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From Transfers to Individual Responsibility: Implications for Savings and Capital Accumulation in Taiwan and the United States

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Author Info

  • Lee, Ronald

    ()
    (University of California)

  • Mason, Andrew

    ()
    (University of Hawaii at Manoa, and Program on Population East-West Center)

  • Miller, Timothy

    ()
    (University of California)

Abstract

A transition in a Third World society from a system of familial support for the elderly to a system of individual responsibility through saving and investment would have effects in some respects similar to a transition from a Pay As You Go public pension system to a funded system. Such a transition might lead to "super-saving" as individuals find themselves behind the normal life cycle trajectory of asset accumulation, and as the elderly continue to be supported by their adult children (or the public pension) so that their dissaving does not offset that of the working age population. But there are other factors at work as well, and the net effect is difficult to intuit. This paper uses a demographically realistic model which incorporates life cycle saving motives in the presence of changing familial or public transfers. We use it to simulate the effects of the change from transfer-based old-age support to a funded system, for Taiwan and for the US, and examine changes in aggregate saving and capital accumulation. We consider a variety of possibilities regarding the degree of foresight and the degree to which pre-existing transfer obligations are honored. Under pure life cycle saving, the demographic transition leads to a large surge in aggregate saving during the later phase of fertility decline, followed by a decline in saving as the population ages. Capital per worker, however, increases substantially and permanently over the transition. Population aging contributes to growth in output per worker, because old hold large capital stocks. This is evident in simulations for both Taiwan and the US. With a transfer system in place to provide for old age support at least partially, these effects on saving rates and capital per worker are muted, and both saving rates and capital follow a substantially lower path. Population aging causes a much smaller increase in capital under transfer systems. Population aging dramatically increases the implicit debt in a transfer system, making a change of system more costly and difficult. An early change to a funded system, while still costly, harnesses the power of population aging to drive capital accumulation, despite falling saving rates. Transfer systems for old age support generate large transfer wealth and corresponding implicit debts in the US Social Security system and in the family transfer system of Taiwan. In our simulations, there are between 1 and 4 times annual GDP. If obligations are honored, these implicit debts must be repaid during a transition toward individual responsibility for old age support through saving, prolonging the effects of the transfer system past the system's dissolution. The working age population at the start of the transition and for some time after bears the cost of the transition, and has reduced consumption, at least under the relatively low interest rates we have assumed.

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Bibliographic Info

Paper provided by Institute for Futures Studies in its series Arbetsrapport with number 2000:3.

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Length: 29 pages
Date of creation: Sep 2000
Date of revision:
Handle: RePEc:hhs:ifswps:2000_003

Note: ISBN 91-89655-10-9
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Related research

Keywords: transfer; system; savings; capital accumulation; Taiwan; US;

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References

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  1. Martin Feldstein, 1997. "Transition to a Fully Funded Pension System: Five Economic Issues," NBER Working Papers 6149, National Bureau of Economic Research, Inc.
  2. Masao Ogaki & Jonathan David Ostry & Carmen Reinhart, 1995. "Saving Behavior in Low- and Middle -Income Developing Countries: A Comparison," IMF Working Papers 95/3, International Monetary Fund.
  3. Angus Deaton & Christina Paxson, 1999. "Growth, demographic structure, and national saving in Taiwan," Working Papers 224, Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies..
  4. Christopher D. Carroll & Lawrence H. Summers, 1991. "Consumption Growth Parallels Income Growth: Some New Evidence," NBER Chapters, in: National Saving and Economic Performance, pages 305-348 National Bureau of Economic Research, Inc.
  5. B. Douglas Bernheim & John B. Shoven, 1991. "National Saving and Economic Performance," NBER Books, National Bureau of Economic Research, Inc, number bern91-2, octubre-d.
  6. Orazio P. Attanasio & James Banks & Costas Meghir & Guglielmo Weber, 1995. "Humps and Bumps in Lifetime Consumption," NBER Working Papers 5350, National Bureau of Economic Research, Inc.
  7. Angus Deaton & Christina Paxson, 1997. "The effects of economic and population growth on national saving and inequality," Demography, Springer, vol. 34(1), pages 97-114, February.
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Cited by:
  1. Sang-Hyop LEE & Andrew MASON & Donghyun PARK, 2011. "Why Does Population Aging Matter So Much for Asia? Population Aging, Economic Security and Economic Growth in Asia," Working Papers DP-2011-04, Economic Research Institute for ASEAN and East Asia (ERIA).
  2. Andrew Mason & Sang-Hyop Lee, 2004. "Population aging and the extended family in Taiwan," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 10(8), pages 197-230, May.
  3. Andrew Mason & Ronald Lee & An-Chi Tung & Mun-Sim Lai & Tim Miller, 2006. "Population Aging and Intergenerational Transfers: Introducing Age into National Accounts," NBER Working Papers 12770, National Bureau of Economic Research, Inc.
  4. Ronald D. Lee & Ryan D. Edwards, 2001. "The fiscal impact of population change," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 46.
  5. Sumon K. Bhaumik, 2001. "Intergenerational transfers: the ignored role of time," MPIDR Working Papers WP-2001-008, Max Planck Institute for Demographic Research, Rostock, Germany.
  6. Andrew Mason & Ronald Lee & Sang-Hyop Lee, 2010. "The Demographic Transition and Economic Growth in the Pacific Rim," NBER Chapters, in: The Economic Consequences of Demographic Change in East Asia, NBER-EASE Volume 19, pages 19-55 National Bureau of Economic Research, Inc.

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