Simulating the future of the Swedish baby-boomgenerations

Professor Anders Klevmarken

Department of Economics

UPPSALA UNIVERSITY

Old age dependency ratios, 2000 and 2050 (population 60+ relative to population 20-59)

Number of elderly 2000. 2020 och 2040

Year Men Index Women Index All IndexNumber of 65+ (1000s)2000 650 100 881 100 1531 1002020 953 147 1103 125 2056 1342040 1164 179 1301 148 2465 161

Number of 80+ (1000-tal)2000 160 100 293 100 453 1002020 209 131 316 108 525 1162040 348 218 463 158 811 179

Source: Sveriges framtida befolkning 2006-2050, Demografiska rapporter 2006:2, SCB

Research issues

• How much health care and social care willthe future big generations of elderly use?

• Can they count on the same amount of assistance from spouces, children and other relatives as today?

• How much will the (public) expendituresfor health care and social care increase?

Research issues• Will the tax revenues from households increase in

proportion to the increase in expenditures for care (with the current tax system)?

• Will future elderly have incomes and assets such that they can pay for the care they will need?

• Is it possible to get a better balance between the demand for care and the resources that can be made available for this purpose by stimulating working generations to retire later, by welcoming more immigrants to Sweden or by improving the health status of the population?

The research project ”The old baby-boomers”

A micro simulation approach because we needed to- analyze population changes and subgroups within the population- compare subgroups of the population to each other, for instance retired to working,- apply the rules of the tax and benefit system to single individuals to get the incentives as well as the incomes right,- analyze distributional issues and at the same time get consistent aggregate estimates.- capture the dynamics of the aging processes- have a flexible forecasting/simulation tool with which we could easily change scenarios and redefine the population groups of interest,

Basic model: SESIM at the Ministry of Finance

The old baby-boomersWe had to add to the model and extend it in several

respects to fit our needs.

New studies of– Changes in the health status of the population– Utilization of sickness benefits, hospital care and

social care of elderly – Migration within Sweden and closeness to kin. – The mechanisms behind early retirement in

Sweden– The incomes of the elderly relative to the working

population– Changes in the distribution of wealth as the

population ages.

Research team• Docent Kristian Bolin, LUCHE, Lund University• Docent Matias Eklöf, Department of Economics, Uppsala

University• Professor Lennart Flood, Department of Economics, Gothenburg

University• FD Urban Fransson, IBF, Uppsala university and Department of

Human and Economic Geography, Gothenburg University• FD Daniel Hallberg, Department of Economics, Uppsala University• FD Sören Höjgård, Swedish Institute for Food and Agricultural

Economics, Lund• Professor Anders Klevmarken, Department of Economics,

Uppsala University• Docent Mårten Lagergren, Stockholm Gerontology Research

Center, Stockholm• Professor Björn Lindgren, LUCHE, Lund University• MSc Andrea Mitrut, Department of Economics, Gothenburg

University

Changes in health statusSimulated population 50-74 shares for each

health category, 2000-2040.

Changes in health status 2000-2040 for people 74+

Average and total number of in-patient hospital days for people 65+

Year Average no of days Total no of days (1000)Base Improved Improved Base Improved Improved

scenario health health & scenario health health &lower lowerdeath risks death risks

2000 3.2 3.3 3.2 4954 5068 49902020 3.2 3.1 3.5 6495 6270 81172040 3.4 2.9 4.0 8396 7241 12087

Total number of elderly with around-the-clock care 2000-2039 (1000s)

Institutionalized care

0

50

100

150

200

2000-2004

2005-2009

2010-2014

2015-2019

2020-2024

2025-2029

2030-2034

2035-2039

85+75-8465-74

Total number of elderly with home help2000-2030 (1000s)

Home help

050

100150200250

2000-2004

2005-2009

2010-2014

2015-2019

2020-2024

2025-2029

2030-2034

2035-2039

85+75-8465-74

Total expenditures for inpatient care, homehelp and institutionalized care for people

65+_______________________________________________________

Year Total exp. Expenditure share Total expenditure(mkr. in ___________________________ as share (%) fixed prices) In-patient Home help Institu- of sum of

tiona direct taxeslized from households

2000 92231 0.365 0.240 0.395 20.52020 166719 0.396 0.204 0.400 24.92040 339297 0.363 0.211 0.426 36.2

Average taxable income for retired relative to the average taxable income of working cohorts of age 20-64, by birth

cohort and calendar year

0,30

0,40

0,50

0,60

0,70

0,80

0,90

65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90

Cohort_37 Cohort_40 Cohort_43 Cohort_46Cohort_49 Cohort_52 Cohort_55

Median income of 65+ relative to the median income of 20-64

År Base High Highscenario pension immig-

age ration__________________________________

2000 0.709 0.711 0.7122020 0.634 0.693 0.6342040 0.552 0.623 0.558

(Equivalized disposable income)

Poverty share (disposable income less than 50% of the median income of the adult population), by

birth cohort and age.

