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Oh dear. More bad news for our pension plans! Trying to think of some reason to hope you are wrong.

Ummm. The Cobb Douglas production function would explain factor shares of NDP, but not NNP (NNI?), if there is international borrowing and lending. But since the demographic change is roughly global, this won't matter much.

Agree. Definitely agree. My long term prediction for equity returns is low. Retirement budgeting is based on gradual liquidation of assets. There is going to be very strong downward pressure on asset values as a result unless government old age program do a singapore and mandate investment accounts rather than transfer programs.

What happens to that graph if you took out compensation to senior brass?

It is irrelevant whether investment accounts or transfers are involved, both are intergenerational. Not needing to grow beyond technological change means most earnings will be distributed as dividends and assets will eventually be consumed as they won't need replacing. Emerging markets will continue to grow for some time even as developed markets flatten or shrink. The UK has had a stable population for 30 years with gdp per capita growth better than the US. But the world will slow over time.

"There is going to be very strong downward pressure on asset values as a result unless government old age program do a singapore and mandate investment accounts rather than transfer programs."

Why do accounts help things compared with transfer programs? It does force at least some purchase of these assets (supporting the price at least a little bit) but that can only help so much given the number of retirees selling assets. In any case, there would be some of this support from us generation Xers buying assets for our own RRSPs.

In some senses transfer programs seem to make the transfer more transparent which increases the odds of an open debate on the right compromise between preventing poverty in old age and not over-taxing current workers.

But we do not have a uniform distribution of wealth -- the wealthiest will keep accumulating assets, living off of the interest, until they die and will not become net sellers of assets. Wealth inequality will moderate any downward pressure on asset prices.

In general, it's "bad practice" to view financial assets at the macro level as being a store of wealth for retirement. That may be how an individual looks at it, but in aggregate this is not the case. You can buy assets on credit -- the non-financial sector doesn't do that a whole lot (except in housing) but the financial sector does. Because of that, you can't argue that there isn't enough money to buy assets that others are trying to sell, so that the assets must fall to a lower price.

If you look at assets as the present value of future profits and if there is a large population of retirees that are spending money but not receiving wages, then whether or not this increases profits or decreases profits will be a function of how the transfers are funded. If the transfers are paid for with corporate profit taxes, then this will put downward pressure on asset prices, but if the transfers are paid for by taxes on labor income, then there is no reason to believe that the market value of assets will decline, and it may well increase.


A clarification, I'm too lazy to check this out myself

Does NNI include public sector incomes and treat the government as a corporation with tax revenues taken as profits?

"If the capital share doesn't increase - that is, if there's a decline in average assets per retiree and/or if the rate of return on those assets falls - then those retirement incomes are going to have to come from the shrinking number of people who will still be of working age. The politics of such a large, intergenerational transfer of income could be difficult to sustain."

I'm not an economist, but it seems to me that an increase in capital's share of income would effectively, in many ways, act as the same kind of intergenerational transfer. However, as there is obviously not a direct correspondence between age and income type, the effects of each type of intergenerational transfer would not be identical. This seems a very important point, as increases in the income share of capital would accrue most not to those with the most need, but rather to those with the most capital. This can be contrasted with intergenerational transfers of income, which could be targeted based on need (or even just distributed equally). Thus, although such intergenerational transfers may be politically difficult, this may just be a messaging failure.

Yes, to the extent that a shift from labour to capital would benefit those who are older, that would be an intergenerational transfer. But if that doesn't happen, it would have to be more of brute-force tax-the-young-and-give-to-the-old thing.

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