite flat from age 20 or so until the end
of life. In the rich countries, by contrast, consumption rises from the early
20s on, and particularly after age 80 or so, when the costs of health and
long-term care rise dramatically. Not all of this upward trend with age,
however, is due to rising costs of health care and long-term care.
Putting together the age patterns of consumption and labor income,
we see that population aging in rich countries is more costly than in poor
ones, because the elderly in rich countries consume more and produce
less than in poor countries.
OCR for page 82
82 AGING IN ASIA
B. Japan and Rich Non-Asian Countries,
A. Four Richest and Four Poorest Non-Asian NTA Countries,
Unweighted Averages
Unweighted Averages
Relative to Average Labor Income 30-49
1.2
1.2
1.0
1.0
Consumption
Consumption
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
Labor Income Labor Income
0
0
0 20 40 60 80
0 20 40 60 80
Age
Age
Rich non-Asia (US, SE, FI, AT)
Rich non-Asia (US, SE, FI, AT) Japan
Poor non-Asia (CR, BR, NG, KE)
D. China and India
C. Asian Regions Compared to Poor Non-Asian Countries,
Unweighted Averages
1.2
Relative to Average Labor Income 30-49
1.2
1.0
1.0
Consumption
Consumption
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
Labor Income Labor Income
0
0
0 20 40 60 80
0 20 40 60 80
Age
Age
Poor non-Asia (CR, BR, NG, KE) India
S & SE Asia (TH, ID, PH, IN)
China
E Asia ex Japan (TW, KR, CN)
FIGURE 4-1 Age profiles of consumption and labor income for countries and
regions of the world, from National Transfer Accounts.
NOTE: See Table 4-1 for country codes.
SOURCE: Calculated from the National Transfer Accounts database. See Lee and
Mason (2011).
Figure 4-1
Panel B compares the age profiles of Japan to the average for the rich
non-Asian countries. Investment in human capital in Japan is higher per
child, particularly in late secondary and tertiary education. The broad pat-
tern of consumption at older ages is similar, but after age 60, consumption
is even higher in Japan. The age pattern of labor income in Japan is strik -
ingly different. It begins a few years later, a gap that persists until age 40
OCR for page 83
83
RONALD LEE and ANDREW MASON
or so. Most interestingly, the whole distribution is then pushed to the
right, with earnings relatively higher from the late 40s through the early
60s, apparently reflecting the influence of the seniority system in Japan.
Labor income in old age is also higher in Japan, although broadly similar
in shape to the other rich countries.
Panel C shows the average age profiles for South and Southeast Asia
(combined) and for East Asia excluding Japan and includes the average
for the poor countries for comparison. For the moment, we set aside the
difference in level of consumption, which largely reflects the situation in
China. The shapes of the consumption curves are very similar above the
early 20s. However, at younger ages, East Asia stands out for the high
level of investment in human capital of children, which is indeed an
important feature of the region. As for labor income, the profile for South
and Southeast Asia looks much like that for the other poor countries.
However, the age profile for East Asia starts at older ages, reflecting the
greater human capital investment, and then rises more rapidly, crossing
the other profiles at around age 20. Thereafter, the East Asian age profile
is shifted several years to the left of the other two, to higher values up
until 40 or so and then lower values after the mid-40s. This early decline
in labor income is striking, and we are not sure what explains it.
Finally, Panel D compares the age profiles for India (Ladusingh and
Narayana, 2011) and China (Li, Chen, and Jiang, 2011). Labor income in
the two countries moves in lockstep until around age 40, but then it drops
rapidly in China while continuing at a high level in India until age 60,
when it drops toward the Chinese level. As for consumption, the most
striking difference is that the level of consumption in China is very low
relative to labor income. This reflects the extraordinarily high level of sav-
ing in China (see Li, Chen, and Jiang, 2011).