0,00

0,05

0,10

0,15

0,20

0,25

0,30

0,35

0,40

44 47 50 53 56 59 62 65 68 71 74 77 80 83 86 89

Cohort 1955 Cohort 1949 Cohort 1943 Cohort 1937

Mean net wealth by period and age of the oldest in the household (1999 prices)

Which incomes do those in most need of care have?

(Percent of all 65+ in each form of care)

Year/Kind of care Quartiles of the distribution of disposable income for all adults

1 2 3 4 All2000No care 46.7 30.8 14.1 8.4 100Home help 68.6 18.7 7.1 5.6 100Institutionalized 65.5 22.2 8.0 4.3 1002040No care 53.1 30.7 10.9 5.3 100Home help 75.4 17.6 3.8 3.2 100Institutionalized 76.4 14.7 4.6 4.2 100

How much wealth do those in most need of care have?

(Percent of all 65+ in each form of care)Year/kind of care Quartiles of the distribution of

net worth for all adults 1 2 3 4 All

2000No care 4.7 28.0 27.4 39.9 100Home help 2.5 40.2 27.4 29.8 100Institutionalized 2.0 39.9 25.8 32.3 1002040No care 12.0 17.4 20.8 49.9 100Home help 12.4 20.1 18.2 49.3 100Institutionalized 11.1 21.6 19.9 47.4 100

Will a reduction in the marginal tax rate increase work effort and improve relative

incomes of 65+ ?The Swedish income tax schedule has three

segments:1. Municipal proportional tax rate of 29-35%.2. National tax rate of 20% above a threshold of

about 30000 euros but below about 47000 euros.

3. National tax rate of 25% above the second threshold.

Experiment: Replace 2 and 3 by 15%

Implications:

• The tax bill of direct taxes from the household sector decreases by about 2% for every year in the simulation period

• The work incentives are small

Share of the female population in gainful work (%)

35.136.631.331.438.539.360-64

65.164.268.668.066.966.351-59

68.167.768.868.466.466.620-50

Lowm-tax

BasicLowm-tax

BasicLowm-tax

BasicAge

204020202000Year

Equivalized disposable income(1000SEK)

Note: Relative income = Median income of 65+/Median income of 20-64(%)

51.151.660.360.172.271.7Relative income

0.3830.3790.3750.3730.3210.313Gini11031087537530253249P90

853842416414195193P75586584295294142143P50335335184184101101P25

Low m-tax

BasicLow m-tax

BasicLow m-tax

BasicStatistic204020202000Year

Conclusions• If the same share of elderly as currently would get

access to health care and social care in the future, the supply of these services would have to increase at the same rate as the age groups concerned. (In-patient care 70%, home help 50%, and institutionalized care a little more than 80%.)

• The expenditures for these services tend to increase faster than the tax revenue from households. This will imply reallocation of resources within the public sector, higher taxes or increased user-fees.

• The income standard of those who are retired will decrease as they age relative to the working generations. Younger birth cohorts will get lower relative incomes than older cohorts unless they retire later.

Conclusions cont.• A large share of the very old will get so low

incomes that they become poor. This group will not have the means to pay for care.

• The baby boom cohorts of the 1940s are relatively wealthy and they will according to our simulations keep their wealth also when they age. This is a potential source to fund increasing care expenditures, but a large share is tied up in housing.

• We will, however, have a relatively large group of care needing elderly who both have low incomes and very little wealth. This group will not be able to afford higher charges for care.

Conclusions cont.• We should not expect that children and other

relatives step in and substitute for public care. • Increased immigration is not very effective in

balancing the increased burden of care for our elderly.

• Much more effective is an increase in the average retirement age.

• A major cut in the marginal income tax rates have only very small effects on the labour market and the income distribution.

Conclusions cont.

• Our simulations are sensitive to changes in the death rates. Lower death rates for ”young and middle aged” elderly may –depending on their health status – result in an increasing number of very old and heavily care dependent persons.