5 Discussion and Conclusion
The New Zealand population is ageing, implying an increase in the ratio of consumers to workers. This paper considers how saving rates should adjust in order to maximise long-run welfare. The paper also examines the extent to which population ageing reduces long-run welfare, compared to a hypothetical situation in which ageing does not occur.
We approach these issues using a Ramsey-Solow model of optimal savings, a model that has been adopted extensively in the literature (Cutler, Poterba, Sheiner and Summers 1990, Elmendorf and Sheiner 2000, Guest and McDonald 2001, 2002a). As is standard in the literature, we make a number of important simplifications. There is only one sector, with no distinction between private and public savings. We concentrate exclusively on the distribution of consumption and savings across periods and ages, and ignore the distribution of consumption and savings across individuals of the same age at the same point in time. We ignore uncertainty, except as a possible explanation for the interest rate premium. We treat the economy as if it is in a steady state in the initial year of projections. There is no distinction between tradable and non-tradable goods, and no labour-supply response to price changes. The model is evidently simple and highly aggregative.
A major advantage of simple, highly aggregative models is that the mechanisms at work are readily identifiable. More complex models rely on a greater number of parameters that are not only unknown in magnitude, but as in the case of the effect of ageing on labour productivity growth, unknown in sign. In such models the underlying economic logic can easily become obscured or invalidated (Black et al 1997: 11).
The simplifications do, however, need to be taken into account when interpreting the results from the model. One implication is that a high degree of precision ought not be ascribed to these results – they are indicative only. Another implication is that the present version of model is unsuited to examining some important questions concerning savings and public policy. The model does not, for instance, distinguish between public and private savings, so it cannot be used to assess the optimality of the current mix between the two. Also, the model considers only the impact of ageing on the path of optimal saving; it does not consider whether the current level of saving is optimal or whether future saving ought to be higher or lower on account of factors other than population ageing.
We are currently extending the basic model described here, to investigate the consequences of distinguishing between tradable and non-tradable goods, and allowing labour supply to respond to price signals. Other aspects of savings and policy public not addressed with the present model require different approaches altogether. Treasury is, for instance, using data from the Household Net Worth survey to examine differences in savings between individuals of the same age.
The basic model can, however, be used to establish some important points about population ageing, savings, and future living standards in New Zealand. Based on our results, it appears that future productivity increases will easily outweigh the reduction in consumption possibilities attributable to population ageing. Indeed, under the benchmark scenario, consumption levels in 2051 are almost twice as high as current levels. Under some parameter settings, including our benchmark scenario, it is optimal for savings to increase. Under the benchmark scenario, however, the increase constitutes less than 0.5 percentage points of GDP for the next 10 years. In contrast, under other parameter settings, it is optimal for savings to fall immediately. The main reason why the increases in savings are relatively muted, and why savings eventually decline, is the slower labour force growth brought about by lower birth rates. Slower labour force growth means that fewer savings are required to equip new workers with any given quantity of capital per worker. The model results suggest, moreover, that fears about population ageing having large negative effects on future consumption levels are probably exaggerated. Our results cast doubt on any assumption that population ageing per se necessitates large increases in national savings beyond those contemplated by current policies.