SUPPORT RATIOS
We can use these age profiles of consumption and labor income to
calculate the way that changing population age distribution would affect
the ratio of producers to consumers, on the hypothetical assumption that
the age profiles remain the same over time or shift at the same rate, for
example due to productivity growth. Given the base-year age profile of
consumption, we calculate the number of “effective consumers” in a year
by multiplying the population at each age by the consumption profile for
that age and then summing over all ages. The number of effective pro -
ducers is calculated similarly. The support ratio for a year is the ratio of
effective producers to effective consumers. In the base year, the number
of effective consumers equals aggregate consumption in the economy
and effective producers equals aggregate labor income. In most countries,
OCR for page 84
84 AGING IN ASIA
aggregate consumption exceeds aggregate labor income, so the support
ratio is typically less than unity. Our interest is in the proportional changes
in the support ratio, not in its level. Changes depend entirely on chang -
ing population age distributions as these interact with a country’s age
profiles. For easier comparison of proportional changes across countries,
we set average consumption at ages 30–49 equal to 60% of average labor
income at these ages in the base year. This affects the level of the support
ratio in every year, but it does not affect its proportional variations over
time. Without this adjustment, China would have a very, very high sup -
port ratio because it has an exceptionally high aggregate saving rate.
Support ratios calculated in this way for 1950 to 2050 are shown in
Figure 4-2 based on United Nations estimates and projections (United
Nations Population Division, 2009). Panel A shows regional averages
for Europe, Latin America, and Africa. Europe largely achieved replace-
ment level fertility by the 1930s, and the trajectory of its support ratio
in Panel A reflects its post-World War II baby boom and baby bust more
than the transition itself. Population aging will reduce Europe’s support
ratio to low levels starting around 2010. In Latin America, rising sup-
port ratios will boost growth rates of per capita income—an effect called
“the demographic dividend”—until around 2030, after which population
aging will reduce the support ratio less rapidly than in Europe. Africa, as
represented here by only Kenya and Nigeria, is at the early stages of the
demographic dividend phase and will benefit from it for many decades
to come.
Panel B shows that China, Taiwan, and South Korea have quite simi -
lar support ratio trajectories, with deeper and more rapid variations than
seen in Panel A. All three economies are about to end the dividend phase
and to embark on declining support ratios, China a bit more gradually
than the others. Japan’s trajectory is very different from Europe’s and
from those of other East Asian economies.
In Panel C, Thailand’s trajectory resembles that of the emerging East
Asian economies in Panel B, while the other South and Southeast Asian
countries’ trajectories are similar to Latin America’s in Panel A.
Finally, Panel D shows China, Japan, and India together for compari-
son purposes. They are indeed very different. Simplifying, one might say
that the trajectories are similar in shape, but Japan’s is 20 years ahead of
China’s, which is, in turn, 30 years ahead of India’s. India has 30 more
years to arrive at the dividend phase, while China has just exhausted it
and Japan has already been aging for years.
We can also calculate the rates of change of these support ratios. In
economies with exceptionally rapid fertility transitions, such as Japan,
Mexico, South Korea, Taiwan, and Thailand, the support ratio some -
times changes by more than 1% per year. Table 4-1 shows the average
OCR for page 85
85
RONALD LEE and ANDREW MASON
B . E ast A sia
A . non-A sian R egional A ver ages
1.2
1.2
E ective L abor I ncome/C onsumption
E ective L abor I ncome/C onsumption
1
1
0.8
0.8
0.6
0.6
0.4
0.4
1950 1970 1990 2010 2030 2050
1950 1970 1990 2010 2030 2050
A ge
A ge
China
Europe (AT, DE, FI, HU, SI, ES, SE)
Japan
Africa (KE, NG)
Korea
Latin America (BR, CL, CR, MX, UY)
Taiwan
C . South and Southeast A sia D. C hina, I ndia, J apan
1.2 1.2
E ective L abor I ncome/C onsumption
E ective L abor I ncome/C onsumption
1 1
0.8 0.8
0.6 0.6
0.4 0.4
1950 1970 1990 2010 2030 2050 1950 1970 1990 2010 2030 2050
A ge A ge
India China
Indonesia
India
Philippines
Japan
Thailand
FIGURE 4-2 Support ratios for countries and regions.
NOTE: See Table 4-1 for country codes.
SOURCE: Calculated from National Transfer Accounts data and United Nations
Population Division (2009).
rate of change of the projected support ratio between 2010–2050 for
the NTA countries. We see that the majority (five out of eight) of the
Asian NTA economies have declining support ratios over this period,
indicating that population aging will reduce the rate of consumption
growth, other things being equal. In the remaining three countries, pro-
jected support ratios rise over the next four decades.
