Intergenerational Transfers of the Sandwich Generation in Taiwan An - PDF document

Intergenerational Transfers of the Sandwich Generation in Taiwan – An Application of the National Transfer Accounts Method Kevin Yu-Ching Hsieh (yqxie1996@hotmail.com ) and An-Chi Tung (actung@econ.sinica.edu.tw) September, 2017 (Very preliminary draft: Please do not quote without permission) keywords ： intergenerational transfers, intra-familial transfers, public transfers, sandwich generation, National Transfer Accounts, Taiwan 1. Motivation At any point of time in any society, resources transfer among generations, through both private and public channels. The working-aged population, who are sandwiched between young children and aging parents, and are called the Sandwich Generation (SG, hereafter) in this study, are usually the net providers of resources to other generations. In many countries, the financial burden of the SG has been escalating in recent years, because elders live longer, and because college fees are higher and the unemployment rate for young people is rising (see for example, Parker and Patten, 2013). Yet a different, and probably opposite, trend has also been observed. In Japan, for example, young elders transfer resource downwards, because they enjoy decent pensions, while the working-aged population are financially weak due to prolonged economic recession (Ogawa et al, 2009). In Taiwan, population aging, education lengthening, and economic recession are all taking place, and in a faster speed than anywhere in the world. However, it remains a puzzle whether the financial burden of the SG has become heavier or lighter in Taiwan, as we do know too well the magnitude and direction intergenerational resource flows. In this study, we aim to measure intergenerational transfers in Taiwan in 1981 and 2015, and then examine how and why these transfers change over time. To construct the necessary data, we use National Transfer Accounting method (NTA

hereafter), transforming micro data into age-specific statistics, and calibrating to macro values from National Income account. Two modifications are made to help accomplishing our goal. First, data were lacking concerning who had paid social premiums and received social benefits for years 1981 to 1995. We solve the problem by trying to identify social insurants by their social economic characteristics. Second, employment-based retirement benefits are quite important in Taiwan, yet they are not measured in NTA, probably because these are not a standard system everywhere. We solve the problem by introducing a new variable in the basic NTA identity. After explaining the research motivation, the second section review the NTA method and our modifications. The third section reports the estimation results, and then discusses and compares the two years. The last section concludes the study by summarizing the findings and remarks on future studies. 2. Data and Methodology 2.1 Brief review of the National Transfer Accounts In a nutshell, the NTA method introduces an extra dimension of age to the National Income data. The innovative NTA data serve to open up new opportunities for re-examining many economic theories, such as life-cycle hypothesis. In addition, they make possible the re-assessment of major social policies, such as the financial sustainability of the National Pension Program in the very long run, and hence carry rich and important policy implications (e.g., Hsieh and Tung, 2016). At the center of the NTA framework is the economic lifecycle, which refers to the variation over our lifetime of our needs and abilities. The economic lifecycle expresses itself in age variation in what we consume and what we produce (United Nations, 2012). Figure 1 shows the age profiles of labor income and consumption, with age shown by the horizontal axis, and per capita value by the vertical axis. The per capita labor income YL, exhibits a bell shape, with highest average income around age 40. Note that not all individuals of each age group are employed, so the average value is determined by both how many people earn labor income and how much they earn. The per capita consumption C, is relatively flat when compared with labor income, as both babies and the elderly consume. Here C includes both private and public consumption, which will be elaborated later.

700,000 600,000 YL 500,000 400,000 NT 300,000 C 200,000 100,000 0 0 10 20 30 40 50 60 70 80 90 age Figure 1. Per capita labor income and consumption The Lifecycle Deficit (LCD), defined as the difference between consumption and labor income, is positive for people in both very young and very old age groups, but is negative for working-age population, as shown in Figure 2. 700,000 600,000 500,000 LCD<0 400,000 NT 300,000 200,000 LCD>0 LCD>0 100,000 0 0 10 20 30 40 50 60 70 80 90 age Figure 2. Per capita Lifecycle Deficit The rise and fall of LCD can be interpreted in at least two ways. First, in every society, children and the elderly consume far more than they produce, while people at working age earn more labor income than they consume. Alternatively, in the lifetime of every individual, there are extended periods in childhood and old-age when consumption exceeds labor income, while there are also periods when labor income is higher than consumption.

