Asset-based Reallocations

1. Asset-based Reallocations Amonthep “Beet” Chawla Berkeley Hands-on 12-16 January, 2009

2. Outline • Overview • Private asset-based reallocations (Andy) • Public asset-based reallocations (Beet)

3. Overview • Brief concept • How to use the RA spreadsheet • Learn from examples: “The Good, the Bad and the Ugly”

4. Concept • Individuals accumulate or dis-accumulate different types of assets to achieve their lifecycle consumption path • Types of assets • capital income • financial income (credit and other property income) • Accumulating assets though the public and private sectors

5. Public Sector Inflows and outflows of individuals’ public asset income and saving are proportional to individuals’ share of tax payment. Children pay indirect tax on consumption, therefore there are public asset income and public saving for children. Private Sector Inflows and outflows of private asset income and saving are to and from a household head. Children and other non-head members do not earn asset income or save. Asset Ownership

6. Asset-based Reallocations (RA) Spreadsheet • Combined both public and private RA • New version with a check list • Fill up data for • Macro controls • Age profiles • NT Flows • Try to find data; acknowledge the drawbacks or shortage of data; and move on! • Don’t try to cook the data • Combined both public and private RA • New version with a check list • Fill up data for • Macro controls • Age profiles • NT Flows • Try to find data; acknowledge the drawbacks or shortage of data; and move on! • Don’t try to cook the data

7. Examples for Checking • Are there private RA for children? • Check if taxes are included in TFW estimation • Do you over smooth some profiles? • Macro controls: do all property income from all sectors net to zero? • Do you fill up all capital income? • How do you handle indirect taxes? • From a RA spreadsheet • From your own estimations

8. Individuals do not save until ages early 40s • Individuals receive asset income before they save to accumulate assets The elderly do not dis-save? Non-zero RA for children

9. How to handle macro controls? Almost zero Using the RA spreadsheet Not all countries may have this information

10. Let’s take a loot at the RA spreadsheet! NTA web

11. Private Asset-based Reallocations: An Introduction Andrew Mason

12. Outline • Overview of Asset-based Reallocations • Implementation with Illustrative Values • Conclusions

13. Asset-based Reallocations:Two Mechanisms • Assets generate interage flows in two ways: • Asset-income • Assets yields positive asset income, an inflow • Debt yields negative asset income, an outflow • Saving • Acquiring an asset or disposing of debt, generates an outflows • Disposing of an asset or acquiring debt, generates an inflow. • Asset-based reallocations are incorporated into NTA based on the flow constraint

14. Inflows Labor Income Asset Income Transfer Inflows Outflows Consumption Saving Transfer Outflows The Flow Account Identity

15. Forms of Assets and Asset Income • Capital • Yields capital income • Examples: Equipment, commercial structures, vehicles, inventories, homes. • Financial assets • All financial assets have a counterpart (counterpart of credit is debt, for example) • Yields property income • Outflow for one unit and inflow for another unit • For the economy (private, public and ROW combined) property income and each component must sum to zero. • Examples of property income: Interest, dividends, land rent, and royalties. • See UNSNA 1993 for a more complete and detailed discussion of assets and asset income

16. Use of Asset-based Reallocations Features of assets limit their use: • Children do not own assets as a general rule. • Capital can only be used to reallocate resources from young ages to old ages. • Because financial assets always have a counterpart, demand must be matched by supply. If one age group is a net debtor, for example, another age group, the government, or the ROW must be a net creditor. • Constraints on indebtedness limit the use of debt for downward reallocations by young adults.

17. Possible Uses of AR • Lifecycle saving: accumulating assets during the working ages to support retirement. • Saving to fund transfers • Saving to fund downward transfers (college saving plans) • Saving to fund transfers to elderly parents • Bequest saving • Funding retirement using inheritances • Saving to generate bequests • Other saving models may have incidental effects on interage flows

18. Lifecycle Saving for Retirement Age 45-64: Save labor income of $1000 per year plus all asset income. Age 65-90: Dis-save a constant amount in each year. Saving Asset income Asset-based reallocations

19. AR Patterns for Other Uses • Saving to fund transfers • Saving by young adults • AR inflows to adults with costly children or elderly parents • Bequest saving • Saving by working age adults • Limited dis-saving by older adults • Reliance on inheritance • Limited saving by working age adults • Significant AR inflows at older ages (asset income from inherited assets).

