Aging, Savings, and Pensions in the Group of Seven Countries: 1980-2025

In the next 30-40 years, past changes in fertility and mortality will lead to a significant increase in the share of the elderly. This study suggests that these demographic trends may lead to a decline in the G-7 private savings rate after 2000, compounding the impact of social expenditure pressures on the government’s deficit. Moreover, public pensions may decline as a share of the consumption needs of the elderly, leading to financial pressures to reduce their consumption. The reduced burden of child support on the working population will not offset the increased burden of societal support for the elderly.

Abstract

In the next 30-40 years, past changes in fertility and mortality will lead to a significant increase in the share of the elderly. This study suggests that these demographic trends may lead to a decline in the G-7 private savings rate after 2000, compounding the impact of social expenditure pressures on the government’s deficit. Moreover, public pensions may decline as a share of the consumption needs of the elderly, leading to financial pressures to reduce their consumption. The reduced burden of child support on the working population will not offset the increased burden of societal support for the elderly.

I. Introduction

This paper is an exercise in macroeconomic speculation. Any effort to forecast developments 40 years into the future can be nothing else. Yet the subject is of considerable importance, touching on issues that will vitally influence the world economy. Significant changes in the demographic structure of the major industrial countries are occurring. Persistent low fertility rates and lengthening life spans are leading to a major shift in the balance among the young, the working age population, and the elderly, and this will inevitably affect the dynamics of these countries and the world economy. An earlier paper by Heller, Hemming, and Kohnert (1986) examines the potential effect of these developments on public social expenditure outlays.

This paper seeks to evaluate the implications for the savings rate, the distribution of consumption across age groups, and levels of intergenerational support for each of the G-7 countries. Inferences are drawn on the aggregate savings rate of the major industrial countries as a group (the G-7), with implications for their external balances individually and with the rest of the world.

The paper will focus on three issues:

  • 1. The effect of the aging of the populations on the aggregate savings rate;

  • 2. The financial capacity of the working population to bear the burden of supporting the young and the elderly; and

  • 3. The adequacy of public pensions in meeting the consumption needs of the elderly.

The first issue will have an impact on world economic developments. Pressures to reduce significantly the overall savings rate of the major industrial countries will affect both their external balance and their growth. The second issue addresses whether the private burden of supporting the younger population might decline to such an extent as to offset the increased tax burden arising from the government’s responsibilities toward the elderly. As to the third issue, if government pension payments are insufficient to support the consumption of the elderly, one can only assume (a) an increased role for self-support by the elderly (either from private pensions or past savings), (b) that the forecast consumption levels of the elderly may be too high (implying a decline in their consumption standards relative to the working age population), or (c) pressures for additional government pension support in the face of the growing political importance of the elderly.

Section II briefly summarizes prospective demographic trends. Potential developments in savings and consumption are derived from two alternative methodologies described in Section III. Sections IV and V examine the results of the analysis and provide some brief concluding thoughts, respectively.

A brief caveat. This paper relies on partial analysis and gives insights only into the first round of pressures likely to influence consumption, savings, productivity, and labor market developments. A significant decline in savings rates may lead to a fall in investment, reducing labor productivity growth and the real growth rate from what is assumed in this study.

II. Demographic Trends and Shifts in the Distribution of Consumption

Over the next four decades, the Heller, Hemming, and Kohnert baseline demographic scenario suggests that the share of the 0-19 age group in the population will decline by 5 to 8 percentage points (Table 1). At least two thirds of this decline will occur by the year 2000 (except in France). The assumed increase in the fertility rate will be reflected in some increase in the share of the 0-9 population by 2000 in the Federal Republic of Germany and the United Kingdom; however, in the other countries, even this share will decline by 2000.

Table 1.

Major Industrial Countries: Demographic Structure, 1980-2025

(In percent of the total population)

article image
Sources: Heller, Hemming, and Kohnert (1986); and Fund staff estimates.

