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Modelling New Zealand's Long-term Fiscal Position - PP 06/01

Resulting demographic projections

These assumptions produce projections of our population growing from 4 million today to 5 million in 2050, a 25% increase in 45 years. The projections also show changing shares in the total population of the young, those of the traditional working age,[21] the old (65 and over) and the “oldest” old (85 and over).

The number of people over 65 is projected to grow almost three-fold, while those 85 and over will grow six-fold by 2050.

The number of people over 65 is projected to grow almost three-fold, while those 85 and over will grow six-fold by 2050. Under this scenario, the working-age population grows until the mid-2020s and then contracts (it shrinks from 66% of the total now to 58% by 2050). Overall population growth slows down until the mid-century and then falls below zero.

Figure 9: The changing shares in the total population
Figure 9: The changing shares in the total population.
Source: Statistics New Zealand, history and Series 5 projection.

The ageing of the population is starkly shown in the following chart of the change in the ratio of people aged 65 and over in the population.

Figure 10: Yearly change in share of people 65 and older
Figure 10: Yearly change in share of people 65 and older.
Source: Statistics New Zealand, history and Series 5 projection. This chart graphs 100 times the difference in the share of 65 and older to the total population between years. If this is above zero, share of those 65 and older in the population is growing. If less than zero, the share of the old is falling.

One way of looking at the changing demographics is to chart the so-called dependency ratios of people 65 and over and those under 15 to working-age people aged 15 to 64 (see Figure 11 below). The aged-dependency ratio climbs from 0.18 in 2005 to 0.45 in 2050. Put another way, in 1900 there were 15 people of working age for every person over 65. Today this has shifted to five people of working age for every person 65 and over, while by mid-century there are projected to be only two.

Figure 11 also shows that the demographic change is not a “bulge” but rather a structural change in the population. Unlike the earlier baby boom, the “ageing boom” (which is partly due to the earlier baby boom) won’t be followed by an ageing bust under these demographic projections and under the probabilistic variants of them. These probabilistic variants are discussed in more detail in Box 1.

Unlike the earlier baby boom, the “ageing boom” (which is partly due to the earlier baby boom) won’t be followed by an ageing bust under these demographic projections. 

Even with Statistics New Zealand’s conservative assumption of fixed mortality rates after the mid-century, the aged-dependency ratio continues to rise until the 2070s when the ratio stabilises around 0.5. Past trends suggest that life expectancy could continue to rise strongly after the 2030s and this would mean that the aged-dependency ratio would be even higher.

Figure 11: Aged-dependency ratio doubles between 2000 and 2050
Figure 11: Aged-dependency ratio doubles between 2000 and 2050.
Source: Statistics New Zealand, history and Series 5 projection

Some people tend to downplay the effect of ageing by pointing to the total dependency ratio which was almost as high in 1960 (pushed up by the youth side) as it is likely to be in 2050 (pushed up by the elderly). The problem with this for the fiscal position is that the young are more likely to be supported privately by families and by relatively small amounts of public spending on schooling, while the elderly in the recent past have tended to use a far greater proportion of public resources in pensions and health care.

Immigration is not a long-term solution to population ageing, although selective immigration is useful for adding to the economy’s skills base.

Changing net migration might be seen as a way of maintaining a low aged-dependency ratio. Let’s assume that we can find large numbers of potential immigrants (this is doubtful, when most countries sooner or later will be facing rising dependency ratios and be competing for immigrants). If we double the number of net immigrants from the assumed 10,000 to 20,000 each year from 2010 to 2050, then the percentage of people aged 65 and over in the population in 2050 would fall from 26.2% to only 24.7%. While the bulk of new immigrants are of working age, they too grow old and eventually make demands on public resources, like the rest of us.

From another point of view, one way of keeping the aged-dependency ratio under 20% (where it was in 2005) all the way out to 2050 would require 300,000 net immigrants each year from 2020 onwards (4.9% of the population in 2020).[22] Immigration, in short, is not a long-term solution to population ageing, although selective immigration is useful for adding to the economy’s skills base.

Box 1: Capturing uncertainty with probabilistic projections

Statistics New Zealand and the Treasury are experimenting with probabilistic (or stochastic) modelling as a way of expressing the uncertainty that surrounds the demographic variables of fertility, life expectancy and migration.[23] In the future, we may extend this approach to some of the economic and fiscal variables used in the LTFM.

Probabilistic modelling usually uses historical information to calculate variability in the demographic data. It uses this variability to construct a probability distribution of outcomes. Probabilistic modelling randomly draws samples from probability distributions when projecting variables forward. This is repeated thousands of times to construct a plot showing the likelihood that certain scenarios will eventuate.

Probabilistic modelling is more informative than scenario analysis. It is less arbitrary and harder to manipulate. Moreover, representing uncertainty as a range of possible outcomes rather than a single number gives a more meaningful picture of the uncertainty arising from demographics. This ability to quantify and represent uncertainty is a major benefit of probabilistic modelling.

Extending probabilistic modelling to fiscal and economic variables provides an additional tool to help judge how much policy adjustment might be necessary to provide a high degree of confidence that fiscal sustainability will be achieved. It would also allow policy makers to identify and gauge the key sources of uncertainty that matter at different points in the future for particular fiscal variables. Finally, it would enable policy makers to evaluate how different policies perform in the context of uncertainty.[24]

In Figure 12 below, the black line is the median projection of the aged-dependency ratio; the dark shaded area indicates the 25% to 75% probability interval; and the total shaded area the 5% to 95% probability interval. Notice that uncertainty about the aged-dependency ratio increases significantly only after 20-25 years. This is because for the next two decades uncertainty around mortality is mainly associated with people whose births have already happened. After that, uncertainty around the aged-dependency ratio increases significantly as there is uncertainty about the births as well as the deaths of people.

Figure 12: The aged-dependency ratio will almost certainly double
Figure 12: The aged-dependency ratio will almost certainly double.
Source: Statistics New Zealand, indicative Series 5 probabilistic projections

It is also important to note that these projections show how likely the rise in the aged-dependency ratio will be. From the figure, we can say with reasonable confidence that the aged-dependency ratio will increase and we are 95% certain that it will increase from around 0.18 now to more than 0.40 in 2050 (that is, at least double in size).

Notes

  • [21]We use “working age” as a convenient label for describing people aged between 15 and 64. There are people outside these limits who work and people inside who don’t. Also, the (demographic) aged-dependency ratio classifies people solely by their age, not by their degree of independence (say, by degree of labour force attachment): there are those older than 65 and under 65 who are dependent and independent. In the future, we are likely to see a greater proportion of older people continuing to work after 65 and hence be “independent,” if present trends continue. The official definition of working age (as used in the Household Labour Force Survey) is the civilian, non-institutionalised population 15 and older (and so has no upper limit) and this definition is used to produce projections of the labour force.
  • [22]The average net migration over the past decade has been 12,000 per year.
  • [23]Dunstan and Speirs (2005)
  • [24]See Bryant (2003), Lee (2004), Heller (2002), and Lee, Anderson and Tuljapurkar (2003)
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