The lifecycle deficits and surpluses are sustainable only because a complex system of institutions and economic mechanisms enable flows of economic resources from surplus to deficit age. In NTA, this age reallocation system is the counterpart of the economic lifecycle. Economic flows across age are mediated by three main sources of reallocation, private transfers (TF), public transfers (TG), and asset-based reallocation (AR), and the last term can be divided by public and private elements. 500,000 400,000 300,000 TF 200,000 TG AR 100,000 NT 0 -100,000 -200,000 LCD -300,000 -400,000 -500,000 0 10 20 30 40 50 60 70 80 90 age Figure 3. Channels to finance LCD. Transfers refer to reallocations which involve no quid pro quo, thus are different from consumption or labor income. Private transfers, TF, are governed by voluntary contracts and social conventions. Examples are familial support of children and parents, bequests, and charitable contributions. Children, and in many cases the elderly, are net receivers of private transfers, and working-age adults are net providers. TF consists of both intra-familial (TFW) and inter-familial (TFB) transfers. Public transfers, TG, are governed by involuntarily resource flows. The public sector reallocates resources relying on social mandates embodied in laws and regulations and implemented by local, regional and national governments. Outflows of TG, or government receipts from the private sector, include all taxes, direct and indirect, and social contributions. Inflows of TG, or government outlays to the private sector, include social benefits as well as government consumption. Asset-based reallocations, AR, realize inter-age flows through inter-temporal exchange. They involve two kinds of flows, asset income and savings. When individuals accumulate pension funds or personal saving during their working years

and rely on asset income and/or dissaving of those assets during their retirement years, they are relying on asset-based reallocations. The above variables can be organized into the following flow identity: C(x) – YL(x) = RA(x) +TG (x) +TF (x) = YAF(x) –SF(x) +YAG(x) –SG(x) +TG(x) +TFB(x) +TFW(x) (1) where x= 0, 1, 2, …, 89, 90+ The left-hand side is the lifecycle deficit, LCD of age x. The right-hand side consists of three transfers, namely RA, TG and TF. RA can be divided into net private asset income YAF, net public asset income YAG, private saving SF and public saving SG. TF can be divided into inter-familial transfer TFB and intra-familial transfer TFW. 2.2 Our modification to adapt to the Taiwan pension systems As mentioned already, two modifications are necessary in constructing the NTA of Taiwan. First, there are no data on social insurances, namely, Government Employee Insurance and Labor Insurance, for years 1981 to 1992, 1 which would distort the estimated TG. The inflow of TG by the elderly, for instance, would be heavily underestimated. We solve the problem by first trying to identify who the social insurants are based on their social economic characteristics. For example, soldiers can be identified by their job type. Once those who are covered by various social insurances are identified, we use the age profile per insurant of 1993 year, the first year when social insurance status is available, and adjust by employment ratio in 1981. This is not the perfect solution, but is a reasonable first approximation. Second, employment-based retirement benefits (EBR) are now singled out from RA and listed under the retired, so that the age distribution would alter, but the economy total remains unchanged. This is necessary because if these items are huge, 2 1 The Farmers’ Health Insurance began in 1985. 2 In 1981, the one-time old-age benefits from GEI was 2.093 million NT, the benefits from old PSP was 4.487 billion, and the receipt from the high-yield accounts were 3.998 million. That is, the latter two were about 4 times as high as the first item. It was about 10 times in 2015, when both the old and new PSP benefits were included. As for those covered by LI, labor retirement pension other than the one-time payment from LI started in 1987 under the Labor Standard Law, and later evolved into the Labor Pension Fund. By 2015, the amount of retirement receipt from the old and new labor pensions were about 2.5 times as high as the amount of the old-age transfers from LI.