This declining share of the young will be offset principally by an increasing share of the working age population through 2000, with increases ranging from 1.4 percent of the population in Japan and France to as high as 3.5 to 4 percent in Canada, Italy, Japan, and the United Kingdom. These two trends explain the sharp decline in the youth dependency rate, the ratio of the young to the working age population (Table 2). The share of the elderly will begin to rise in this period, by 2 percent of the population in Canada, the Federal Republic of Germany, Italy, and the United States, and by as much as 6 percentage points in Japan (only small increases will occur in France and the United Kingdom).

Table 2.

Major Industrial Countries: Age-Dependency Ratios

(In percent)

article image
Sources: Heller, Hemming, and Kohnert (1986); and Fund staff estimates.

In the first quarter of the next century, these trends are sharply reversed. In all countries but France, the share of the labor force declines by approximately 2 to 3 percentage points, with larger declines in Canada and Japan of 5.4 and 6.5 percentage points, respectively. In contrast, the share of the elderly rises sharply, by as much as 6 percent of the population in Canada, the Federal Republic of Germany, Japan, and the United States, and 3 percent in Italy and the United Kingdom. This will sharply increase the elderly dependency rate.

III. Methodology

Conceptually, this paper uses two different methodologies. The first applies the results of earlier econometric studies linking the aggregate private savings rate to demographic variables. The second applies age-specific consumption parameters to examine the aggregate impact on consumption (and potentially savings) of a change in the population’s age structure. The empirical analysis relies on the baseline demographic and economic scenario developed for a recent Fund study on aging and social expenditure (Heller, Hemming, and Kohnert (1986)). That study provides demographic projections through 2025, as well as forecasts of the growth of labor productivity, the unemployment rate, and the growth in real output.

1. Forecasts of the private savings rate

The savings literature acknowledges the significance of demographic variables for the aggregate private savings rate. Most studies are derived from Modigliani and Brumberg-type models of consumption, where the savings of individuals change over their life cycle, with the highest savings rates among the middle-age groups, and low savings and even dissaving among the elderly. Intuitively, this suggests a negative relationship between the share of the elderly in the population and the private savings rate. A higher share of the young would also adversely affect the savings rate, in that they are consumers but do not add to income. These relationships are borne out in recent cross-country econometric studies by Modigliani (1970), Modigliani and Sterling (1980), Feldstein (1980), and Horioka (1986), which estimate the impact on the aggregate private savings rate of changes in the youth and elderly dependency rates. 1/

In Section IV.1, the coefficients of these studies are used to project the change in the ratio of “aggregate private savings” (household and corporate) to gross domestic product (GDP) that would arise from the forecast change in each countries’ youth and elderly dependency rates, holding all other variables constant. One may also estimate the resulting change in the aggregate G-7 private savings rate. 2/ Since the dependent variable in these studies is the ratio of “aggregate private savings” to “private national income,” 3/ the results in terms of GDP are derived by assuming that this last ratio is fixed at its 1980 level in each country. This assumption probably biases the results toward an understatement of the likely change in savings rates in any country. 4/

Each of these studies has its limitations, and one should be wary of relying on them for long-term projections. Use of simple linear estimates when there are significant changes in demographic variables may be inaccurate if there are actually nonlinear relationships. Application of the same coefficients to each country is also problematical (e.g., in Japan, the elderly are said to save, which is not consistent with the coefficients of these models). 5/ Such models also fail to consider the impact on savings of the erosion of the nuclear family structure and the increasing number of single parent and single person households in the United States and Europe. Over time, such changes may not only have a significant impact on the savings behavior of working households but also on the bequest motives of the elderly.

Moreover, each equation includes other nondemographic explanatory variables that may change over the period including, inter alia, the rate of productivity growth, the elderly labor force participation rate, the retirement age, the benefit replacement rate of public pensions, and the average growth of real per capita national income. Section IV briefly assesses how forecast changes in these variables may affect the results.