OCR for page 86
86 AGING IN ASIA
HOW DO THE ELDERLY FUND THEIR CONSUMPTION?
As discussed earlier, children’s consumption is funded largely by
public and private transfers, and partly by their own productive efforts,
particularly in poorer countries. The elderly, however, may additionally
use assets accumulated during their earlier working years through sav -
ing and/or inheritance. Where assets are an important source of funding
for consumption in old age, an increase in the ratio of elderly to work -
ing age population will raise the ratio of assets to workers. This will be
true whether asset accumulation takes place through funded govern-
ment pension programs (as opposed to pay-as-you-go pensions), funded
occupational pensions, or direct saving by individuals. If these assets are
invested in domestic capital, then capital per worker will rise, raising the
productivity of labor and offsetting to a greater or lesser degree the drop
in support ratios (Lee, Mason, and Miller, 2003; Mason and Lee, 2007).
We first combine public and private transfers into the single measure
“transfers” and consider how the funding of old age consumption is
divided among transfers, labor income, and asset income. It is possible for
an elderly person to own substantial assets but to save the asset income
rather than use it to fund consumption. In this case, we will not count it
as a funding source for consumption. On this principle, we can calculate
the percentage of old age consumption that is funded by one’s own labor
income, by net transfers, and by assets. Net transfers can have a negative
value, indicating that net transfers are made to younger people. The per-
centages must add to 100%.
Figure 4-3 is a triangle graph. The proportion of each of these three
funding components is indicated along one side of the triangle. If a coun -
try is situated at one of the vertices of the triangle, then elder consump -
tion is funded 100% by the source that names that vertex. If a country is
situated on an edge of the triangle, then support comes entirely from a
mixture of the two sources naming the vertices that the edge connects. If
a country is inside the triangle, the elderly are funded by a mix of all three
sources. If a country is situated to the right of the triangle, the elderly are
receiving negative net transfers, meaning that they contribute to others,
rather than the reverse.
In Figure 4-3, the points cluster around a line from the transfer ver-
tex (where Austria, Hungary, Slovenia, and Sweden are funded nearly
100% by transfers) to a point on the opposite edge (between India and
Indonesia). Along this line, for a given share of transfers, about one-third
of the balance of the funding comes from labor income and two-thirds
from assets. Most of the action in the chart reflects the tradeoff between
relying on transfers and on assets, with less systematic variation in labor
income as a source. Nonetheless, in economies relying more on assets,
OCR for page 87
87
RONALD LEE and ANDREW MASON
Assets
IN
1/3 Europe and United States
ID
Latin America
2/3
MX
Asia
US
ES PH
2/3
UY
DE JP
1/3 KR
CR
BR
SI TW
CN
AT CL
HU
Transfers
Labor
SE
income
2/3 1/3
FIGURE 4-3 Shares of elder consumption funded from labor income, transfers,
and asset-based reallocations in seventeen NTA countries.
Figure 4-3
NOTE: See Table 4-1 for country codes.
SOURCE: Mason et al. (2011).
people also rely more on labor income in old age. The Asian countries fall
close to the line, with China, Japan, South Korea, and Taiwan closer to the
transfers vertex and India, Indonesia, and the Philippines at the other end
of the line. These are also the poorest NTA countries in the region, and
poor countries generally have higher labor income in old age. Note also
that India and Indonesia are well outside the triangle, indicating that the
elderly make net transfers to others rather than receive them.
A surprising result at first glance is the extent to which the elderly
are relying on assets in some relatively low-income countries like India,
Mexico, and the Philippines. The imputed rent from owner-occupied
housing is important for many elderly living in these countries, and if
the elderly own a productive asset such as a farm used as part of a family
enterprise, one-third of the income will be allocated to the asset and
therefore to the elderly. Also it should be kept in mind that we are mea-
suring the extent to which the elderly are relying on assets to fund their
consumption. In many countries the elderly may save most or all asset
income, rather than use it to fund their consumption.
