The effect of educational expansion and family change on the sustainability of public and private transfers

This paper examines the impact of aging and related socio-economic trends (educational expansion and changes in family structure) on the sustainability of public and private transfers. For this purpose, recently available disaggregated National Transfer Accounts (NTA) are combined with dynamic microsimulation techniques to build the first dynamic microsimulation model that incorporates NTA accounting (microWELT) and is thus able to capture how agents rely on public and private transfers over their lifecycle. The model simulates the major lifetime transitions at the individual level, including education, emancipation, fertility, partnership formation and dissolution, and death. The analysis was conducted for four European countries, representative of four welfare models: Austria, Finland, Spain, and the UK. We compare sustainability indicators for the economy, the public sector, and families in the NTA tradition with enriched indicators that capture additional composition effects. When these additional composition effects are ignored, as in previous literature, we find that the Economic Support Ratio decreases more than the pure Demographic Support Ratio. In striking contrast, we show that composition effects due to educational expansion that interact with changes in family structures lead to the opposite result, alleviating the effects of demographic aging. Unlike public transfers, private transfers are only slightly affected by aging, as they are near zero for the elderly.