4.1 The impact of ageing on living standards (continued)
The other significant departure from the base case occurs for the low fertility scenario. In this case living standards are higher than in the base case until at least 2050. By 2100, however, living standards are lower. This is an interesting case in view of concerns about falling fertility rates in New Zealand as in many industrialised countries. The analysis here suggests that such concerns are ill-founded, which supports similar results for other countries (see, for example, Weil (1999) and Guest and McDonald (2002b)). In general, a lower (higher) fertility rate results in a higher (lower) standard of living for an initial period, which may last for decades, before the reverse occurs. Raising the fertility rate will always result in a transitory cost to living standards. As discussed in Section 2.2.4 reducing fertility initially raises the support ratio because the initial increase in youth dependency occurs without a commensurate reduction in old age dependency. Figure 9 illustrates the effect of lower fertility on living standards for the next 100 years. The net effect is decomposed into its three components: the dependency effect, the capital widening effect and the capital intensity effect. The dependency effect dominates the capital intensity and widening effects. When added to the dependency effect the latter two effects extend the period over which low fertility outperforms base fertility in terms of living standards.
The effect of lower fertility and the other two alternative demographic scenarios on living standards over the next 100 years is illustrated in Figure 10. In both the low-fertility and low-mortality variants, living standards towards the end of the projection period are significantly lower than in the base variant. However, the low-mortality variant does not have the compensating advantage of an initial period of high consumption. Figure 10 shows low migration having much less effect on living standards than low fertility or mortality. This is partly because the alternative migration series is less extreme than the alternative fertility and mortality series. But it also reflects the fact that changes in migration levels generally have less effect on age-structure, and hence support ratios, than comparable changes in fertility and mortality.