OCR for page 88
88 AGING IN ASIA
The next step is to set labor income aside and consider how consump-
tion net of labor income is funded. The advantage is that by looking at
how elder consumption net of labor income is funded, we can distinguish
public and private transfers as well as asset income. Figure 4-4 shows the
result. Most countries are arrayed along the edge joining assets and pub-
lic transfers, indicating that the elderly have zero net family transfers or,
in most cases, they are making net familial transfers to younger people.
Public transfers are a very important source of old age support for most
countries. Asian countries, however, rely more prominently on the family
as a source of old-age consumption. India, the Philippines, and Thailand
lie on the edge joining assets and family transfers, indicating that public
transfers play no role. Indonesia also lies on this edge-line, but so far above
the asset vertex as to be outside the range of the chart. China, South Korea,
and Taiwan are well inside the triangle, indicating that old age support is
IN
Assets
PH
MX
Europe and United States
Latin America
1/3
Asia
TH US
2/3
UY
KR ES
JP 2/3
DE BR
1/3
CR
CL
TW
CN
AT
SI
SE
Family
HU Public
transfers
transfers
2/3 1/3
FIGURE 4-4 How is elder consumption net of labor income funded? Shares of
public transfers, family transfers, and asset-based reallocations for seventeen
NTA countries.
NOTE: See Table 4-1 for country codes.
SOURCE: Calculated from data in Lee and Mason (2011).
Figure 4-4
OCR for page 89
89
RONALD LEE and ANDREW MASON
drawn from all three sources, with Taiwan drawing quite equally on the
three. Japan lies on the edge connecting assets and public transfers, indicat-
ing that on net, elders neither give nor receive family transfers.
In the countries located near the public transfers vertex, the elderly
have little motivation to save for retirement on average, because their
consumption needs are met by public pensions and healthcare. This does
not mean that there is little saving, because there are certainly many other
motives to save besides provision for old age. It does mean, however, that
in these countries, population aging is less likely to produce a second
demographic dividend by raising asset accumulation and making the
economy more capital intensive and the labor more productive.
POPULATION AGING AND HUMAN CAPITAL ACCUMULATION
The main cause of population aging is low fertility, not longer life.
East Asia has had exceptionally rapid and deep fertility declines, and the
average total fertility rate in the region is now 1.5 births per woman, with
Taiwan lowest at 1.0. East Asia is also known for its heavy investment in
education per child, and it is sometimes suggested that this is one of the
explanations for its rapid economic growth over recent decades. Might
the very low fertility be linked to the high investment in human capital?
A well-developed theory in economics, originally due to Becker and
Lewis (1973) and Willis (1973), asserts that parents derive utility from both
the quantity and the average quality of their children, as well as from
their own consumption. “Quality” indicates the amount spent to rear each
child on average. Quantity and quality interact in the budget constraint
multiplicatively, since the total amount spent by parents on their children
is the number of children times the amount spent per child, quantity
times quality. In the extreme case often used for expositional purposes,
the parents first decide an amount to allocate to children in total, and
then decide how to allocate it between quantity and quality. In this case
the quantity-quality tradeoff is particularly stark: Quality = Total Funds
Pre-Allocated to Children Divided by Quantity.
When income rises over time, the demand for quality, which is pos -
ited to have a larger income elasticity than the demand for quantity, rises,
and this raises the shadow price of quantity. The net result is that parents
opt to have lower fertility and to invest much more in each child. Other
factors can also alter the balance between quantity and quality, such as the
rate of return to human capital as perceived by parents, the availability of
contraceptives, or improved transportation networks that reduce the cost
to parents of sending their children to school.
Although the quantity-quality theory was developed for private
expenditures, it may also characterize public spending on human capital.
OCR for page 90
90 AGING IN ASIA
The rise in the support ratio may ease fiscal constraints faced by govern -
ments, allowing them to invest more in human capital. Governments
might be forward-looking and invest more in human capital so as to offset
the coming decline in the number of workers.
