Bequest Estimate and Wealth Impact in Japan: Based on a CGE model - PowerPoint PPT Presentation

Max Planck Institute for Demographic Research Bequest Estimate and Wealth Impact in Japan: Based on a CGE model with realistic demography (Work-in-progress) Miguel Sánchez-Romero † Naohiro Ogawa ‡ Rikiya Matsukura ‡ † Max Planck Institute for Demographic Research (MPIDR) ‡ NUPRI, Nihon University

Motivation Japan is at the forefront of population aging ⇒ ↓ labor and production Austria 1.2 Brasil Germany Japan 1 Mexico Spain Aged dependency ratio Sweden Taiwan 0.8 USA 0.6 0.4 0.2 0 1950 1975 2000 2025 2050 2075 2100 Year Source: Authors’ estimations based on local statistics, HFD, HMD, and UN Population Division. Notes: aged group (ages 62+), working group (ages 18-61). () June 2-8th 2013 Global NTA Conference, Barcelona 2 / 31

Motivation Necessity of using additional resources for generating economic growth (mainly through physical capital and human capital) However, there aren’t estimations of bequest in Japan (micro-macro level) () June 2-8th 2013 Global NTA Conference, Barcelona 3 / 31

Motivation Necessity of using additional resources for generating economic growth (mainly through physical capital and human capital) However, there aren’t estimations of bequest in Japan (micro-macro level) () June 2-8th 2013 Global NTA Conference, Barcelona 3 / 31

Motivation Two main questions: Can we estimate bequest? ◮ Macro and historical: Piketty (2011) for France 1820-2050 ◮ Lifecycle models: Kotlikoff and Summers (1981), Kotlikoff (1988), and Modigliani (1986, 1988) applied to US ◮ Wealth inequality: general equilibrium models (see literature review by Cagetti and Nardi (2008)) Can we use bequest to improve economic growth? ◮ Shall savings be annuitized? ◮ Who should receive bequest? ◮ “The tragedy of annuitization” by Heijdra et al. (2010) ⇒ wealth should not be annuitized and it should be transferred to children () June 2-8th 2013 Global NTA Conference, Barcelona 4 / 31

Motivation Two main questions: Can we estimate bequest? ◮ Macro and historical: Piketty (2011) for France 1820-2050 ◮ Lifecycle models: Kotlikoff and Summers (1981), Kotlikoff (1988), and Modigliani (1986, 1988) applied to US ◮ Wealth inequality: general equilibrium models (see literature review by Cagetti and Nardi (2008)) Can we use bequest to improve economic growth? ◮ Shall savings be annuitized? ◮ Who should receive bequest? ◮ “The tragedy of annuitization” by Heijdra et al. (2010) ⇒ wealth should not be annuitized and it should be transferred to children () June 2-8th 2013 Global NTA Conference, Barcelona 4 / 31

Research goals Research goals 1. Provide reliable estimates of bequest flows in Japan (using a CGE model with realistic demography) 2. Give insight on the observed inheritance profiles 3. Give policy recommendations () June 2-8th 2013 Global NTA Conference, Barcelona 5 / 31

Research goals Research goals 1. Provide reliable estimates of bequest flows in Japan (using a CGE model with realistic demography) 2. Give insight on the observed inheritance profiles 3. Give policy recommendations () June 2-8th 2013 Global NTA Conference, Barcelona 5 / 31

Research goals Research goals 1. Provide reliable estimates of bequest flows in Japan (using a CGE model with realistic demography) 2. Give insight on the observed inheritance profiles 3. Give policy recommendations () June 2-8th 2013 Global NTA Conference, Barcelona 5 / 31

Model set-up The model set-up ◮ Population ◮ Economic model () June 2-8th 2013 Global NTA Conference, Barcelona 6 / 31

Model set-up Population reconstruction - Population ◮ Single sex model (“population reconstruction”) - Inverse projection, (Lee, 1985) - Generalized inverse population projection (Oeppen, 1993) ◮ Realistic fertility and mortality (exogenous) ◮ No migration ◮ Information derived from the population reconstruction: ⋆ Adults, children, expected parents, expected number of sibling, expected number of offspring () June 2-8th 2013 Global NTA Conference, Barcelona 7 / 31

Model set-up Population reconstruction 100 6 Simulation Simulation Data Data 90 Life expectancy at birth 5 Total fertility rate 80 4 70 60 3 50 2 40 30 1 1700 1800 1900 2000 2100 2200 1700 1800 1900 2000 2100 2200 Year Year Life expectancy Total fertility rate 6 2.5 Simulated pop. 1903 Simulated pop. 2000 4 Simulated pop. 2100 Population (in millions) 2.0 Census 1903 Census 2000 2 Rate (in %) 1.5 0 1.0 −2 0.5 −4 −6 0 1,880 1,900 1,920 1,940 1,960 1,980 2,000 2,020 2,040 0 20 40 60 80 100 Year Age Net migration rate Population distribution Source: Authors’ calculations. UN Population Division, Ministry of Health and Labor of Japan, and Statistics Bureau of Japan. () June 2-8th 2013 Global NTA Conference, Barcelona 8 / 31

