3 Benchmark results

This section presents the benchmark projections for the distribution of social expenditure as a proportion of GDP. The essential features are that all social expenditures are assumed to grow in real terms at 1.5 per cent per year, the same rate as labour productivity. The results therefore refer to a ‘pure ageing' assumption. Immigration is based on the average over recent years of 14,500 net immigrants each year (with total annual immigration of 82,500). Changes in mortality rates are assumed to continue (at values given in Table 1 of Appendix B) for 15 years, after which they remain constant. Changes in labour force participation rates, taken from Creedy and Scobie (2005), are assumed to apply for 10 years. Fertility rates are assumed to change for 10 years, after which no further changes in these rates are projected. The standard deviation of productivity growth is assumed to be 0.02, reflecting a high degree of uncertainty about this variable.

For the social expenditure categories, the standard deviations (in each age, gender and expenditure category) were set at 0.05 for each category and age group and gender.

Figure 2 shows the projected population pyramids for ten-year intervals over the 50-year projection period (for plotting purposes, the results are arranged into 5-year age groups). The figures actually show the arithmetic mean values of the various distributions. As expected, the population projections are associated with a relatively small degree of uncertainty, in that the confidence intervals around the mean values are very small. For this reason they are not shown here.

Figure 3 shows the time profile of various measures of the distribution of the projected ratio of total social expenditure to GDP from 2010 to 2060.[10] In addition to the mean, the profiles of upper and lower quartiles, and 5^th and 95^th percentiles are shown.[11] This diagram may be compared with Figure 3 of Creedy and Scobie (2005), which covers the period 2001 to 2051. The latter, as expected, starts from a similar base, but the present projections display slightly smaller ‘spreads' in the profiles over time. Nevertheless the most striking feature of Figure 3 is the increasing uncertainty regarding the social expenditure ratio.

As with earlier projections, the arithmetic mean ratio of total social expenditure to GDP increases relatively sharply from around 2020, as a result of the movement of the post World War II baby boomers into retirement and old age. In Creedy and Scobie (2005) the projected profile of this ratio becomes stable by around 2040. In the present case the mean ratio falls very slightly after this date. Given the assumption that mean per capita growth rates of social expenditure are the same as that of (mean) productivity growth, the profiles are affected largely by the changing age composition over time. The slight reduction in the projected mean expenditure ratio in later years therefore seems to be explained by the fact that the baby boom generations will have all died by that time. However, given the large degree of uncertainty (the high dispersion in the distribution of the expenditure ratio), these reductions cannot be treated as statistically ‘significant'.

The generally lower average social expenditure ratio in the present case is not explained by the much higher annual value of net immigration, compared with the earlier results (which were based on a long term average of only 5,000 (associated with gross immigration of 60,000), a value that has been substantially exceeded since 2001).[12] Higher immigration has very little effect, although it must be recognised that in the present model migrants are assumed to acquire existing New Zealand mortality, fertility and labour force participation characteristics as soon as they arrive (along with entitlements to benefits). And although the average age of immigrants is slightly lower than that of the New Zealand population, there are of course substantial numbers of migrants in the older age groups.[13]

Figure 2: Population Projections by Age Groups and Gender 2010-2060

Figure 3: Projected Social Expenditure as a Share of GDP: 2010-2060 (Benchmark Case)

To illustrate how the assumed standard errors of the per capita growth rates of social expenditures translate into standard errors of the costs, the projected growth in health and education costs per capita, for males and females separately, are shown in Figures 4 and 5. In each case the mean is plotted, along with two standard deviations either side of it. Health includes the five health categories aggregated; these are personal health, public health, mental health, DSS older, and DSS under 65. Education includes the two categories, primary and tertiary education.[14] The largest degree of uncertainty relates to unemployment benefits, since in this case the uncertainty also includes the age and gender-specific unemployment rates. Unemployment costs per capita are illustrated in Figure 6.

Figure 4: Health Expenditure per Capita: 2010-2060

Figure 5: Education Expenditure per Capita: 2010-2060

Figure 6: Unemployment Benefit Expenditure per Capita: 2010-2060