Drivers of expenditure

There are two aspects of demographic change that are important for superannuation spending. One is the number of people reaching the age of eligibility and the other is how long they survive after they have become eligible.

As we noted in Chapter 4 (on demography), the structural change in New Zealand’s population is due to the combination of declines in both fertility and mortality. The effects of demographic change are often referred to as “population ageing” because the median age of the population is increasing. Another way of thinking about population change is in terms of survival: how many people live to what age.

What is happening in New Zealand, and the rest of the world, is that rates of survival are increasing. That is, the effect we are observing is that more people are living into old age. There has not been much increase in the oldest age to which humans can live, but there have been substantial increases in the number of people living into very old age.

This effect is illustrated in Figure 8.3, which shows the survival rates from the 1893 and 2003 New Zealand life tables. It shows, for a cohort of 100,000 people, how many are still alive at a given age.

Source: Based on data for New Zealand from the Human Mortality Database, Non-Māori population

Source: Based on data for New Zealand from the Human Mortality Database

The increase in the number of people surviving to age 65 is the cumulative result of the reductions in death rates that are occurring across all younger ages. While infant mortality rates have fallen significantly, there have also been substantial reductions in mortality at all ages up to age 65 (Figure 8.4).

Life expectancy

Another consequence of the fall in mortality is an increase in life expectancy. Life expectancy is related to survival because “average life expectancy” as calculated by demographers for a group of people born in a particular year is the total number of life-years that group will experience, divided by the number of people in the group, based on mortality rates in that year.[49] Thus, while “life expectancy” is the average age to which the population cohort will live, it must be remembered that it is the average of all the ages, including those who die young.

Importantly, the increase in life expectancy being experienced in New Zealand and other countries does not mean that there has been a large increase in the oldest age to which people live. Rather, what we are seeing is more people living to old age.

“Life expectancy at birth” is the most commonly quoted figure and it includes the whole population. However, it is also possible to calculate a figure for remaining years of life for any age. This is the average age to which people who have already survived to a specified age might be expected to live. Calculating life expectancies at different ages demonstrates the effect of early deaths on life expectancy at birth.

Source: Based on data for New Zealand from the Human Mortality Database

In Sweden in 1751, life expectancy at birth was 38.44 years, while the expected years of life remaining for those who survived to age one was 46.71. These figures are different because the rate of infant mortality was so high in 18th century Sweden: almost 20% of babies born died before their first birthday.

In New Zealand in 2003, life expectancy at birth was 79.26 years (males and females combined), while life expectancy at age one was 78.65, meaning that those who survived to age one could expect to live a further 78.65 years (giving a total expected life of 79.65 - 78.65 plus 1).

The effect that increasing survival is having on life expectancies at birth in New Zealand is shown in Figure 8.5.

Similarly, and in some cases even more dramatically, increases in life expectancy are occurring in much of the world and have been for many years. Oeppen and Vaupel (2002) point to 160 years of history of the female life expectancy in the record-holding countries increasing at a steady rate of three months per year.