How will income security and health care financing be affected by population aging; how should they change? An International

PerspectiveAndrew Mason

University of Hawaii at Manoa andThe East-West Center

Overview

• How do different societies provide for the economic needs of their elderly?

• Primarily a descriptive exercise relying on National Transfer Account data.– Health consumption and its finance– Labor income of older individuals– Funding of the lifecycle deficit, i.e., the gap

between consumption and labor income.

The NTA 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

Source: Mason, Lee, et al., 2009; Lee, Lee, and Mason, 2008.

0

1

2

3

4

5

6

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

Age

Mil

lion

yen

(m

easu

red

in 2

000

cons

tant

pri

ce)

Figure 5. Age-specific profiles of per capita consumption and production: Japan, 1984-2004

Labor income 2004Labor income 1999

Labor income 1994

Labor income 1989

Labor income 1984

Consumption 2004

Consumption 1999

Consumption 1994

Consumption 1999

Consumption 1984

Source: Ogawa, Chawla, and Matsukura forthcoming.

Per capita LCD at older ages has increased substantially during the last 20 years. Japan is also aging rapidly; hence, growth in the total

LCD for elderly has been very rapid.

Pattern in Japan and Elsewhere Raises Two Important Questions

• What steps should be taken to control health care spending which accounts for most of the increase of consumption at older ages?

• Can policies raise the labor income of the elderly? – Age at retirement: Gruber and Wise– Productivity of older workers

Per Capita Health Consumption, Japan, 1984-2004

0

500000

1000000

1500000

2000000

2500000

0 8 16 24 32 40 48 56 64 72 80 88

1984

1989

1994

1999

2004

2004a

Note: Long-term care introduced in early 2000s included in 2004a.

Publicly Funded Health Consumption, Per Capita Values, Age 55-90+

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

55 60 65 70 75 80 85 90

Rel

ativ

e to

mea

n Y

l(30

-49)

Austria

Brazil

Chile

China

Costa Rica

Finland

Germany

Hungary

Japan

Mexico

S Korea

Slovenia

Taiwan

Uruguay

US

Source: www.ntaccounts.org.

Private Health Consumption, Per Capita Values, Age 55-90+

0

0.05

0.1

0.15

0.2

0.25

0.3

55 60 65 70 75 80 85 90

Rel

ativ

e to

mea

n Y

l(30

-49)

Austria

Brazil

Chile

China

Costa Rica

Finland

Germany

Hungary

Japan

Mexico

S Korea

Slovenia

Taiwan

Uruguay

US

Source: www.ntaccounts.org.

Health Care Spending, Synthetic Cohort, 55+

0 2 4 6 8

Austria

Brazil

Chile

China

Costa Rica

Finland

Germany

Hungary

Japan

Mexico

S Korea

Slovenia

Taiwan

Uruguay

US

Relative to Yl(30-49)

Public

Private

Note: Synthetic cohort values calculated using L(x)/L(55) using the US2000 life table for both sexes combined. Health spending data: www.ntaccounts.org.

Summary

• Public spending on health in the US is similar to that in other industrialized countries, e.g., Japan and Germany: high and steeply increasing with age.

• Private spending on health is more important in the US and some developing countries than in other industrialized countries.

• The rise in private spending with age in the US is very steep, but not so elsewhere.

Labor Income

Labor Income as a Percentage of Consumption for 65+ (Above Average)

38.9

35.5

34.2

32.5

28.1

24.2

23.8

22.9

21.3

20.6

17.4

16.9

0.0 10.0 20.0 30.0 40.0 50.0

Philippines (1999)

China (2002)

Kenya (1994)

India (2004)

Mexico (2004)

Costa Rica (2004)

S.Korea (2000)

Indonesia (2005)

Chile (1997)

Brazil (1996)

Thailand (2004)

Average

Source: S-H Lee 2009.

Labor Income as a Percentage of Consumption for 65+ (Below Average)

16.9

15.4

14.7

11.7

10.9

5.8

4.7

4.1

3.9

3.5

3.2

1.8

0.0 5.0 10.0 15.0 20.0

Average

US (2003)

Taiw an (1998)

Japan (2004)

Hungary (2005)

Spain (2000)

Sw eden (2003)

Finland (2004)

France (2001)

Slovenia (2004)

Germany (2003)

Austria (2000)

Source: S-H Lee 2009.

