Executive Summary
This paper reports projections of social expenditure in New Zealand, over the fifty-year period 2011 to 2061, which explicitly model uncertainty associated with a wide range of variables using a 'stochastic' approach.
The stochastic approach regards the parameters (fertility, labour force participation rates, age specific per capita expenditures, and so on) as being characterised by a distribution, rather than taking fixed values. A large number of projections of the variables of interest (such as total social expenditure in relation to GDP) can thus be made, in each case taking a random draw from each of the specified distributions. This generates a distribution of values in each year of the projection period, whose properties can be examined.
The first stage is the production of projections for the size of the population, together with its distribution by age and gender. This requires projections of trends in fertility, mortality and net migration. Projected labour force participation rates are then combined with age and gender specific unemployment rates to generate the size of the workforce. This is multiplied by average productivity per worker to obtain GDP. Social expenditures per capita are combined with population (by age and gender) to obtain total social expenditure on each of 13 categories for each age and gender group. The resulting total social expenditure is finally expressed as a share of projected GDP.
Focussing on 'pure ageing' results (whereby per capita social expenditure costs in each category grow at the same rate on average as productivity growth), the projections reveal considerable uncertainty regarding the ratio of total social expenditure to GDP as the time period increases.
In the benchmark case, the mean ratio of expenditure to GDP is projected to rise from its current level of 25 per cent to 28 per cent by 2061. However, the 5thand 95th percentiles are 22.5 per cent and 35 per cent.
A negligible part of the dispersion in this ratio is contributed by demographic uncertainty.
Much of the uncertainty was found to be contributed by uncertainty regarding future unemployment and labour force participation rates, and the rate of productivity growth. More optimistic assumptions regarding labour force participation and health costs among the aged produced lower average ratios of expenditure to GDP. A consistent finding was the tendency for the average expenditure ratio to fall slightly beyond around 2040, following the death of the post World War II baby boom generations.