In light of these various possibilities, it is interesting to look at the
cross-national relationship between investment in human capital per child
and the Total Fertility Rate (TFR). (See Lee and Mason, 2010a, for a more
detailed analysis of the full set of NTA countries.) First, however, we
explain how we measure human capital investment. The theoretical lit -
erature (Becker et al., 1973; Willis, 1973) counts all expenditure on children
as quality. We choose to focus on the explicit spending on education and
health, since this is more clearly discretionary (rather than being passively
tied to parental consumption such as housing and meal choices) and is
more clearly linked to later life labor productivity. We sum from the NTA
estimates of public and private spending per child for each single year of
age. For education, these sums go from 0 to 26 to include postgraduate
education, while for healthcare they go from 0 through 17. This gives a
synthetic cohort estimate of human capital investment per child, with
public and private spending combined. We do not attempt to take into
account the opportunity cost of the children’s time as a costly input. As
elsewhere, we standardize the results for different countries by dividing
the human capital measure by average labor income for ages 30–49. Our
measure, then, can be interpreted as the number of years’ worth of prime
age labor income that are invested in human capital per child. For fertility
we use the average TFR in the five years preceding the NTA observation
year. In the stylized story, the product of quantity and quality is constant,
in which case the logs of quantity and of quality should be linearly related
with a slope of –1.0. We will therefore plot the logarithm of our measure
of human capital investment against the logarithm of fertility.
Figure 4-5 shows the result for the eight Asian countries, for both
total and private human capital expenditures. For total human capital
expenditures, there is a strong negative relationship, with an elasticity of
–.91, quite close to the expository model prediction of –1.0. For private
expenditures alone, the elasticity is similar at –.89. However, the scatter
is much tighter to the line for the total investment than for the private
investment, consistent with the idea that public and private investments
substitute for one another.
The log of standardized public expenditure on human capital in a
country is shown by the gap between the two markers (circle and cross)
for that country. Thus Japan and Taiwan invest the same amount in total,
but Taiwan has low public spending and high private spending, while
Japan has the opposite. China and South Korea both have low public
spending, whereas Thailand has unusually high public spending.
OCR for page 91
91
RONALD LEE and ANDREW MASON
2.0
JP Total
TW
Private
KR
1.5
Relative to Average Labor Income 30–49
TH
TW
CN
Capital Spending per Child
y = –0.91x + 1.74
1.0 t = –3.59
PH
R² = 0.68
KR ID
CN
0.5 IN
JP
PH
0.0
ID
TH
IN
y = –0.87x + 0.87
t = – 2.19
–0.5
R² = 0.44
0.0 0.5 1.0 1.5
Total Fertility Rate
FIGURE 4-5 Investment in human capital in relation to total fertility rate in Asia.
NOTE: See Table 4-1 for country codes.
SOURCE: Calculated from data in Lee and Mason (2011).
Figure 4-5
The East Asian countries have far lower fertility than those in South -
east Asia or India, and they have correspondingly higher human capital
investment per child. The per child human capital investment in Taiwan
and Japan is approximately five years of prime age labor income, an
amount comparable to that of Europe.
Elsewhere we have looked at the relation of changes over time in
fertility and human capital in Japan, Taiwan, and the United States, and
found similar results (Lee and Mason, 2010b).
We expect that as fertility falls in other Asian countries, spending per
child will rise, with beneficial effects for future labor productivity and
economic growth. To some degree, quality of labor will be substituted for
quantity of labor, reducing the difficulties of the working ages in provid -
ing for the elderly population.
OCR for page 92
92 AGING IN ASIA
NATIONAL TRANSFER ACCOUNTS AND
HEALTH AND RETIREMENT STUDIES (HRS)
National Transfer Accounts rely on survey data as a key source of
information, in addition to National Income and Product Accounts and
various kinds of administrative data. The richness and quality of HRS-
type data (henceforth, HRSTD) can potentially improve the quality of the
NTA estimates in a number of ways, despite its restriction to respondents
who are at least 45 or 50 years of age. HRSTD can provide high-quality
data on interhousehold transfers to and from the elderly. While NTAs
require such data for the entire age range, HRSTD can be used to check
the quality of the NTA estimates where they overlap. Preliminary work
along these lines for the United States has so far found good agreement
between the NTA and HRS data, after appropriate adjustments are made
to bring the concepts into line.
HRSTD on bequests should be particularly valuable, because data
on bequests, particularly smaller bequests, are hard to come by. In some
countries, data on savings and asset holdings are also not readily avail -
able. Savings rates are necessary for NTA flow accounts. Ordinarily, they
are calculated in NTA as a residual, so having high quality data to check
against this residual is valuable, in part because matching the residual
would provide a partial confirmation of the other estimates from which it
is derived. Asset holdings are necessary to construct NTA wealth accounts.