20. Complexities in Interpreting AR Patterns • Age patterns reflect multiple objectives and influences • Many theories describe lifetime behavior of a cohort; data are for a cross-section. • Behavior of any age group reflects its history. Older age groups often have very different economic and demographic histories than younger age groups. • Patterns may reflect important social changes (decline of extended family) or institutional change (emergence of financial markets). • AR for any year may reflect important time effects, e.g., a financial crisis or the implementation of a new policy.

21. Implementation • Definitions and Aggregate Controls (Relationship to UNSNA 1993) • Private sector • Asset income • Saving • Constructing Age Profiles • Lifecycle model • Bequests and other capital transfers • Other models

22. What does private mean? • Private refers to all inflows to and outflows from the household sector, the corporate sector (financial and non-financial), and non-profit institutions serving households (NPISHs). • Public enterprise is part of the private sector. • Operating surplus is private asset income • Dividends and other distributions by public enterprise to the government are part of public asset income • Intersectoral flows between the private sector, the government and ROW are important • Public debt leads to private asset income (interest) • Foreign investment leads to flows between private and ROW

23. Computing Asset Income • Asset income consists of capital income and property income • Capital income is the return to capital net of depreciation • Three components of capital income • Operating surplus of corporations • Capital’s share of mixed income • Operating surplus of households (return to owner-occupied housing) and other consumer durables (if possible) • No exact counterpart in SNA because mixed income is not allocated between return to capital and return to labor • Capital income is the estimated value net of subsidies and taxes on production.

24. Computing Asset Income (cont) • Property income • Interest • Other property income • Dividends and similar distributions • Rent (returns to land, royalties on fossil fuels and other sub-soil minerals) • Other less important components • Important check on property income: • For the economy as a whole property income and each component (interest, dividends, rent, etc.) must sum to zero. • Private flows are non-zero and balanced by public flows or ROW flows.

25. Aggregate Controls:Capital Income • Operating surplus of corporations and NPISHs • Capital’s share of mixed income • Operating surplus of households (imputed rent of owner-occupied housing) • Taxes on products and production; subsidies

26. Sources of data and adjustments • Source: NIPA • Operating surplus for each sector • Mixed income • Taxes on products and production • Subsidies • Adjustments • Mixed income includes returns to labor; assume that 1/3 is a return is capital income • Taxes and subsidies • Follow same procedures used elsewhere • As a broad rule taxes on production net of subsidies are allocated between capital income and labor income in proportion to their relative income shares.

27. Capital income in TaiwanAn Illustration

28. Aggregate Controls: Property Income • Property income is available in SNA by sector and type of property income • Mapping of NIPA sectors NTA sectors • General government  public • Households, NPISHs, corporations  private • ROW  ROW • Exact classification of property income varies, but for NTA important to know: • Interest, household and other separately • Other property income, i.e., all property income other than interest combined.

29. Property Income in TaiwanAn Example

30. Intersectoral Flows • A complete set of accounts requires data (or estimates) of intersectoral flows of property income. • Ex: Interest paid to ROW by the private sector. • Some information is often available: • Interest paid by government to ROW. • Interest paid by the private sector on govt loans. • Intersectoral flows can be approximated if direct estimates are not available. • AR spreadsheet calculates intersectoral flows by assuming that some flows are known and that other flows are proportional to totals.

31. Intersectoral Flows of InterestAn Example from Taiwan

32. Private Saving • NTA Saving is equivalent to private saving net of depreciation in SNA. • Saving does not include some economic flows that affect the value of assets owned: • Capital transfers, e.g., bequests, dowry, and other large gifts • Holding gains, e.g., asset price changes, wars, and natural disasters • A(t)= A(t-1) + S(t) + K transfers (t) + Holding gains (t) for any cohort

33. Age Profiles for Asset-based Flows • Difficult to assign asset-based flows to individuals • Assets are often jointly owned • Legal ownership and effective ownership may differ • Limited information from surveys • In NTA saving and asset-income are assigned to the age of the household head

34. Determining Age Profiles for Interest • Interest from business credit • Many private credit transactions involve financial transactions between firms, e.g., between financial and non-financial institutions. • Inter-age flows may not arise from these transactions. NTA assumes that they do not. • Interest from consumer credit • Individuals borrow and lend to realize age reallocation objectives. • Role in age reallocations is limited because • Children cannot be held liable for debts • No natural private counterpart for funding retirement by accumulating credit during working years.

