4 Sensitivity Analyses

This section explores the impact on the projected levels of social expenditure of variations to the assumptions used in the benchmark case. In order to concentrate on the effects of the anticipated demographic transition, the sensitivity analyses retain the use of a ‘pure ageing' assumption (whereby average growth rates of the social expenditure categories are equal to average productivity growth).

First, it is of interest to examine the implications of having a higher age of eligibility for NZ Superannuation. The full effects cannot be modelled explicitly, but suppose that the age of eligibility is raised, for males and females, to aged 70.[15] To reflect this increase, the NZS costs per capita were changed: for males and females in age groups from 60 to 69 these were reduced to zero. For the age group 70-74 the annual per capita costs were changed to 10000 and 12000 for males and females respectively. Associated with these changes, the labour force participation rates for males in age groups 55-59, 60-64, 65-69, and 70-74 were changed to 0.9, 0.9, 0.75 and 0.1 respectively. For females in the corresponding groups the rates were increased to 0.8, 0.8, 0.75 and 0.1.

A related modification is a change to the assumed length of time over which mortality declines. This was changed from 15 to 30 years. The age-related health costs (DSS Older) for age groups from 50 to 64 were also reduced to zero. The modifications to labour force participation and health costs were, for simplicity, assumed to operate immediately. This modification from the benchmark case is thus one in which people continue to live longer, but this extra length of life is associated with improved health and hence also higher labour force participation. The extra longevity ultimately leads to higher stocks of retired individuals, though this is mitigated to some extent by the assumed higher labour force participation, which raises GDP.

The projected distribution of the ratio of social expenditure to GDP is shown in Figure 7. It is clear that these more optimistic assumptions imply a downward shift in the distribution, although the spread of values (between the 5^th and 95^th percentiles) remains similar to that of the benchmark case.

Figure 7: Projected Social Expenditure as a Share of GDP: 2010-2060 (Increased Longevity and Higher Labour Force Participation of Those Aged over 55)

Clearly a wide range of alternative assumptions could be examined, as discussed in Creedy and Scobie (2005), but in view of the present emphasis on uncertainty it is of interest to consider alternative assumptions about the standard errors of a number of the variables. First, the elimination of any uncertainty regarding demographic elements has very little effect, as expected; the resulting diagram (not shown here) is difficult to distinguish from the benchmark of Figure 3.

Two more cases are reported here. In the first variant, the standard deviations of expenditure categories in all age groups were set to zero. The uncertainty is thus attributed to demographic, labour market and productivity variations. In the second variant, the standard deviations of the unemployment and participation rates, and that of the productivity growth rate, were set equal to zero. The resulting projected distributions of the social expenditure to GDP ratio are shown in Figures 8 and 9. Comparison of these two figures shows that spread of the distributions arising from labour market and productivity variations is substantially higher than that arising from the uncertainty with regard to per capita social expenditures (as reflected in the observed variability over earlier years).

Figure 8: Projected Social Expenditure as a Share of GDP: 2010-2060: No Uncertainty Regarding Growth of all Social Expenditure Categories

Figure 9: Projected Social Expenditure as a Share of GDP: 2010-2060: No Uncertainty in Participation and Unemployment Rates, and Productivity Growth Rate