Summary: Labor Income

• Strongly related to level of development• Very low in Europe and compared with Japan,

Taiwan, and the US. • Strong disincentives to work due to tax and

pension provisions in many European countries.• Compulsory retirement except in the US.• Low labor income is partly low participation, but

also wages and productivity are very low.

Reallocation Systems for the Elderly

• Lifecycle Deficit is funded in three important ways – Asset-based reallocations

• Asset income • Dis-saving• Almost all is asset income; dis-saving is rarely observed.

– Net public transfers• Value of all good and services received through the public sector• Cash transfers, e.g., pensions.• Less taxes paid

– Net private transfers• Net Inter-household transfers• Net intra-household transfers

Austria

Costa Rica

Japan

Finland

Mexico

Philippines

S. Korea

Taiwan

ThailandUS

Germany

1/3

1/3

1/3

2/3

2/3

2/3

Assets

PublicTransfers

FamilyTransfers

Reallocations as a share of lifecycle deficit, 65 and older, selected countries, recent year.

Source: Lee, Lee & Mason (2007)

6570

75 80

85

90+

1/3

1/3

1/3

2/3

2/3

2/3

Assets

PublicTransfers

FamilyTransfers

United States (2003)

Source: Salas & Rachelis (2008)

70

75

80

85

90+

1/3

1/3

1/3

2/3

2/3

2/3

Assets

PublicTransfers

FamilyTransfers

Philippines (1999)

Source: Chawla (2008)

65

70

75

80

85

90+

1/3

1/3

1/3

2/3

2/3

2/3

Assets

PublicTransfers

FamilyTransfers

Thailand (2004)

Source: Mejia-Guevara (2008)

70

75

80

85

90+

1/3

1/3

1/3

2/3

2/3

2/3

Assets

PublicTransfers

FamilyTransfers

Mexico (2004)

Source: National Transfer Accounts

65

70

7580

8590+

1/3

1/3

1/3

2/3

2/3

2/3

Assets

PublicTransfers

FamilyTransfers

South Korea (2000)

Source: Mason, Lee, Tung, Lai & Miller (forthcoming)

65

70

7580

85

90+

1/3

1/3

1/3

2/3

2/3

2/3

Assets

PublicTransfers

FamilyTransfers

Taiwan (1998)

Source: Ogawa, Mason, Chawla & Matsukura (2008)

65

70

75

80

85

90+

1/3

1/3

1/3

2/3

2/3

2/3

Assets

PublicTransfers

FamilyTransfers

Japan (2004)

Source: Rosero-Bixby & Robles (2008)

65

70

7580

8589

1/3

1/3

1/3

2/3

2/3

2/3

Assets

PublicTransfers

FamilyTransfers

Costa Rica (2004)

Source: Risto & Vanne (2008)

65

70 8089

75

1/3

1/3

1/3

2/3

2/3

2/3

Assets

PublicTransfers

FamilyTransfers

Finland (2004)

Source: Kluge (forthcoming)

65

7075

80

85

90+

1/3

1/3

1/3

2/3

2/3

2/3

Assets

PublicTransfers

FamilyTransfers

Germany (2003)

Source: Fuernkranz-Prskawetz & Sambt (2008)

6570

8085

90+

75

1/3

1/3

1/3

2/3

2/3

2/3

Assets

PublicTransfers

FamilyTransfers

Austria (2000)

Patterns and Generalizations• In industrialized countries familial transfers are modest and typically

downward, i.e., from the elderly to their children and grandchildren. • In Latin American countries, familial transfers are also downward. • Familial transfers are an important source of support for elderly in

Asian countries. • Developing countries rely more on asset-based reallocations than

industrialized countries. • The US relies more on asset-based reallocations than other

industrialized countries. • Public transfers are much more important in Europe and Japan

than the US.• Public transfers are much more important in Latin America than in

developing Asia.

Age Patterns

• Asset-based reallocations decline and transfers increase with age (except in Finland)

• Familial transfers increase in Philippines, Thailand, Mexico, S. Korea, Costa Rica, and Japan.

• Public transfers increase in Austria, Germany, and the US.

• In Taiwan, public transfers increase among young elderly and familial transfers among old elderly.

Reallocation System Issues

• Incentive and dis-incentive effects on– Retirement– Saving– Human capital investment

• Do systems vary in their risk-sharing features?

• Which systems are most vulnerable to population aging?

The Endh