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

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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

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

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

1. National Transfer Accounts Institute for Mathematical Methods in

http://www.ntaccounts.org/web/nta/show http://europe.ntaccounts.org/web/nta/show/ 36 countries Europe: Austria Finland France Germany Hungary Slovenia Spain Sweden UK Italy Institute for Mathematical Methods in

Institute for Mathematical Methods in

Institute for Mathematical Methods in

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

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

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Population [%] Population [%] a) Population Projections 100 90 80 70 60 50 40 30 20 10 0 Austria Germany Hungary Slovenia Spain Year P65+ P20-64 P0-19 Age structure in European NTA countries 1960-2050 (actual data for 1960-2010 and projections for 2011-2060); in percentages 100 90 80 70 60 50 40 Finland France Sweden UK P65+ P20-64 30 20 10 0 P0-19 Year Institute for Mathematical Methods in

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

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

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

Institute for Mathematical Methods in

Labour income p.c. / Avg Lab. Inc (30-49) Labour income p.c. / Avg Lab. Inc (30-49) c) NTA age profiles 1.2 1.0 0.8 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 30-49 age group 0.6 0.4 0.2 1.2 0.0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90+ 1.0 Finland (2004) France (2004) Sweden (2003) Age 0.8 UK (2007) 0.6 0.4 0.2 0.0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90+ Age Institute for Mathematical Methods in

Consumption p.c. / Avg Lab. Inc (30-49) Consumption p.c. / Avg Lab. Inc (30-49) c) NTA age profiles - continued 1.6 1.4 1.2 1.0 0.8 0.6 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 30-49 age group 0.4 0.2 0.0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90+ 1.6 1.4 Age 1.2 1.0 0.8 Finland (2004) France (2004) Sweden (2003) UK (2007) 0.6 0.4 0.2 0.0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90+ Age Institute for Mathematical Methods in

Lifecycle deficit p.c. / Avg lab. inc (30-49) Lifecycle deficit p.c. / Avg lab. inc (30-49) c) NTA age profiles - continued 1.6 1.4 1.2 1.0 0.8 0.6 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 30-49 age group 0.4 0.2 0.0-0.2-0.4-0.6-0.8 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90+ Age 1.6 1.4 1.2 1.0 0.8 0.6 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) 0.2 0.0-0.2-0.4-0.6-0.8 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90+ Age Institute for Mathematical Methods in

Institute for Mathematical Methods in

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

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

3. Results Institute for Mathematical Methods in

Ratio Ratio Ratio Ratio Four alternative measures of the support ratio (relative to 2000); European NTA countries 1.10 1.10 1.05 Germany 1.05 France 1.00 1.00 0.95 0.95 0.90 0.85 LF1/CON1 0.80 LF2/CON1 0.75 LF1/CON2 LF2/CON2 0.70 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Year 0.90 0.85 LF1/CON1 0.80 LF2/CON1 0.75 LF1/CON2 LF2/CON2 0.70 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Year 1.10 1.10 1.05 Slovenia 1.05 UK 1.00 1.00 0.95 0.95 0.90 0.85 LF1/CON1 0.80 LF2/CON1 0.75 LF1/CON2 LF2/CON2 0.70 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Year 0.90 0.85 LF1/CON1 0.80 LF2/CON1 0.75 LF1/CON2 LF2/CON2 0.70 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Year Institute for Mathematical Methods in

Institute for Mathematical Methods in -0.015-0.010-0.005 0.000 0.005 0.010 0.015 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 g(l/n) Year Hungary Slovenia Spain -0.015-0.010-0.005 0.000 0.005 0.010 0.015 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 g(l/n) Year Austria Germany -0.015-0.010-0.005 0.000 0.005 0.010 0.015 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 g(l/n) Year Finland France Sweden UK First demographic dividend

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Years, in which the first demographic dividend was positive Austria Finland France Germany Hungary Slovenia Spain Sweden UK Year Institute for Mathematical Methods in