Finally, an analysis was made of the predictive accuracy of these four models, in terms of their predictions for the period 1960-80. The results, presented in Table 10, suggest the caution which is needed in appraising the results. The closest estimates are obtained strictly using the demographic coefficients of the Modigliani and Modigliani-Sterling models, but even these may be off by several percentage points of private national income. With the exception of France (where the Feldstein model yields a more accurate forecast), the sign of the change is correctly forecast by one of the two models. Italy is the one country where the resulting change in saving is the opposite of what any of the equations would have forecast. Surprisingly, the predictions derived using the full set of independent variables appear less accurate.

2. Forecasts of consumption patterns and levels

If the average level of consumption of individuals varies by age, a shift in the age structure of a population will have consequences for the distribution of consumption across age groups. Empirical analysis of these effects is rendered difficult by data problems. While consumption expenditure surveys are routinely available, these are typically on a household, not an individual, basis. No studies have attempted to estimate the average consumption level of individuals at different ages, since the consumption of individuals, particularly the young, is integrally related to a household’s consumption.

There is, however, a literature available on “household equivalence scales” (Danziger, van der Gaag, Smolensky, and Taussig (1982)). Such scales estimate the relative income required by families of different composition to achieve a comparable standard of living. As such, these scales provide indices of income requirements according to the size of a household, its age structure, the sex of its household head, all relative to that of a reference household. Such scales may be used to derive age-consumption relativities.

Two such scales were used, both relating to the United States. Danziger, van der Gaag, Smolensky, and Taussig (1982) derive a scale based on Lluch’s (1973) linear expenditure system; it specifies the minimum amount of money income needed by a household of given characteristics to reach a predetermined utility level Uo (hereafter the “Constant Utility Equivalence” or CUE scale). 6/ In 1968, the Bureau of Labor Statistics (BLS) developed a scale to obtain an objective means of identifying equivalent levels of consumption for families of varying composition. Their scale (hereafter the BLS scale) is “based on the assumption that families spending an equal proportion of income on food have attained an equivalent level of total consumption.” 7/ The BLS scale was based on detailed consumption surveys of the early 1960s, the CUE scale on the 1972-73 BLS Consumer Expenditure Survey (see Tables 11 and 12).

With these equivalence scales, it is possible to impute, for each household type, by age of household head and broad age group of children (under age 6, ages 6-15, 16-17, 18 and over), the marginal extra income required to add an extra person of a given age to a household. This permits the derivation of a standardized equivalence scale, with an index of relative consumption by age group. 8/ For adults, it is necessary to develop an adjusted measure of consumption to reflect the likelihood of being in a single person or multiple adult household (since the consumption required by a two adult household is significantly less than twice that of two single adult households). 9/ The results are then normalized by the average equivalence scale for those in the 35-54 age group to yield adjusted for marital status equivalence scales for each four-year period age group (see Chart 1), and scaled up proportionately such that for the year 1980, total private consumption expenditure, C1980, is fully distributed across all age groups, viz.,

Chart 1.
Chart 1.

Bureau of Labor Statistics and Constant Utility Equivalence Scales1/

Citation: IMF Working Papers 1989, 013; 10.5089/9781451924657.001.A001

Sources: Bureau of Labor Statistics (1968); Danziger, van der Gaag, Smolensky, and Taussig (1982). See also Table 13.1/ United States data.
article image

This last procedure was applied for each G-7 country, Ei being held invariant across countries (Table 3).

Table 3.

Consumption Shares by Aggregated Age Croups

(In percent)

article image
Source: Fund staff estimates.

Finally, there remains the problem of estimating the development of average per capita consumption, ct, across time. Two approaches are used in this analysis. The first relates the growth of ct to the growth in labor productivity, based on the assumption that disposable incomes move most closely with real wages, and the latter with labor productivity. The second initially relates the growth of consumption per capita to the growth of GDP per capita, and then adjusts for the change in the demographic structure. 10/

In both cases, an iterative approach is used to derive consumption. Using the first case for illustrative purposes, it is assumed that in 2000, an initial estimate of consumption per capita is made, viz.,

article image

Using the above equivalence scales, and the size and structure of the population in 2000 as projected in Heller, Hemming, and Kohnert (1986), one may derive the aggregate consumption associated with each of the age groups. The resulting total private consumption level, divided by the total population in 2000, yields a revised consumption per capita, c2000, which will be the basis for projecting consumption levels in the subsequent benchmark years, 2010 and 2025. The rationale is that the initial extrapolation gives an estimate of trend consumption, but this needs to be adjusted to take account of the bias implied by the changing age structure. The revised consumption per capita represents the base from which subsequent consumption would grow.

