asset-based reallocations
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Asset-based Reallocations. Amonthep “Beet” Chawla Berkeley Hands-on 12-16 January, 2009. Outline. Overview Private asset-based reallocations (Andy) Public asset-based reallocations (Beet). Overview. Brief concept How to use the RA spreadsheet Learn from examples: - PowerPoint PPT PresentationTRANSCRIPT
Asset-based Reallocations
Amonthep “Beet” Chawla
Berkeley Hands-on12-16 January, 2009
Outline
• Overview
• Private asset-based reallocations (Andy)
• Public asset-based reallocations (Beet)
Overview
• Brief concept
• How to use the RA spreadsheet
• Learn from examples: “The Good, the Bad and the Ugly”
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
Asset Ownership
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-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
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
Non-zero RA for children
1. Individuals do not save until ages early 40s
2. Individuals receive asset income before they save to accumulate assets
The elderly do not dis-save?
How to handle macro controls?
Using the RA spreadsheet
Almost zero
Not all countries may have this information
Let’s take a loot at the RA spreadsheet!
NTA web
Private Asset-based Reallocations: An Introduction
Andrew Mason
Outline
• Overview of Asset-based Reallocations
• Implementation with Illustrative Values
• Conclusions
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
The Flow Account Identity
• Inflows– Labor Income– Asset Income– Transfer Inflows
• Outflows– Consumption– Saving– Transfer Outflows
Inflows Outflows
( ) ( ) ( ) ( ) ( ) ( )l aY a Y a a C a S a a
Lifecycle Deficit Asset-based Reallocations Net Transfers
Age Reallocations
( ) ( ) ( ) ( ) ( ) ( )l aC a Y a Y a S a a a
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
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.
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
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.
-3000
-2000
-1000
0
1000
2000
3000
4000
45 50 55 60 65 70 75 80 85 90
Asset-based reallocations
Saving
Asset income
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).
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.
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
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
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.
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.
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
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.
Capital income in TaiwanAn Illustration
Capital Income and Components, Taiwan, 1998, NT$ Millions
Capital income 2,878,451
Operating surplus, net 2,605,429
Operating surplus of corporations and NPISHs , net 1,980,109
Operating surplus of households, net 625,320
Capital share of mixed income, net 173,112
Other taxes less subsidies on production 99,909
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.
Property Income in TaiwanAn ExampleProperty Income and Components, Taiwan, 1998, NT$ Millions
Total Private ROW Public
Property income, net 0 -172,192 -81,097 253,289
Property income, inflows 3,883,803 3,361,863 127,902 394,038
Property income, outflows -3,883,803 -3,534,056 -208,999 -140,748
Interest, net 0 218,625 -121,713 -96,912
Inflows 2,606,230 2,487,285 75,108 43,837
Outflows -2,606,230 -2,268,661 -196,821 -140,748
Other property income, net 0 -390,817 40,616 350,201
Inflows 1,277,573 874,578 52,794 350,201
Outflows -1,277,573 -1,265,395 -12,178 0
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.
Intersectoral Flows of InterestAn Example from Taiwan
Intersectoral Flows of Interest, Taiwan, 1998, NT$ Million
Inflows to:
Outflows from: Public Private ROW Total
Public - 140,693 55 140,748
Private 39,352 2,154,256 75,053 2,268,661
ROW 4,485 192,336 - 196,821
Total 43,837 2,487,285 75,108 2,606,230
Note: Outflows and inflows are both represented as positive values in this table.
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
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
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.
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.
Sources for NTA Age Profiles Profile from income and expenditure survey NTA Profile
Property income (Interest, dividends, rental income)
Operating surplus (except households), property income inflows, property income outflows (except consumer interest)
Self-employment income, income from family business
Mixed income (capital’s share)
Imputed rent from owner-occupied housing
Operating surplus
Interest expense Consumer Interest Outflow
Asset Income Profiles, Per Capita Values, Taiwan 2008
-50,000
0
50,000
100,000
150,000
200,000
250,000
0 7
14
21
28
35
42
49
56
63
70
77
84
Per capita interest expense
Per capita property income
Per capita mixed income (capital share)
Per capita operating surplus, household
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.