2010 2015 2020 2025 2030 2035 2040 2045 2050 2010 2015 2020 2025 2030 2035 2040 2045 2050 Support ratio, Index of consumption Wealth relative to labour income 2010 2015 2020 2025 2030 2035 2040 2045 2050 2010 2015 2020 2025 2030 2035 2040 2045 2050 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) 1.60 1.60 1.40 Austria 1.40 Spain 1.20 1.20 1.00 1.00 0.80 0.80 0.60 0.60 0.40 0.20 L/N c_bar/yl_bar C/Yl 0.40 0.20 L/N c_bar/yl_bar C/Yl 0.00 0.00 Year Year 1.60 1.40 Germany 24 22 20 UK 1.20 18 1.00 16 14 0.80 12 Wp/Yl 0.60 0.40 0.20 0.00 L/N c_bar/yl_bar C/Yl 10 8 6 4 2 0 A/Yl -Tk/Yl Year Year Institute for Mathematical Methods in

Cumulative first and second demographic dividend 2010 2015 2020 2025 2030 2035 2040 2045 2050 Cumulative effect of the first (negative values) and second (positive values or zero) demographic dividend on economic growth in 2010-2060 period 20 15 Second demographic dividend 10 Austria 5 0 Finland France Germany -5 Hungary -10-15 -20 First demographic dividend Slovenia Spain Sweden UK -25-30 Year Institute for Mathematical Methods in

Cumulative first and second demographic dividend combined 2010 2015 2020 2025 2030 2035 2040 2045 2050 Cumulative effect of both demographic dividends combined on economic growth in 2010-2060 period 20 15 10 Austria 5 0 Finland Germany Hungary -5 Slovenia -10-15 Spain Sweden UK -20-25 -30 Year Institute for Mathematical Methods in

4. Conclusion Institute for Mathematical Methods in

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

E N D Institute for Mathematical Methods in

Ergebnisse für Österreich (2005) Institute for Mathematical Methods in

Das Lebenszyklusdefizit Institute for Mathematical Methods in

Öffentliche und Private Konsumausgaben 2005 Institute for Mathematical Methods in

Öffentliche Transfers: Ein- und Abgang

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

Aggregierte Altersprofile des Einkommens und Konsums Institute for Mathematical Methods in

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

Institute for Mathematical Methods in

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

1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 g(l/n) 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 g(l/n) g(l/n) Erste demographische Dividende 0.015 0.015 0.010 0.005 Finland France Sweden 0.010 0.005 Hungary Slovenia Spain 0.000 0.000-0.005-0.005-0.010-0.010-0.015 Year -0.015 Year 0.015 0.010 Austria 0.005 Germany 0.000-0.005-0.010 Periods of positive 1 st dem. dividend Austria Finland France Germany Hungary Slovenia Spain Sweden -0.015 Year Year Institute for Mathematical Methods in

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

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

Euro Life cycle deficit 40.000 Consumption and labor income, Austria 2005. 35.000 30.000 25.000 surplus 20.000 15.000 10.000 deficit deficit 5.000 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 23 36 years Age 58 Source: Hammer and Prskawetz (2011) Institute for Mathematical Methods in

Euro Euro public consumption, Austria 2005 private consumption, Austria 2005 12.000 20.000 10.000 8.000 education health other consumption total public consumption 18.000 16.000 14.000 12.000 6.000 10.000 8.000 education 4.000 2.000 6.000 4.000 2.000 health other consumption 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 age age Source: Hammer and Prskawetz (2011) Institute for Mathematical Methods in

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

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

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) 26-59 44 11 Germany (2003) 27-57 63 46 Hungary (2005) 25-58 49 0 Spain (2000) 26-58 69 51 Sweden (2003) 25-62 61 3 Austria (2000) 21-56 57 14 Slovenia (2004) 25-55 65 15 UK (2007) 24-56 72 69 W( t) A( t) T ( t) T ( t) k P Institute for Mathematical Methods in