Several points should be stressed in using these weights. First, although based on empirical data, these remain simply normative scales. 11/ The equivalence scale may suggest that a child’s consumption is 19 percent of a 35 year old’s, but this may not be what is actually observed, on average; the implied distribution of consumption across age groups may prove equally inaccurate. Using such scales to examine the result of changes in a population’s age structure simply reflects the assumption that adjustments in consumption are necessary to maintain equivalent levels of well being. 12/

Second, there is a marked difference in the age relativities of consumption implied by the two scales. With the exception of the 20-34 age group (Chart 1), the BLS scale is uniformly higher than the CUE scale. Some of the differences are as much as 50 percent (e.g., in the CUE scale, a child aged 0-4 consumes a fifth that of an adult aged 35-54, relative to a third in the BLS scale). As a result, the effects on total consumption from a decline in the share of the young will be greater using the BLS equivalence scale.

These differences are clearly reflected in the corresponding shares of consumption of the younger age groups in 1980, with the CUE scale implying a lower consumption share to the 0-19 age group. In the United States, the shares of the 0-9 age group would be 9.6 and 5 percent of total consumption under the BLS and CUE scales, respectively.

Third, these equivalence scales, developed from data of the 1960s and early 1970s, may not be representative of current (let alone future) consumption patterns. The marginal cost of a child in two-earner households may now be considerably greater than in earlier periods when a single-earner household was more the norm. 13/ This suggests that the BLS scale may be the more relevant of the two scales, since it attaches a higher relative consumption weight to the young. Neither scale would appear to take account of the lumpy costs of college education, which would be a significant bulge in the consumption requirements of the age group 18-22 in some countries.

Finally, these equivalence scales have not been developed in any of the other six countries (at least to our knowledge). The derived U.S. scales are thus applied to all of the countries in the analysis. 14/

IV. Results

1. What are the effects of demographic trends on aggregate private savings?

a. Savings models

Table 4 presents the implications of projected demographic trends for the aggregate private savings rate, based on the simple application of the demographic coefficients of the four econometric models of private savings discussed earlier. All other variables used in these models are assumed constant. 15/ The results are presented for each country in terms of the impact of changes in the youth (Dep) and elderly (Age) dependency rates, respectively, on the ratio of aggregate private savings to GDP. The combined impact (Net) is also presented.

Table 4.

Change in the Ratio of Aggregate Private Savings to GDP During Each Period

(In percent of GDP)

article image
article image
Source: Fund staff estimates.
Note:Coefficients derived from following models:
M:Modigliani (1970),
M&S:Modigliani and Sterling (1980),
F:Feldstein (1980), and
H:Horioka (1986).
Also see Table 14.

The results for the period 1980-2000 indicate some striking differences between the models. The two Modigliani models suggest that demographic pressures, ceteris paribus, would lead to at most a modest decline—1 percent of GDP—in the ratio of private savings to GDP for the G-7 as a group. In contrast, the Feldstein and Horioka models suggest an increase in the G-7 savings rate of 2 percent of GDP. The difference arises principally from the relative size of the coefficient used to measure the impact on the savings rate of the significant decline in the youth dependency ratio during this period. The Modigliani models suggest that changes in this variable, positive or negative, have only a negligible impact on the savings rate. The coefficients of the Horioka and Feldstein models suggest a more substantial impact. 16/

Through 2000, the response of the household savings rate to changes in the youth dependency rate is likely to be a matter of both empirical and policy significance. In almost every country, the youth dependency rate will fall sharply, with the average declining from 53 percent to 43 percent.