Model set-up Economic model Model : CGE OLG model with realistic demography Assumptions : Closed economy, perfect annuity market, no borrowing constraints, and competitive markets - Firm : Demands labor ( H ) and capital ( K ) - Government : Provides goods and services ( G ) and levies taxes on { τ ct , τ l , τ k , τ p , τ b } . Our government runs an unbalanced social security pension system - Individuals : Maximum life span 120 years, (endog.) work effort, retirement, saving/consumption (child-rearing cost), and bequest. Preferences similar to Braun et al. (2009) and ˙ Imrohoroˇ glu and Kitao (2012) () June 2-8th 2013 Global NTA Conference, Barcelona 9 / 31

Model set-up Economic model Model : CGE OLG model with realistic demography Assumptions : Closed economy, perfect annuity market, no borrowing constraints, and competitive markets - Firm : Demands labor ( H ) and capital ( K ) - Government : Provides goods and services ( G ) and levies taxes on { τ ct , τ l , τ k , τ p , τ b } . Our government runs an unbalanced social security pension system - Individuals : Maximum life span 120 years, (endog.) work effort, retirement, saving/consumption (child-rearing cost), and bequest. Preferences similar to Braun et al. (2009) and ˙ Imrohoroˇ glu and Kitao (2012) () June 2-8th 2013 Global NTA Conference, Barcelona 9 / 31

Model set-up Economic model Model : CGE OLG model with realistic demography Assumptions : Closed economy, perfect annuity market, no borrowing constraints, and competitive markets - Firm : Demands labor ( H ) and capital ( K ) - Government : Provides goods and services ( G ) and levies taxes on { τ ct , τ l , τ k , τ p , τ b } . Our government runs an unbalanced social security pension system - Individuals : Maximum life span 120 years, (endog.) work effort, retirement, saving/consumption (child-rearing cost), and bequest. Preferences similar to Braun et al. (2009) and ˙ Imrohoroˇ glu and Kitao (2012) () June 2-8th 2013 Global NTA Conference, Barcelona 9 / 31

Model set-up Economic model Model : CGE OLG model with realistic demography Assumptions : Closed economy, perfect annuity market, no borrowing constraints, and competitive markets - Firm : Demands labor ( H ) and capital ( K ) - Government : Provides goods and services ( G ) and levies taxes on { τ ct , τ l , τ k , τ p , τ b } . Our government runs an unbalanced social security pension system - Individuals : Maximum life span 120 years, (endog.) work effort, retirement, saving/consumption (child-rearing cost), and bequest. Preferences similar to Braun et al. (2009) and ˙ Imrohoroˇ glu and Kitao (2012) () June 2-8th 2013 Global NTA Conference, Barcelona 9 / 31

Model set-up Economic model ⋆ Economic unit (double-head “pseudo-household”) ◮ Two adults (2 heads) ◮ Dependent children ◮ Economic decisions: 1. Consumption/saving 2. Intensive and extensive labor supply (work effort, retirement age) 3. Bequest ◮ Assumptions: 1. No economies of scale 2. All resources are equally distributed within the heads 3. All individuals are paired with an individual of the same age when they become adults 4. Exit from marriage can only occur because of death () June 2-8th 2013 Global NTA Conference, Barcelona 10 / 31

Model set-up Economic model Calibration 5 No bequest motive Bequest motive I Bequest motive II Bequest motive III 4 Data Ratio 3 2 1 1900 1950 2000 2050 2100 Year Figure: Capital-output ratio, period 1885-2100, Japan () June 2-8th 2013 Global NTA Conference, Barcelona 11 / 31

Model set-up Economic model 1.5 No bequest motive No bequest motive Bequest motive I Bequest motive I Bequest motive II Bequest motive II Ratio to labor income Ratio to labor income Bequest motive III Bequest motive III 1.0 NTA data NTA data 1.0 ages 30−50 ages 30−50 0.5 0.5 0 0 0 20 40 60 80 100 0 20 40 60 80 100 Age Age Consumption and labor income, 1984 Consumption and labor income, 1994 1.5 No bequest motive Bequest motive I Bequest motive II Ratio to labor income Bequest motive III NTA data 1.0 ages 30−50 0.5 0 0 20 40 60 80 100 Age Consumption and labor income, 2004 () June 2-8th 2013 Global NTA Conference, Barcelona 12 / 31

Bequest estimation Comparison of our model to JSTAR data () June 2-8th 2013 Global NTA Conference, Barcelona 13 / 31