The difficulties with measures of asset holdings are particularly severe in
East Asia, where many elderly transfer ownership of their assets to their
co-residing adult son well before the time of death. This practice makes
it very difficult to trace the accumulation of assets over the life course,
which is necessary for understanding how population aging affects asset
accumulation. It should be possible, using longitudinal HRSTD, to trace
asset transfers of this sort. With the data now used to construct NTAs, we
attribute ownership of assets to the head of the household, which may
obscure the behavioral processes that lead to its original accumulation.
If HRSTD can help improve NTA estimates, NTAs also broaden the
picture offered by HRSTD in certain respects. Most obviously, NTAs cover
the entire age range, not just the elderly. But there is much more. NTAs
estimate intrahousehold transfers such as transfers to co-resident elders.
Since familial transfers are a very important source of support for the
elderly in Asia, as we saw in Figure 4-5, it is important to develop infor-
mation about their size absolutely and relative to other sources of sup -
port available to the elderly. Familial transfers to co-resident elderly also
provide for intergenerational sharing that enables the elderly to share in
the benefits of very rapid economic growth long after they have left the
labor force.
OCR for page 93
93
RONALD LEE and ANDREW MASON
NTAs also provide a natural interface with macroeconomic models
and analyses, including overlapping generations models and Auerbach-
Kotlikoff-Gohkale style Generational Accounting (Auerbach, Gokhale,
and Kotlikoff, 1991; Auerbach, Kotlikoff, and Leibfritz, 1999). Estimates
derived from HRSTD can be inserted in NTAs and used for this purpose.
Similarly, NTAs lend naturally to long-term projections and assessments
of fiscal sustainability of public-sector programs.
Finally, the exercise of formulating NTA estimates leads to questions
that can be addressed using the microanalysis of HRSTD. The question
raised above about the transfer of ownership of elders’ assets at the point
of moving into an adult child’s house is a case in point.
CONCLUSIONS
Population aging in East Asia will be early and profound, due to early
fertility declines to very low levels and high and rising life expectancy. In
most of Southeast Asia (Thailand is an exception) and India, aging will
come later and more gradually. What can be said about the economic
effects that this population aging will have? The data presented in this
chapter provide some insights and raise some questions.
Japan is the richest Asian country and had the earliest fertility transi-
tion. Unlike other Asian countries, Japan has also instituted public sector
transfer programs for the elderly that are quite similar to those in Europe,
with generous pensions, health care, and long-term care. As a result, Japan
will face similarly severe long-term fiscal problems as its population ages.
As in Europe and the United States, the consequences of population aging
in Japan are exacerbated by a strong upward gradient in consumption by
age, a pattern that has probably emerged in recent decades as the welfare
state has grown.
In the rest of Asia, the public-sector transfers to the elderly are very
low, and if they remain so, then population aging will not threaten fiscal
sustainability. However, it would not be surprising if they followed Japan
and other rich countries in coming decades and developed similar public
transfers to the elderly.
Without public transfers for the elderly, one might wonder whether
the family will instead bear the costs of population aging. Indeed, in East
Asia and in Thailand, net familial support of the elderly is important.
In India and Southeast Asia, however, neither public transfers nor net
familial transfers go to the elderly. The elderly, who continue to earn labor
income, also receive substantial asset income and use it not only for their
own consumption, but also to make net transfers to their children. These
downward transfers, funded by assets, may reflect residence by children’s
families in homes owned by their elderly parents or may reflect familial
OCR for page 94
94 AGING IN ASIA
work on farms owned by the elderly parents, to whom our methods
impute one-third of family farm output as the asset share. In any case,
in these circumstances population aging would impose smaller costs on
the working age population. Furthermore, outside of Japan, consumption
is flat across age from the early twenties until death, which means that
population aging will be less costly for families.
