The Most Important Graph in the World US

The Most Important Graph in the World: US Life Cycle Deficits, 1888 -2003 Gretchen Donehower UC Berkeley Department of Demography September 27, 2006

Talk Outline • Quick review of National Transfer Accounts project • Introduce concepts, data and methods with current life cycle deficit age profiles (2003) • Review life cycle deficits back to 1888 • Applications of age profiles and future research directions

National Transfer Accounts (NTA) • www. ntaccounts. org • National Income and Product Accounts (NIPA) – aggregate stocks and flows in an economy • NIPA + age + transfer framework = NTA – who owns the stocks, who creates the flows? – how are flows transferred among individuals? • Thanks NIA, thanks Ron!

Life Cycle Deficits, 2003

Life Cycle Deficits, 2003 Age 29 57

Components of Labor Income, 2003

Components of Consumption, 2003

Data • Consumer Expenditure Surveys (CEX) • Non-institutional population only, for now • Early samples not nationally representative – 1888: Industrial workers and their children – 1917: Industrial workers and their families • Some profiles have to be estimated outside of household surveys – Public education consumption – Government-provided health care consumption

Missing Institutional Population • Missing many elderly in nursing homes, and other institutionalized • Their consumption of some things will be lower, others higher • Probably not a big income profile impact

Methods • Two Parts: – Estimate the age shape – Adjust to NIPA “control totals” • Age shape estimation: – Direct measurement (earnings) – Consumer weights (most private consumption) – Age regression (private education & health) – Proxy variable (fringe benefits) – External estimates (public education & health)

Dollars (US, 2000) Labor Income and Consumption, 1888 -2003 Age

Scaled Life Cycle Deficits, 1888 -2003

Scaled Life Cycle Deficits, 1888 -2003

Scaled Life Cycle Deficits, 1888 -2003

Scaled Life Cycle Deficits, 1888 -2003

Scaled Life Cycle Deficits, 1888 -2003

Scaled Life Cycle Deficits, 1888 -2003

Scaled Life Cycle Deficits, 1888 -2003

Components of Labor Income

Components of Consumption

Summary of Changes • Young – Size of deficits increased somewhat – Composition changed to more education • Old – Consistently larger deficits over time – More health-related consumption, public and private • Working Ages – Recently, fewer years making smaller surplus?

Summary Measures: Average Age of Profile • Constant age distribution (US 1950 is used here) • Recent strong increases in average ages of consuming AND producing.

Summary Measures: Age of Life Cycle Deficit Transitions • From first to last age of surplus (labor income > consumption) • Recent shrinking of time span to accumulate surplus

Paying for the Life Cycle Deficit • Since 1929 at least, we have never paid for all of consumption with labor earnings • So we must be using capital income and borrowing • Even more in recent years?

What’s Next? • Fine tuning estimates presented today • Cross-national comparison • Applications of consumption and labor income profiles – Modeling economic change in the context of demographic change (demographic dividends) – Budget projections – How profiles respond to institutional change • On to transfers and reallocations! (The really fun stuff…)