Economic Support Ratios and the First and Second Demographic Dividend in Europe

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1 Economic Support Ratios and the First and Second Demographic Dividend in Europe Alexia Prskawetz Vienna University of Technology, Vienna Institute of Demography, and Wittgenstein Centre for Demography and Global Human Capital Joze Sambt University of Ljubljana Institute for Mathematical Methods in

2 Structure of the talk 1. National transfer accounts 2. Data and methodology population projections 3. Results 4. Conclusion NTA methodology NTA age profiles support ratio first and second demographic dividend Institute for Mathematical Methods in

3 Over coming decades, changes in population age structure will have profound implications for the macroeconomy, influencing economic growth, generational equity, human capital, saving and investment, and the sustainability of public and private transfer systems. How the future unfolds will depend on key actors in the generational economy: governments, families, financial institutions, and others. This pathbreaking book provides a comprehensive analysis of the macroeconomic effects of changes in population age structure across the globe. Institute for Mathematical Methods in

4 1. National Transfer Accounts Institute for Mathematical Methods in

5 countries Europe: Austria Finland France Germany Hungary Slovenia Spain Sweden UK Italy Institute for Mathematical Methods in

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8 NTA documents means by which those age groups with life cycle deficits draw on surplus resources from persons in prime working ages. Institute for Mathematical Methods in

9 2. Data and methodology a) Population projections b) NTA Methodology c) NTA age profiles of labour income, consumption and lifecycle deficit d) Support ratio e) The first and second demographic dividend Institute for Mathematical Methods in

10 Population [%] Population [%] a) Population Projections Austria Germany Hungary Slovenia Spain Year P65+ P20-64 P0-19 Age structure in European NTA countries (actual data for and projections for ); in percentages Finland France Sweden UK P65+ P P0-19 Year Institute for Mathematical Methods in

11 b) NTA methodology flow account identity Inflows Y l (a) labor income Y a (a) asset income τ + (a) transfers received = Outflows C(a) consumption S(a) savings τ - (a) transfers paid Y l a ( a) Y ( a) ( a) C( a) S( a) ( a) inflows outflows l a C( a) Y ( a) Y ( a) S( a) ( a) ( a) lifecycle deficit asset-based reallocations net transfers (Source: Mason 2007) age reallocation Institute for Mathematical Methods in

12 Components of......consumption: education, health, others private vs. public...income:...transfers:...assets: asset income, labor income education, healthcare, pensions, illness, unemployment, family and children public vs. private businesses, homes, etc. primarily through private institutions The mechanisms by which assets are shifted across age groups is important because it determines whether population ageing leads to accumulation of assets or to the expansion of public and private transfer programs. (Mason and Lee 2006) Institute for Mathematical Methods in

13 life cycle deficit can be financed through: a) public transfers (health, pensions, unemployment, ) b) private transfers (parents financing consumption of children) c) asset reallocation (savings, interests on bonds, selling house) These flows are mediated by public and private institutions Institute for Mathematical Methods in

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15 Labour income p.c. / Avg Lab. Inc (30-49) Labour income p.c. / Avg Lab. Inc (30-49) c) NTA age profiles Austria (2000) Germany (2003) Hungary (2005) Slovenia (2004) Spain (2000) Labour income age profile for European NTA countries; presented as labour income per capita relative to the average labour income in age group Finland (2004) France (2004) Sweden (2003) Age 0.8 UK (2007) Age Institute for Mathematical Methods in

16 Consumption p.c. / Avg Lab. Inc (30-49) Consumption p.c. / Avg Lab. Inc (30-49) c) NTA age profiles - continued Austria (2000) Germany (2003) Hungary (2005) Slovenia (2004) Spain (2000) Consumption age profile for European NTA countries; as consumption per capita relative to the average labour income in the age group Age Finland (2004) France (2004) Sweden (2003) UK (2007) Age Institute for Mathematical Methods in

17 Lifecycle deficit p.c. / Avg lab. inc (30-49) Lifecycle deficit p.c. / Avg lab. inc (30-49) c) NTA age profiles - continued Austria (2000) Germany (2003) Hungary (2005) Slovenia (2004) Spain (2000) Lifecycle deficit age profile for European NTA countries; as lifecycle deficit per capita relative to the average labour income in age group Age Finland (2004) France (2004) Sweden (2003) UK (2007) 0.4 Negative LCD: Germany: 31 years (age 27-57) Slovenia: 31 years (age 25-55) Sweden: 38 years (age 25 62) Age Institute for Mathematical Methods in

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19 d) Support ratio LF1 64 a20 N a LF2 a0 ( a) P( a, t) CON1 a0 N a CON2 ( a0 a) P( a, t) SR1 LF1/CON1 SR2 LF1/CON2 SR3 LF2/CON1 SR4 LF2/CON2 NTA support ratio Institute for Mathematical Methods in

20 Institute for Mathematical Methods in e) The First and Second Demographic Dividend ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( t N t L t L t Y t Y t C t N t C N L Y N L Y C C ˆ ˆ ˆ ˆ N L N Y L Y C C ˆ ) ˆ ˆ ( ˆ first demographic dividend second demographic dividend

21 3. Results Institute for Mathematical Methods in

22 Ratio Ratio Ratio Ratio Four alternative measures of the support ratio (relative to 2000); European NTA countries Germany 1.05 France LF1/CON LF2/CON LF1/CON2 LF2/CON Year LF1/CON LF2/CON LF1/CON2 LF2/CON Year Slovenia 1.05 UK LF1/CON LF2/CON LF1/CON2 LF2/CON Year LF1/CON LF2/CON LF1/CON2 LF2/CON Year Institute for Mathematical Methods in

