Aging, Family Transfers, and Income Inequality by

aging leads to an increase in consumption or income inequality. The results are based on a conventional model that analyzes compositional effects given inter-age differences in the means and variances of income (Lam 1997; Lam and Levison 1992). Depending on the response of public and private transfer systems, however, analysis limited to compositional effects may be misleading. The prospect of population aging has motivated the reform of many public transfer systems in Latin America, Europe, and the US. Although the ultimate effect of reform on their redistributive features remains uncertain, a recent analysis of OECD data led Gruber and Wise (Gruber and Wise 2001) to conclude that aging has led to a decline in the share of resources going to the elderly.2 Similarly Razin et al. (2002) conclude that a rise in the overall dependency ratio is leading to a decline in social transfers. In contrast, Preston (1984) contends that elderly in the US were able to claim a disproportionate share of public resources as their numbers and political power increased.3 The link to income inequality is completed by von Weizsacker (1995) who shows that depending on the response of public transfer aging can lead either to a rise or a decline in income inequality