2.2 The effects of demographic projections
Figure 2 plots the aggregate support ratios for the Medium Fertility, High Fertility, High Migration, Zero Migration and Low Mortality demographic projections.[4] Cutler et al. (1990) is the seminal study that introduced the notion of a support ratio in population economics. For a New Zealand application see Bryant, Guest and Scobie (2003). Under the Medium projection, the support ratio falls by 11.5% from 2015 to 2060, having already fallen by 3.5% by 2015 from 2005, and by 4.5% from its peak in 1988 (not shown in Fig 2). This implies, other things equal,[5] the 16% fall in the support ratio from its peak in 1988 to its projected level in 2060 would imply living standards about 16% lower than they would otherwise have been. Is this large? It implies that average growth in annual consumption per capita would be reduced from 1.5% per annum, for example, to 1.17%. Consumption per capita would therefore be 168 percent higher than today instead of 195% higher in the absence of population ageing (that is, with L/N remaining constant). Whether these costs are high enough to be a concern for public policy is a value judgement which is not pursued further here.
- Figure 2 - Support ratios. Effect of demographic projections
Sensitivity to demographic projections is also indicated in Figure 2. The High Fertility projection results in a lower support ratio until 2060 (compared with the Medium projection) when the higher number of workers finally offsets the higher number of young dependants. The drop in the support ratio, relative to Medium, reaches a maximum at 2035 of 4.0%. This implies from (3) that other things constant, national living standards would be 4.0% lower in 2035 than would be the case under the Medium Fertility scenario, but by 2060 the gap would zero. Zero migration lowers the support ratio by 4.5% by 2060, while High Migration raises the support ratio by 1.8% by 2060. Low mortality reduces the support ratio by 3.6% by 2060.
These figures indicate the national consumption cost of ageing from 2015 to 2060. The role of the simulation model is to allow fiscal policy to distribute this consumption cost over time in order to consider the intergenerational equity implications.
Notes
- [4]Projections are produced by Statistics New Zealand. The Medium projection is Statistics New Zealand's Series 5 projection, assuming medium fertility, medium mortality and medium net migration. Labour participation rates for males and females are actual rates for 1987 to 2011 (Statistics New Zealand); the 1987 rates are assumed for years prior to 1987 and the 2011 rates are assumed for years beyond 2011. The High Fertility projection assumes a total fertility rate of 2.5 from 2011-12. The ‘very high migration' projection assumes net migration of 25,000 p.a. from 2012, compared with 12,000 in the Medium projection. The Low Mortality projection assumes that life expectancy at birth increases from 81 and 84 years for males and females respectively in 2015, to 95 years for both males and females in 2060.
- [5]That is, for given values of labour productivity, saving per worker and foreign liabilities per worker. Population ageing could affect these variables but, on current evidence, the dominant effect of ageing on consumption per capita occurs through the support ratio (see for example Guest, 2007).
