Executive summary

Structural demographic changes over the next few decades

The structure of New Zealand’s population is changing. This is driven mainly by increases in longevity (life expectancy) and lower fertility rates (number of children per woman). New Zealand used to have high rates of mortality and fertility, but both have fallen markedly over the past century (Figure 1).

The result of these changes is a permanent shift in the make-up of the population. This change is not a demographic bulge that will reverse at some time in the future.

One way to show the permanent nature of these changes is to compare the number of young and old people with the rest of the population.

Source: Statistics New Zealand

Source: Statistics New Zealand

Figure 2 shows changes in the ratios of these groups from 1880 to 2100. The effect of the baby boom is evident. Equally clear is that there is no downturn in the proportion of old people when the baby boomers have died. There is going to be a permanent change in the structure of the population.

While by 2100 the combined ratio of young and old is back to the levels seen at the beginning of the 20th century, the composition is different: people over 65 make up the largest share. What is also evident is that most of the change in population will occur over the next 30 years. This is significant for the government’s fiscal position because the cost of supporting young people tends to come from their families, while the cost of supporting the elderly tends to come from the State.

Population ageing is a story of survival: more and more people are living past 65 and past 85. However, not only is the average age of the population increasing, but what it means to grow old is also changing.

Projecting these changes out 50 years is fraught with uncertainty.

Source: Statistics New Zealand

The optimistic view is that life expectancy will continue to increase steadily and that morbidity (the incidence of disease) will also reduce steadily. As a result, more people will live healthy, active lives into what was once considered “old age.”

The pessimistic view is that past increases in life expectancy were generally the result of reductions in infant mortality that will not continue. The incidence of chronic health conditions, such as obesity and heart disease, is increasing in the adult population. The result is more old people requiring increasing amounts of health care just to maintain a basic standard of health. Life expectancy may even fall.

The Statement uses Statistics New Zealand’s median projections of the future population (Figure 3). These tend towards the optimistic view of ageing. Life expectancy will continue to grow, but will eventually stabilise. In addition, the health projections assume that older people are likely to be somewhat healthier than they are today.

Source: The Treasury

Source: The Treasury

Individual drivers of spending

In the tradition of previous studies of the long-term fiscal position, the projections made here of major spending categories and taxes and other revenue are based on assumptions derived from history, current policy settings and judgements.

This approach is a powerful tool for examining how changes in the population affect individual spending areas. An example is New Zealand Superannuation, where it is possible to project the number of people who will be 65 and over and multiply that by the projected rate of superannuation. The results of this approach are shown in Figure 4. One point to note is the similarity between the shape of the superannuation curve in Figure 4 and that for older people in Figure 2. These are similar because the main driver of superannuation spending is the number of people aged 65 and over.

For health, the main driver is the cost of individual treatments and advances in medical care: more diseases will become treatable in the future.

It is possible to undertake similar “no policy change” projections for other areas of government spending, although in some instances, more judgement is required. Figure 5 shows projections for welfare benefits and education.

In the case of welfare, the main driver is the level of benefits, where a continuation of the current policy of indexing benefits to price inflation is assumed. Benefit levels fall, as a proportion of GDP, because GDP grows much faster than prices over the projection period.

For education, demography again has a key role to play: the shape of the education curve mirrors the curve showing the relative number of young people in Figure 2. That is, because there will be fewer young people relative to the total population, total spending will fall as a share of GDP, even if the cost per pupil increases (as projected here).