In the US and other rich nations of the world, there have been striking and important changes in the growth and age patterns of labor income and consumption. These changes call for explanations that are not yet available, but will be explored as part of this project. The top panel of Figure 1 shows NTA age profiles of labor income (including wages, salaries, fringe benefits, and 2/3 of self-employment income, averaged over males and females and including 0’s) based on data from 1981 through 2011.
Age is on the horizontal axis from 0 to 90, and each line gives the labor income of a birth cohort. Cohorts born after 1970 have stagnating labor income (the lines lie on top of one another), but earlier-born cohorts (those now at older ages) have rising labor income, most rapidly at ages 60+. However, the lower panel shows the striking result that each generation, including those born after 1970, experienced higher consumption (including private expenditures plus public in-kind transfers such as education and health care) than those before.
Consumption at older ages has risen very rapidly relative to younger ages. What accounts for this? Increased public transfers? Reduced saving? Increased bequests? Lower fertility? We expect to be able to decompose the changes into components such as public and private education, health care, and other forms of consumption to assess the role of each in these trends. We can also look in more detail at the kinds of consumption by age during earlier historical periods.
For example, Figure 2 shows the cross-sectional age profile of consumption from age 0 to 90 broken down into private and public consumption. Private includes private health care, private education, and services from owner-occupied housing, as well as a large category of “private other”. Public includes publicly funded health care (mainly above age 65 in the US), public education, and public “other” which is all else, allocated equally across all ages. It is striking that in 1960 the elderly consumed far less than younger adults, whereas by 1985 the elderly consumed far more than younger adults, a pattern that had grown even stronger by 2015.
The ratio of consumption at age 90 to consumption at age 25 more than doubled from 1960 to 2015. The greatest part of increased consumption at older ages is due to increased spending on health care, mainly public spending but also private spending. However, we also see that private “other” rose, perhaps reflecting the increasing coverage and generosity of the public pension system. We can also see an impressive increase in public education combined with an increase in private education spending mainly for higher education. Overall, public sector transfers to the elderly appear to be the dominant driver of these important changes. Our future work will provide more details on changes in public and private transfers over this period, and provide estimates on an annual basis from 1981 through 2017.
Figure 2. The changing age profile of per capita consumption and its composition in the US for 1960, 1985 and 2015