Capital Income Flows and the Relative Well-Being of America's Aged Population
Barry P. Bosworth, Gary Burtless, and Sarah E. Anders
(2007) Center for Retirement Research at Boston College

One way to assess the effectiveness of a nation’s pension system is to measure its success in bringing the incomes of the aged close to those enjoyed by the nonaged. The comparability of income estimates for the aged and nonaged depends, however, on the relative accuracy of the income reports for the two populations. Unfortunately, some income items that are particularly important to the elderly, including occupational pensions, income derived from financial assets, and returns on homeowners’ net equity in their principal residence, are either unreported or significantly underreported in household surveys. In this paper we assess the effects of unmeasured and underreported income flows on the relative incomes of the aged and near-aged.

This paper is a monster and very ambitious in the sense that what it really does is to provide recommendations for national income estimates and household survey methodology. What I am particularly interested in is the point that by including income earned from transfers and dividends (and other secondary asset income) the standing of the aged cohort is increased relative to the younger cohort who naturally earns the majority of its income from wages. This is very interesting I feel since the conclusions can be used to derive some general tendencies of the life cycle of aged cohorts in the sense that these will attempt to put their assets to work in order to yield cash flows. Recently, I treated this and related issue in the context of Japan where the main point was that the income earned by Japanese savers came from foreign assets. Whether this is the case in the US is dubious. Obviously, the US economy is still able to provide domestic return for its savers, at least for now. However, the evidence from this paper highlights one very important potential transmission mechanism that runs from the life cycle behaviour of ageing cohorts to international capital flows. The key here is the extent to which we observe a decline in home bias as the domestic economy steadily looses steam as a result of the effect of demographic changes ripples through. If the decline in home bias as we are currently seeing in Japan is universal we end up in a rather interesting situation since as the ratio of aged to young economies in the world is set to change in favor of the former how are all those savers going to earn yield and what will it mean for those few economies who are young. Can they be expected to keep their markets open?

Ok, that was enough for now. As the astute reader will have observed this first edition of the Research Digest was compiled by papers from the Center for Retirment Research at Boston College. This is a coincidence since the recent slew of refereces to hit my inbox was from this particular source. As I said in the introdution I hope that I will be able to do these on a semi-regular basis.