4.2  Retirement income

Public provision of retirement income has been perhaps one of the most widely discussed issues relating to ageing populations. This is particularly true for New Zealand where, if our current commitment to universal provision of retirement income continues, the effects of an ageing population will be considerable.

The cost of publicly providing retirement income, at the current level of 65 percent of the average wage for a married couple, has been projected to exceed 8 percent of GDP over the next fifty years, up from 4 percent in 2001 (McCulloch and Frances 2001). This represents a significant increase in the claim on public funds in the future.

Prior to October 2001 New Zealand Superannuation was paid solely out of general taxation on a “pay-as-you-go” (PAYG) basis. In October 2001 the government introduced the New Zealand Superannuation fund, a partial pre-funding approach to superannuation. The fund has been created to smooth the cost of New Zealand Superannuation given the large increase in government expenditure that is expected in the future under the PAYG approach. Contribution levels for the fund have been calculated under the assumption that the current level of payment and age of entitlement will remain at their 2001 levels. It is expected that the fund will be drawn upon after the year 2025 and used to meet up to 14 percent of the cost of universal superannuation (Finance and Expenditure Select Committee 2001).

Policy in recent times has focussed on 65 as the entitlement age for publicly funded superannuation. However, better health and increasing longevity for people over the age of 65, indicates that an increase in the potential working life of individuals in New Zealand will occur. It is possible that policy focussed on a retirement age of 65 will act to offset a potential reduction in the old-age dependency ratio (given evidence indicating that universal pensions reduce labour force participation and induce early retirement) that could otherwise arise out of increases in the potential working lives of New Zealanders. This suggests that if the entitlement age for New Zealand superannuation were to be lifted over time the fiscal ‘burden’ for the government of funding retirement income could be lessened considerably.

Assuming that the age of eligibility and pension benefits in real terms remain the same over time, an increasing old-age dependency ratio implies the tax rate would need to increase were the superannuation scheme to be continued to be funded purely as a pay-as-you-go system. In fact it is precisely with the aim of tax smoothing that a partial pre-funding of future liabilities has been introduced in New Zealand (Treasury, 2001b). Finding the appropriate settings for public policy for retirement income will likely remain one of the key areas for research on the impacts of population ageing.

4.3  Other age-related expenditure issues

The literature surrounding the fiscal implications of an ageing population has largely focussed on health and pensions. There are, however, other areas of government spending, such as education, policing and major capital works, which may be also affected significantly by changes in the population’s age structure.

There are areas of government expenditure that may shrink as a result of ageing populations, the most notable of which are spending on law and order and on education. Consider the case for spending on policing and prisons. There is a negative correlation between crime and age, with people between the ages of fifteen and thirty committing the majority of crime (Statistics New Zealand 2001a). If crime continues to be a phenomenon associated with younger people, then government may find itself able to reduce funding to the police and prisons as the number of young people in New Zealand declines.

Equally in education, declining relative numbers of young, through falling fertility rates, may act to lower the amount of funding needed in that sector, particularly in primary and secondary education. Reductions in these areas of expenditure may partially offset future increases in the cost of expenditures such as health.

At the same time, however, demands on government resources to provide public infrastructure may act to offset any “gains” from the reduction in demand for policing or education. Government funded infrastructure is centred in areas in New Zealand where demand for their benefits is greatest. As the distribution of New Zealand’s population changes there are likely to be changes to the needs of the population with regard to the distribution of said infrastructure. Perhaps the most notable example of this is the movement of elderly to areas such as the Bay of Plenty region (Tauranga in particular). It is entirely probable that the demand for health services will climb rapidly in this region as elderly people migrate there to retire. As a result the government may find that whilst expenditure is keeping pace with per capita demand nationally, it may be falling well short of demand in given regions. This issue appears to have received little or no attention, to date, but may have significant ramifications for government expenditure.