Per Capita Private Asset-based Reallocations, US, 2003
-10,000.00
-5,000.00
0.005,000.00
10,000.00
15,000.00
20,000.0025,000.00
30,000.00
35,000.000 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85
90+
Asset-based Reallocations Asset income Saving
Per Capita Private Asset Income Components, US, 2003
0.00
10,000.00
20,000.00
30,000.00
40,000.00
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 8590+
Capital income Interest income, net Other property income, net
Per Capita Private Property Income, US, 2003
-30,000
-20,000
-10,000
0
10,000
20,000
30,000
0 5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
+
Interest inflows Interest outflows
Other property income, inflows Other property income, outflows
Per Capita Private Interest, US, 2003
-4,000.00
-2,000.00
0.00
2,000.00
4,000.00
6,000.00
8,000.00
0 10 20 30 40 50 60 70 80 90+
Pe
r C
ap
ita
Va
lue
Interest, Net Consumer interest, net
Public interest, net Other interest, net
Per Capita Private Capital Income, US, 2003
0
5,000
10,000
15,000
20,000
25,000
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90+
Operating surplus, corps and NPISHs Operating surplus, hholds
Mixed income Taxes on production
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.
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?
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?
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
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
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.
The End
Public Asset-based Reallocations
Amonthep Chawla
Outline
• Overview of the Public Sector and Public Asset-based Reallocations
• Implementation with Illustrative Values
• Conclusions
The Public Sector
• The public sector includes all inflows to and outflows from the general government.
• Public enterprise is part of the private sector; however, the general government may receive property income from public enterprise.
Public Asset-based Reallocations
• Public assets generate interage flows between public asset income and public saving.
• Public asset income includes public operating surplus and public property income.
• Based on SNA, the public sector has no public capital income.
• Public property income includes inflows from and outflows to the private sector and ROW.
Public Asset-based Reallocations (cont.)
• The government saves when it acquires an asset or dispose of debt, generating an outflow
• The government dis-saves when it dispose of an asset or acquires debt, generating an inflow.
• Public saving is measured as the sum of public asset income and public transfer surplus/deficit.
Public Transfer Surplus/Deficit
• Balancing item that insures that transfer outflows and inflows are equal
• Relationship between transfer surplus/deficit and public saving– If taxes and grants exceed public transfer
inflows, transfer surplus and public asset income are saved
– if taxes and grants fall short of public transfer inflows, transfer deficit must be financed out of asset income with the residual saved
Estimation Methods
• Aggregate Controls: similar to private property income, public property income includes interest, rent, dividends and other less important components of property income.
• Age Profile: the age profiles of public property income (both inflows and outflows) and public saving follow the general tax profile.
Asset-base Reallocations for Japan: an Illustration
Total Age groups
0-19 20-29 30-49 50-64 65+
Public asset-based reallocations
22,749 715 2,456 8,577 7,643 3,358
Public asset income
-5,458 -172 -589 -2,058 -1,834 -805
Capital income 0 0 0 0 0 0
Public Interest, net -5,796 -182 -626 -2,185 -1,947 -855
Other property income, net
338 11 36 127 113 50
Less: Public saving
-28,207 -887 -3,046 -10,635 -9,477 -4,163
Asset-based Reallocations, Japan, 2004, Aggregate, billion yen
Per Capita Public Asset-based Reallocations, Japan, 2004
-500,000
-400,000-300,000
-200,000
-100,0000
100,000
200,000300,000
400,000
0 10 20 30 40 50 60 70 80 90+yen
Asset-based Reallocations Asset income Saving
Per Capita Public Property Income, Japan, 2004
-200,000
-150,000
-100,000
-50,000
0
50,000
100,000
150,000
0 10 20 30 40 50 60 70 80 90+yen
Interest inflows Interest outflows
Other property income, inflows Other property income, outflows
Summary
• Taxes, public expenditures and public asset income determine how much resources are available for individuals to save through the public sector
• Reallocations through public assets are one of major mechanisms that individuals at all age groups rely on to finance their lifecycle deficit