Part 1: New Zealand's Future Fiscal Challenges

A. Where we've come from and where we're heading

New Zealand has seen significant changes over the past 40 years. In 1973, hardly anyone had a computer, a mobile phone, or any digital devices. The Government controlled the prices of many goods, how much money people could take overseas or bring into New Zealand, and the exchange rate. The Treaty of Waitangi was not recognised as having any legal force.

Things have certainly changed, and that will continue. On average, people will be richer, healthier, and will live longer. Our society will become more diverse across a number of dimensions. While there's much we can't foresee, we have to make some predictions when thinking about government policies over a long horizon.

New Zealand's population is ageing

The profile of New Zealand's population is becoming older. This ageing of the population is partly a result of positive developments in health and longevity. People are, on average, healthier and enjoying longer lives. When a girl was born in 1961, for example, she could have expected a lifespan of 85 years, whereas a girl born in 2011 has a life expectancy of 93 years.[3]

New Zealand's falling birth rate contributes to population ageing. Women aged 45 to 49 years averaged 3.3, 2.5, and 2.3 births during their lifetime as at the 1981, 1996, and 2006 censuses, respectively. The proportion of women aged 45 to 49 years who were childless was 9%, 10%, and 13% at the 1981, 1996, and 2006 censuses, respectively.[4]

Population ageing is not a new trend - New Zealand's population has been gradually ageing for most of the 20th century. The number of people aged 65 years and over, for example, has doubled since 1980.

Statistics New Zealand projects that this age group will double in size again by 2036, numbering between 1.18 and 1.25 million in that year. By 2061, it may number between 1.44 and 1.66 million.[5] The increase in the number of people aged 65 years and over between 2011 and 2036 will be driven by the relatively large post-war generation. This generation, known as the "baby boomers", was born during a period of high birth rates between 1945 and 1965. The size of this generation is not the cause of population ageing, although it does accelerate the trend. The fall in the birth rate and the trends towards lengthening lives mean the population would still be ageing, even if there had been no post-war baby boom.

Increasing numbers of people in older age groups have implications for the structure of the population. Currently, around 66% of the population is in the 15-64 age group. In 2061, that proportion might be more like 58%. On the other hand, the proportion of people aged 65+ is projected to be between 22% and 30% in 2061, compared with around 14% now.[6]

Within this overall story of population ageing there is some variation among different ethnic groups and across different regions. Māori and Pasifika, for example, have higher birth rates and tend to give birth at younger ages and to die at younger ages, so they are ageing more slowly than other ethnic groups. Māori families might have five generations over the span of a century, whereas non-Māori families might have three generations. Also, some regions of New Zealand - often rural areas - are ageing much faster than the national average because of the departure of young adults or an inflow of older people wishing to retire.

The process of population ageing is not unique to New Zealand. Most developed countries are experiencing this trend and are also considering what it means for society, for individuals and for government finances.[7]

Figure 1 Getting older: New Zealand's changing population structure, 1960s-2060s

An ageing population will put pressure on some government services. Our implied intergenerational contract assumes that people generally pay most taxes during their working lives, but less at the beginning and end of life, when they are more likely to receive benefits funded by taxpayers. In our system, these benefits come primarily in the form of education (at the beginning of life), healthcare (mainly at the end of life) and NZ Super (at the end of life).[8]

Figure 2 Net taxpayers and net recipients, 2010[9]

A world with a higher proportion of people in older age groups raises questions about the sustainability of this intergenerational contract. Retaining current policy settings for the benefits that older people receive will increasingly cost more. Working-age people might be asked to pay more tax as a result, but may not be able to receive the same benefits when they need them.[10]

These issues suggest that the precise parameters of what benefits older people get, when and how they get them, and how much taxpayers fund might need to change to some extent.

The mix of ethnic groups will continue to change

Around 68% of the New Zealand population said they were ethnically European in the 2006 census. Māori are the next largest ethnic group, at around 15%, followed by the Asian population at around 9%, and the Pasifika population at around 7%. Approximately 11% of people identified as a "New Zealander".[11]

The ethnic mix of the population will continue to change in the future. All four of the major ethnic populations are expected to grow in number, but they will grow at different rates, with implications for the overall ethnic mix of the population. The Asian population is expected to see the fastest growth. Growth in the Māori and Pasifika populations is also expected to outpace the growth in the European population.

Different ethnic groups are associated with different demographic profiles. For example, Māori are a comparatively young population with generally higher fertility, earlier fertility, and shorter life expectancies than non-Māori New Zealanders.[12] As well as differences in life expectancy, a number of other health indicators reveal a high disparity in health outcomes between ethnicities. For example, there are clear ethnic and social inequalities in rates of infectious diseases. Rates of rheumatic fever for Māori are about 20 times higher than for people of European ethnicity and almost 40 times higher for Pacific people. Rates of avoidable hospital admission for Māori and Pacific people are significantly higher than the overall rate (almost double for Pacific people).

The Māori population itself is, of course, diverse. It is true, however, to say that the Māori population as a whole is associated with poorer average outcomes than the non-Māori population.