4.4  Revenue

As the population ages and the number in the workforce declines first relatively and then possibly absolutely, it is plausible to foresee changes in the tax base for income taxes. In the face of rising fiscal costs governments will be faced with decisions about how to manage the balance and whether increasing tax rates on a declining working population to support an ageing population is a feasible and acceptable strategy. Any assessment of the implications for revenue must consider the effect of an ageing population on labour force participation rates, the patterns of consumption and investment and the forms and levels of wealth accumulation. Most of the focus to date has been on the fiscal costs associated with ageing – there is relatively little guidance on how revenues might be expected to behave.

4.5  Income distribution[17]

Recent changes to the pattern of income distribution in New Zealand have implications for fiscal programmes in the years ahead. Population ageing raises questions as to the relative income levels and wealth[18] of the elderly. As the population ages, will the elderly become relatively poorer, and would that create increased demand on government resources to preserve their incomes relative to the working age population?

It is evident that the consumption and saving patterns of different age cohorts of the population differ markedly. As O’Dea (2000. p45) notes:

If incomes across the age-range all increase over time at the same real rate, each successive cohort should trace out [an income] profile lying above the previous cohort… In 1986 there is a sharp break. The income for each cohort falls well below that of the cohort 5 years older, instead of continuing above it.

This pattern may imply changes in the income distribution as these cohorts reach retirement. People on low incomes during their working life are likely to be solely reliant on government superannuation for retirement income[19]. As such they are also more likely to qualify for benefits and less likely to use privately provided health and long term care services. Subsequently, if the numbers of individuals with low incomes during their working life increases, we may expect an increase in the number of individuals eligible for government assistance and demanding government services.

It is of interest to note however, that those over the age of 60 increased their income share between the years of 1983 and 1998 (Hyslop and Mare 2001;O'Dea 2000). Again, this increase in income share is probably indicative of cohort effects. Those cohorts that retired during the 1990s have, by in large, benefited from the welfare state more than any other group in New Zealand’s history (Thomson 1996) and as such one may expect that they are, in the aggregate, a relatively wealthy demographic group This serves to underscore the importance of the economic and social policies that prevail during the life cycle of a particular age cohort. Mounting evidence suggests that their saving and consumption behaviour and hence accumulated retirement wealth is shaped by the public policies in areas such as superannuation, health, housing, welfare and education.[20] It is to be expected that as the population ages, the distribution of income that will be observed at a point in time will reflect the life time experiences of particular cohorts.[21]

4.6  Political economy

Elderly voters will represent an increasing part of the total electorate as the population continues to age. This raises the question of whether elderly constituents will use their increased political influence to command a greater proportion of public resources than would have been expected based solely on the increase in their absolute numbers.

New Zealand’s political history provides precedents of situations where agendas that favour the elderly have been pursued successfully by interest groups. The Liberal government of the 1890s, Labour government in the 1930s, and National in the 1970s all instituted public welfare programmes (predominantly retirement income policies) in response to the demands of elderly constituents (Levine and Roberts 1993). In particular the National government’s superannuation scheme of the mid 1970s increased superannuation payment both in absolute terms and relative to other benefits.

It is intuitively appealing to argue that elderly voters will be able to exert sufficient political pressure in the future to bias the allocation of public resources towards services and goods that they favour; such as health services and income transfers in the form of retirement income. This presumption is far too simplistic. It ignores the fact that the elderly are a heterogeneous group who, by in large, have very divergent views on the role of government and on government expenditure. The notion that “the elderly” are a coherent constituency with a unified agenda, although often used by political commentators, is a misnomer.

In fact, contrary to commonly held presumptions, there is evidence that increasing dependency ratios may lead to a reduction in the size of the welfare state. An analysis of data for the United States and twelve Western European countries (1965 – 1992) has yielded a negative correlation between dependency ratios and labour taxes and the size of social transfers (Razin, et al. 2001). Such analysis is fraught with specification problems, the most obvious being the widespread dismantling of government welfare programmes in the 1980s, due largely to political and economic changes which cannot be effectively controlled for. Nevertheless, the results can be shown to be consistent with theoretical models of the political economy and they suggest that simplistic views of the political economy of population ageing are flawed.

Thus, while intuitively appealing, there is no strong evidence to suggest that public resources will be “captured” by vocal elderly interest groups as the population ages.