In contrast, in the subsequent period, 2000-2025, the youth dependency rate is projected to decline marginally in most countries and to increase only slightly in Japan and the United Kingdom. Only in France will the rate decline gradually, but continuously, over the entire period. The elderly dependency rate will increase over the entire period, in some cases markedly. These four models indicate that demographic trends will give rise to an unambiguous and sharp decline in the aggregate private savings rate, with only the size of the decline a matter of uncertainty. In the period 2000-2010, private saving in the G-7 as a whole could drop by 1 to 3 percent of GDP from its level in 2000; the decline in the youth dependency rate will slightly moderate the large fall in the saving rates arising from the increasing elderly dependency rate. The fall in the savings rate would principally reflect developments in the Federal Republic of Germany and Japan.

During the period 2010-2025, these models imply that the sharp increase in the share of the elderly population could induce a decline in the G-7 private saving rate of 3 to 11 percent of GDP. The impact is likely to be greatest in Canada and the United States, but large declines may also be experienced in the Federal Republic of Germany, Japan, and the United Kingdom.

Over the period 1980-2025, the models imply that demographic pressures could lead to a decline in G-7 private savings by 5 to 12 percent of GDP. The decline could be largest in Japan, where savings may fall by at least 7 percent of GDP. These are large swings. While it would seem doubtful that shifts of this magnitude will actually occur, the pressures will be substantial.

The specification of the four econometric models also suggest the important effects of other variables. In Heller, Hemming, and Kohnert (1986), some of these variables are forecast to change over the period, with conflicting effects on the savings rate. Relative to the recessionary period 1978-82, real per capita income growth is forecast to increase during the period 1980-2025 for the Federal Republic of Germany, Japan, and the United States. The Modigliani-Sterling model would suggest that this could buoy the G-7 savings rate by about 1 to 1.5 percent over the full period. Using the Modigliani model, the Heller, Hemming, and Kohnert forecast increase in productivity in Japan and the United States should offset the expected decline in productivity in France and the Federal Republic of Germany, yielding a much smaller additional stimulus to the G-7 savings rate of approximately 0.5 percent of G-7 GDP. In the Feldstein model, the forecast increase in real growth in the United States should buoy G-7 savings by 0.8 percent of G-7 GDP and a further positive effect will arise from the expected reductions in the benefit replacement rate. These effects would be offset, however, by the negative effects on savings of the expected increase in the elderly labor force participation rate.

b. Consumption models

Applying the equivalence scale approach to examine the net change in consumption for the population as a whole implicitly provides an alternative perspective on potential pressures on the private savings rate. The starting point for the analysis is the fact that the increase in the weight of the elderly relative to the 0-19 age group in the population should lead to an increase in consumption, ceteris paribus, since the former have significantly higher relative per capita consumption levels.

By applying the age-specific consumption weights to the population shares that are projected to prevail in 2000, 2010, and 2025 (and holding real consumption levels constant), one can see that an index of consumption would rise by 2 to 5 percent under the BLS scale, and 3 to 7 percent under the CUE scale (Table 5). In some sense, these results suggest the pressures on aggregate consumption arising strictly from demographic factors (or at least the change in the age structure). 1/

Table 5.

Changes in Consumption Arising from Changes in the Age Structure 1/

(1980 = 100)

article image
Source: Fund staff estimates.

Calculated by applying the age-specific equivalence weights to the shares of the population in the different age groups.

What is far more conjectural is the broad trend of consumption per capita over the period. In both scenarios (e.g., consumption per capita moves with GDP per capita or labor productivity), total consumption is adjusted to take account of the impact of shifts in the age composition of the population. We have noted that through 2010, GDP per capita tends to rise more rapidly than productivity, reflecting more rapid growth in the labor force than in the population. It is not unreasonable to assume that consumption would broadly follow the trend in GDP per capita.