23 Institute for Mathematical Methods in g(l/n) Year Hungary Slovenia Spain g(l/n) Year Austria Germany g(l/n) Year Finland France Sweden UK First demographic dividend

24 Years, in which the first demographic dividend was positive Austria Finland France Germany Hungary Slovenia Spain Sweden UK Year Institute for Mathematical Methods in

25 Support ratio, Index of consumption Wealth relative to labour income Support ratio, Index of consumption Support ratio, Index of consumption Components of consumption per capita C( t) N( t) C( t) Y( t) Y( t) L( t) L( t) N( t) Austria 1.40 Spain L/N c_bar/yl_bar C/Yl L/N c_bar/yl_bar C/Yl Year Year Germany UK Wp/Yl L/N c_bar/yl_bar C/Yl A/Yl -Tk/Yl Year Year Institute for Mathematical Methods in

26 Cumulative first and second demographic dividend Cumulative effect of the first (negative values) and second (positive values or zero) demographic dividend on economic growth in period Second demographic dividend 10 Austria 5 0 Finland France Germany -5 Hungary First demographic dividend Slovenia Spain Sweden UK Year Institute for Mathematical Methods in

27 Cumulative first and second demographic dividend combined Cumulative effect of both demographic dividends combined on economic growth in period Austria 5 0 Finland Germany Hungary -5 Slovenia Spain Sweden UK Year Institute for Mathematical Methods in

28 4. Conclusion Institute for Mathematical Methods in

29 Age specific economic activities instead of age limits NTA support ratio predicts a greater decline as conventional support ratio (SR) Germany and Slovenia are the countries with the strongest drop in the SR The first demographic dividend is negative for the next five decades The cumulative effect of the FDD is in the range of -11% (UK) and -28% (Slovenia) A second demographic dividend is projected only for UK, Germany and Spain. BUT So far only cross-section age profiles! Institute for Mathematical Methods in

30 E N D Institute for Mathematical Methods in

31 Ergebnisse für Österreich (2005) Institute for Mathematical Methods in

32 Das Lebenszyklusdefizit Institute for Mathematical Methods in

33 Öffentliche und Private Konsumausgaben 2005 Institute for Mathematical Methods in

34 Öffentliche Transfers: Ein- und Abgang

35 Reallokation von Einkommen, Konsum und Transfers über das Alter Institute for Mathematical Methods in

36 Aggregierte Altersprofile des Einkommens und Konsums Institute for Mathematical Methods in

37 SUPPORT RATIO Demographischer support ratio: = LF / CON LF. Arbeitsbevölkerung CON. Konsum LF = i=20 64 N i CON = i=1 99 N i Ökonomischer support ratio: LF = i w i PR i N i CON = i=1 99 S i N i Institute for Mathematical Methods in

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39 Erste demographische Dividende Y(t) N(t) L(t) N(t) Y(t) L(t) ŷ Lˆ Nˆ l ŷ Institute for Mathematical Methods in

40 g(l/n) g(l/n) g(l/n) Erste demographische Dividende Finland France Sweden Hungary Slovenia Spain Year Year Austria Germany Periods of positive 1 st dem. dividend Austria Finland France Germany Hungary Slovenia Spain Sweden Year Year Institute for Mathematical Methods in

41 3. National Transfer Accounts The Flow Account Identity Inflows Y l (a) labor income Y a (a) asset income τ + (a) transfers received = Outflows C(a) consumption S(a) savings τ - (a) transfers paid Y l a ( a) Y ( a) ( a) C( a) S( a) ( a) inflows outflows l a C( a) Y ( a) Y ( a) S( a) ( a) ( a) lifecycle deficit asset-based reallocations net transfers (Source: Mason 2007) age reallocation Institute for Mathematical Methods in

42 Components of......consumption: education, health, others private vs. public...income:...transfers:...assets: asset income, labor income education, healthcare, pensions, illness, unemployment, family and children public vs. private businesses, homes, etc. primarily through private institutions The mechanisms by which assets are shifted across age groups is important because it determines whether population ageing leads to accumulation of assets or to the expansion of public and private transfer programs. (Mason and Lee 2006) Institute for Mathematical Methods in

43 Euro Life cycle deficit Consumption and labor income, Austria surplus deficit deficit years Age 58 Source: Hammer and Prskawetz (2011) Institute for Mathematical Methods in

44 Euro Euro public consumption, Austria 2005 private consumption, Austria education health other consumption total public consumption education health other consumption age age Source: Hammer and Prskawetz (2011) Institute for Mathematical Methods in

45 age-reallocation in Austria, 2005 Source: Hammer and Prskawetz (2011) Institute for Mathematical Methods in

46 We cannot continue with the status quo! Source: Hammer and Prskawetz (2011) Institute for Mathematical Methods in

47 e) The First and second demographic dividend - continued Age span in which LCD is negative; the share of private transfers in total transfers to children and the share of asset based reallocation in financing the consumption of elderly Country Age span in which LCD is negative Children t k Elderly t Finland (2004) Germany (2003) Hungary (2005) Spain (2000) Sweden (2003) Austria (2000) Slovenia (2004) UK (2007) W( t) A( t) T ( t) T ( t) k P Institute for Mathematical Methods in