Population aging may also be associated with increased physical
capital and increased human capital per worker. In countries where the
elderly hold substantial assets that they accumulated through their sav -
ings out of their lifetime earnings rather than through inheritance, popu-
lation aging will tend to raise asset holdings per capita, and if these are
invested in the domestic economy, then the rising capital labor ratio will
boost productivity and wages. In addition, the low and declining fertility
that is the main cause of population aging is associated with increased
investments in human capital per child, raising future productivity and
earnings. This has been particularly so in Asia, both through public and
private spending. In this way, quality of workers may be substituted for
quantity, further reducing the adverse effects of population aging in this
region.
The economic consequences of population aging in Asian countries
will depend on whether they follow the path of Japan or instead retain the
current features of their public sectors and private economic behaviors.
REFERENCES
Auerbach, A.J., J. Gokhale, and L.J. Kotlikoff. (1991). Generational accounts: A meaningful
alternative to deficit accounting. Pp. 55-110 in Tax Policy and the Economy, D. Bradford
(Ed.). Cambridge, MA: MIT Press for the National Bureau of Economic Research.
Auerbach, A.J., L.J. Kotlikoff, and W. Leibfritz (Eds.). (1999). Generational Accounting Around
the World. Chicago: University of Chicago Press.
Becker, G., and H.G. Lewis. (1973). On the interaction between the quantity and quality of
children. Journal of Political Economy 81(2):S279-S288.
Costa, D.L. (1998). The Evolution of Retirement: An American Economic History, 1880-1990.
Chicago: University of Chicago Press.
Gruber, J., and D.A. Wise. (1999). Introduction and summary. Pp. 437-474 in Social Security
and Retirement around the World, J. Gruber and D.A. Wise (Eds.). Chicago: University
of Chicago Press.
Gruber, J., and D.A. Wise. (2001). An International Perspective on Policies for an Aging Society.
NBER Working Paper No. W8103. Cambridge, MA: National Bureau of Economic
Research. Available: http://www.nber.org/papers/w8103.pdf.
Ladusingh, L., and M.R. Narayana. (2011). The role of familial transfers in supporting the
lifecycle deficit in India. In Population Aging and the Generational Economy: A Global Per-
spective, R. Lee and A. Mason (Eds.). Cheltenham, UK: Edward Elgar.
Lee, R., and A. Mason. (2010a). Fertility, human capital, and economic growth over the
demographic transition. European Journal of Population 26(2), May 2010. DOI10.1007/
s10680-009-9186-x:159-182.
OCR for page 95
95
RONALD LEE and ANDREW MASON
Lee, R., and A. Mason (2010b). Some macroeconomic aspects of global population aging.
Demography 47(Suppl):S151-S172.
Lee, R., and A. Mason. (2011). Population Aging and the Generational Economy: A Global Perspec-
tive. Cheltenham, UK: Edward Elgar.
Lee, R., A. Mason, and T. Miller. (2003). From transfers to individual responsibility: Implica-
Implica-
tions for savings and capital accumulation in Taiwan and the United States. Scandina-
vian Journal of Economics 105(3):339-357.
Li, L., Q. Chen, and Y. Jiang. (2011). The changing patterns of China‘s public services. In
Population Aging and the Generational Economy: A Global Perspective, R. Lee and A. Mason
(Eds.). Cheltenham, UK: Edward Elgar.
Mason, A., and R. Lee. (2007). Transfers, capital, and consumption over the demographic
transition. Pp. 128-162 in Population Aging, Intergenerational Transfers and the Macro-
economy, R. Clark, A. Mason, and N. Ogawa (Eds.). Cheltenham, UK: Edward Elgar.
Mason, A., R. Lee, and S.-H. Lee. (2010). The demographic transition and economic growth
in the Pacific Rim. Pp. 19-55 in The Economic Consequences of Demographic Change in East
Asia, T. Ito and A.K. Rose (Eds.). Chicago: University of Chicago Press.
Mason, A., N. Ogawa, A. Chawla, and R. Matsukura. (2011). Asset-based flows from a gen -
erational perspective. Pp. 209-236 in Population Aging and the Generational Economy: A
Global Perspective, R. Lee and A. Mason (Eds.). Cheltenham, UK: Edward Elgar.
United Nations Population Division. (2009). World Population Prospects: The 2008 Revision.
New York: United Nations.
Willis, R.J. (1973). A New Approach to the economic theory of fertility behavior. Journal of
Political Economy 81(2, Part 2):S14-S64.