After 2010, the labor force is projected to stop growing in some countries, while the population continues to rise. As a result, while GDP rises at roughly the rate of productivity, GDP per capita rises at a much slower rate over the period. An important question at that time will be whether the incomes of the elderly, many of which will be dependent on social security benefit formulae, are adjusted to move with the growth in real wage levels, or will be constrained to rise at a slower pace. The effect on aggregate private consumption levels, and thus the implied potential for savings, will hinge on these alternatives.

Table 6 (Part A) indicates the potential change in the ratio of savings to GDP associated with these developments in the ratio of private consumption to GDP for each of the four models. The potential change in savings is calculated assuming that the full change in the consumption ratio is used for savings. As with the earlier results, the major uncertainty relates to the movement of the savings rate in the next decade and a half, but the difference relates less to the demographic scenario and more to the matter of whether per capita consumption moves with labor productivity or GDP per capita. If it moves at the higher growth path associated with GDP per capita during the period 1980-2000, one could witness an increase in the aggregate private consumption rate—or a potential decline in the aggregate savings rate—of approximately 2 to 3 percent of GDP by 2000, with the larger increase associated with the CUE equivalence scale (reflecting the fact that the decline in the share of the young yields less of an offsetting reduction in consumption than that arising from the increase in the elderly). If per capita consumption moves with labor productivity, one could observe a potential increase in the aggregate G-7 savings rate of 1 to 2 percent of GDP, with a particularly significant increase in the potential savings rate of the United States (over 3 percent of GDP). The choice of demographic parameters shifts the potential savings rate by approximately 1 percent of GDP during this period. 18/

Table 6.

Major Industrial Countries: Potential Change In the Private and Aggregate Savings Rates, 1980-2000

Part A. Potential Change In Savings Rate (+ = Increase)

(As percent of GDP)

Part B. Potential Change in Savings Rates Less Increase in Government Nonpension Social Expenditure 4/ (+ = increase)

(As percent of GDP)

article image
Sources: Heller, Hemming, and Kohnert (1986); and Fund staff estimates.

Weighted average of each scenario using May 1987 current exchange rate weights.

Weighted average of minimum and maximum of each equivalency scale scenario using May 1987 current exchange rate weights.

The change in government nonpension social expenditure, as a percent of GDP:

article image

In the next decade, the potential G-7 private savings rate could decrease by approximately 3 to 4 percent of GDP from its level in 2000, reflecting a decline in the savings rate in virtually all G-7 countries (with the possible exception of Italy). The sharpest decrease in the potential private savings rate could occur during the period 2010-2025, with the onset of retirement of the baby boom population in Canada and the United States. Private consumption in these countries could rise by approximately 6 to 10 percent of GDP under the alternative scenarios.

Over the whole period 1980-2025, there could be a substantial increase in aggregate consumption, whichever scenario is chosen. If one examines the minimum and the maximum G-7 average that is possible across the different scenarios, the potential decline in savings for the G-7 as a whole ranges from 5 to 12 percent of GDP. This will be a pervasive phenomenon in all of the countries surveyed. It is interesting to note that these results are consistent with the earlier savings model results.

The discussion has heretofore focused strictly on private savings. Yet there will be additional pressures on overall savings in the economy, arising from pressures in the government sector. The Heller, Hemming, and Kohnert study indicated that this period will witness a significant increase in the ratio of government social expenditure to GDP. In part, this reflects higher pension transfer payments to the elderly, essentially providing some of the disposable income to finance the increased private consumption already captured in the above analysis.

Some of the increase, however, is likely to be used to fund other social expenditures, particularly medical care, which are not likely to be included in the increased private consumption expenditure suggested from the equivalence scale analysis. One cannot know how this increased government expenditure will be financed, and whether it will be at the expense of private consumption or savings. One can assume that the problem of financing the government’s deficit will constitute an additional source of pressure on the overall savings rate in these economies. The pressure may arise from the necessity of increasing taxation, which may be partly borne from a decrease in savings, or it may arise from an increase in the government’s deficit.

