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Challenges and Choices: New Zealand's Long-Term Fiscal Statement

4  Could things be different?

This Statement uses modelling to illustrate the effects of various factors like economic and population changes, and government policy and spending decisions, on the long-term fiscal outlook. The scenarios in this document are based upon a number of assumptions, including economic growth, public sector productivity and demographic changes around fertility, mortality and migration. While we think all of these assumptions are plausible, it is easy to come up with different plausible assumptions that change the long-term projections. This section examines those assumptions and looks at what effect different factors may have on the fiscal position.

Demography

  • New Zealand's future population will have a rising proportion of older people, a falling share of people in the prime working years and relatively fewer children. The impending retirement of the baby boomers brings this change forward.
  • The number of people over 65 is projected to grow two and a half times by 2050, while those 85 and over will grow five-fold.
  • Population ageing is likely to cause a slowdown in economic growth because of the shift to a relatively smaller working-age population. It will also have major effects on government spending and revenue.
  • Already, 25% of government spending is on the 12% of the population aged over 65.
  • The first baby boomers will receive NZS from 2011 and the number of new superannuitants will peak in the late 2020s. 

Population ageing is a long-term international trend driven by people living longer lives and having smaller families. In New Zealand, as in many other countries, the post-World War II baby boom overlays this ageing trend.

Figure 4.1 - Population by age
Figure 4.1 - Population by age.
Source: Statistics New Zealand, Series 5 projection, produced for the Treasury, March 2009

Projections prepared for Treasury by Statistics New Zealand show the working-age group (those aged from 15 to 64) growing steadily for the next 50 years so that it is 13% larger in 2050. Under this baseline projection, the number of people aged 65 and older climbs from 553,000 to 1.35 million. This elderly group is also ageing: by mid-century, we will have about 330,000 people 85 and older, compared with just below 67,000 now.

These numbers highlight the second driver of an ageing population - the major increase in life expectancy. A person turning 65 in 2050 would expect to live another 24 years, 4.4 years more on average than a 65-year-old in 2008.

The latest estimate of life expectancy at birth for males is 78 years and for females is 82.2 years. In the early 1950s, these numbers were 67.2 and 71.3 years respectively. Looking ahead, Statistics New Zealand assumes that male life expectancy at birth moves to 84.5 years in 2050, while female longevity rises to 88 years (medium case).

The unprecedented demographic trends mean the old-age dependency ratio - the ratio of people aged 65 and older relative to the working-age population aged 15 to 64 - rises from 19% in 2009 to 42% in 2050. The following table shows that the ratio of people 65 and older to those between 15 and 64 more than doubled in the 100 years to 2000, and will do so again in the next 50 years.

Table 4.1 - People 65 and older for every 100 aged between 15 and 64
Table 4.1 - People 65 and older for every 100 aged between 15 and 64.
Source: Statistics New Zealand

These population shifts in New Zealand are already underway. But they are about to accelerate, with the first baby boomers retiring in 2011; most of the change in the population will occur over the next 20 years.

Labour market

Clearly, people living longer and healthier lives is a good thing. The issues with demographics are the impact on the economy of having relatively fewer people of what is currently working age and the fact that a significant part of government spending is on services (mainly health spending) and support (mainly superannuation payments) for older people. In short, there will be relatively fewer people to drive the economy and more people requiring government services and support.

Part of the solution to both issues will be for people to continue working later in life. The changes to population age structure will mean that extra workers will be demanded. As life expectancy will continue to increase steadily and we expect the incidence of disease will also reduce steadily, more people will live healthy, active lives into what was once considered "old age".

We know a lot about what workers and superannuitants are likely to do over the next 20 years - they are alive now and the majority are already in New Zealand. The trend is for people to work more years after 65, and not simply retire, and for them to work fewer hours. Workforce participation rates for people over 65 rose through the 1990s and have continued moving upwards to be among the highest in the Organisation for Economic Co-operation and Development (OECD). However, there is still a sharp fall in the proportion of people who continue to work either full - or part-time after reaching 65.

International policy responses to ageing

There is considerable diversity in the extent of population ageing around the world and the policy responses to it. Japan, for instance, is likely to have 74 people aged 65 and over for every 100 aged 15 to 64 by 2050, and its population will be shrinking. Conversely, the United States could have only 34 older people for every 100 between 15 and 64 by mid-century.

France and the Nordic countries are addressing low birth rates with cash transfers to families, ensuring the availability of part-time work and formal child care and their flagging fertility rates have returned to replacement levels. Countries have begun changing spending programmes that were most affected by ageing. Pension schemes with defined benefits were closed or converted earnings indexation to inflation indexation. Several governments have announced that the age for receiving pension payments would rise and are attempting to close down early retirement pensions.

Others are looking at grants to adapt housing to keep older people living longer in their own homes and out of costly care, or paying families to provide care for elderly relatives. Germany, the Netherlands, Luxembourg and Japan have introduced mandatory long-term care insurance schemes.[4]

Notes

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