35. Determining Age Profiles for Interest • Interest payments between firms (corporations) do not generate net interage flows in NTA. • Age profile of inflows and outflows are identical. • Interest flows between firms and public sector or ROW does lead to net interage flows. • Interest payments between consumers and firms do generate net interage flows. • Age profile of interest expense for consumers differs from the age profile of interest income for firms. • Consumer interest expense is approximated by interest outflows from households.

36. Sources for NTA Age Profiles

38. Calculation of AR Flows • Per capita age profiles and population data are used to calculate the age distribution of each class of asset income. • Age distributions are combined with aggregate values to calculate asset income by age. • Saving by age is calculated as the residual, S(a)=T(a)+YA(a)-LCD(a); private saving is equal to total saving less public saving. • Check: S(a) must total to net private saving.

44. Summary of Technical Problems • Role of household head • Definitions vary across surveys • Most surveys use an economic definition, e.g., principal earner. • Some surveys use a self-reported head concept. • Non-head members have asset-based flows that are assigned to the head • Estimates of asset-based mitigate these problems • Assignment of operating surplus • Household surveys include only the distributed earnings of corporations. • Methodology assumes that retained earnings has the same age profile as non-retained earnings. • Estimates at upper ages may be unreliable due to small number of observations.

45. Issues to Explore with Asset-based Reallocations • Do the elderly rely on assets to fund their retirement years? • Asset income • Dis-saving • Is the importance of asset-based reallocations changing over time? If so, why? • Changes in public transfer policy? • Decline in the extended family? • Changes in financial systems, interest rates, etc.? • How are current generations of prime-age adults behaving? • Are their saving enough to meet their future retirement needs? • Are they accumulating too much debt to finance education, purchases of homes, and other consumer durables?

46. Issues (continued) • How important are bequests and other capital transfers relative to lifecycle saving? • Do asset-based reallocations serve other important roles? Do people rely on assets to support their children, for example? • How is population aging interacting with asset-based reallocations to influence important macroeconomic trends? • How is the financial crisis affecting support systems and the economic circumstances of different generations?

47. Conclusions • Private asset-based reallocations bear on many issues. • Importance to solving lifecycle problems • Implications for intergenerational equity • Effects on macroeconomic performance • Interpret with care • Difficult to measure • Outcomes reflect complex behavior and historical patterns that differ widely across cohorts

48. Additional Materials • Andrew Mason, Naohiro Ogawa, Rikiya Matsukura, and Amonthep Chawla (forthcoming) "Asset-based Reallocations". NTA Working Paper. • Methodology writeup on the website: http://www.ntaccounts.org/web/nta/show/Documents/Asset-based%20Reallocations • RA spreadsheet on the website: http://www.ntaccounts.org/web/nta/show/Asset-based%20reallocations

49. Acknowledgements • Naohiro Ogawa, Andrew Mason, Amonthep Chawla, and Rikiya Matsukura (2008) "Japan’s Unprecedented Aging and Changing Intergenerational Transfers". NTA Working Paper. Additional data at http://www.ntaccounts.org. • Lee, Ronald, Sang-Hyop Lee, and Andrew Mason (2007) "Charting the Economic Life Cycle," in Population Aging, Human Capital Accumulation, and Productivity Growth, Alexia Prskawetz, David E. Bloom, and Wolfgang Lutz, eds., a supplement to Population and Development Review vol. 33. (New York: Population Council). Additional data at http://www.ntaccounts.org. • Mason, Andrew, Ronald Lee, An-Chi Tung, Mun Sim Lai, and Tim Miller (forthcoming) “Population Aging and Intergenerational Transfers: Introducing Age into National Income Accounts,” Developments in the Economics of Aging edited by David Wise (National Bureau of Economic Research: University of Chicago Press). Additional data at http://www.ntaccounts.org.

50. The End