To give some sense of the additional pressure on savings arising from the fiscal sphere, Table 6 (Part B) indicates the combined impact of the change in consumption (or potential savings) already described in Table 6 (Part A), and the change in the government’s social expenditure burden arising from nonpension outlays. 19/ These estimates do not encompass any other factors that may be affecting government expenditures during this period. They are also sensitive to the assumptions made on the ability of policymakers to control the rate of medical care cost inflation, and the absence, in the Heller, Hemming, and Kohnert study, of any projections of the increase in the cost of chronic care for the very elderly (e.g., over age 75).

In the period 1980-2000, the nonpension social expenditure burden is projected to decline in Canada, the Federal Republic of Germany, the United Kingdom, and the United States, with only small increases in France and Japan (less than 0.5 percent of GDP). This will enhance the potential for some increase in the aggregate savings rate of the G-7 group during this period. However, in the subsequent two decades, nonpension social expenditure outlays of the government could rise by 1 to 2 percent of GDP. During the period 2000-2010, the increase would be largest in Japan (1.5 percent of GDP) with the other countries experiencing smaller increases of 0.5 percent of GDP. In the period after 2010, the increases could range from 1 to 2 percent of GDP in Canada, the Federal Republic of Germany, the United Kingdom, and the United States. For the G-7 as a group, these factors may further exacerbate pressures to reduce the aggregate savings rate.

2. How sustainable will be the burden of intergenerational support?

The Heller, Hemming, and Kohnert study suggested that under current policies there would be a striking increase in government social expenditure, in some countries increasing as a share of GDP by as much as 12 percent (Japan) and in others by A to 9 percent (e.g., France, the Federal Republic of Germany, Italy, and the United Kingdom). It noted that if the “net increase in expenditure was to be financed exclusively through the payroll tax,” tax rates would have to increase by 7 percentage points in France and by as much as 21 percentage points in Japan. The issue raised was whether this higher burden of intergenerational support arising from government transfers to the elderly could be financially absorbed by the working age population.

Yet the study also noted that there remains

“an asymmetry between the young and aged segments of the population in terms of their relative dependence on government intervention for their overall support. The only element of youth care involving substantial government expenditures appears to be education. A comprehensive accounting for the shifts in absorption of economic resources implied by the prospective demographic changes would have to trace also the relative decline in private expenditures for food, shelter, clothing, entertainment, and in some countries medical care. This was beyond the scope of this study.” 20/

The question to be addressed in this section is the magnitude of the decline in private consumption associated with the diminished importance of the younger age groups in the population, relative to the potential increase in the tax burden associated with public support of the elderly. Will the reduced burden of child support to the working age population free up their financial capacity to support, either privately or through public intermediation, the consumption of the elderly?

It is clear from Table 3 that the share of the young in total consumption, by whichever equivalence scale is used, will fall quite significantly, particularly between 1980 and 2000. Table 7 (Part A) indicates the change in the ratio of consumption by the 0-19 age group to total wages, the latter chosen to yield comparability with the payroll tax base. The prospective increases in the payroll tax burden, as indicated in Heller, Hemming, and Kohnert (1986), are also provided for comparison purposes. Four cases are indicated, representing alternative combinations of the two equivalence scales and the two alternative approaches to estimating the dynamics in the growth of consumption with rising productivity and incomes.

Table 7.

Perspectives on the Change In Intergenerational Financing Burden on the Working Population

Part A. Comparison of the Change in the Share of Consumption of the 0-19 Age Group In Total Wages, with Potential Payroll Tax Increase (+ = increase)

(In percent of total wages)

Part B. Combined Impact of Reduced Burden of Child Support and Increased Government Social Expenditure Burden 3/ (+ = net Increase In overall tax burden of taxes and child support)

(As a percent of total wages)

article image
Source: Heller Hemming and Kohnert (1986); and Fund staff estimates.

Potential increase In payroll tax burden to finance higher social expenditure burden, as a percent of total. wages; see Heller, Hemming, and Kohnert (1986), p. 4.

Equals sum of (A) and (B) in Part A.