Executive Summary
This paper examines the potential impact on the New Zealand income distribution of population ageing and expected changes in rates of labour force participation. This ignores many other types of change, but the concentration on these two influences is warranted in view of their importance and the fact that they can be anticipated with some degree of confidence relative to other changes.
The effects on aggregate measures of income inequality and poverty are examined, along with the way income tax, benefits and various forms of government spending (including health and education) are distributed across age groups.
Statistics New Zealand projected population and labour force participation profiles of New Zealand for selected years from 2020 to 2060 are in turn applied to data from the Household Economic Survey (HES). The HES uses sample weights for each individual and household and these are used to produce population-level aggregates from the sample survey information. Hence, the approach is to compute new weights to reflect the demographic and labour market participation profiles for future years. The weights are scaled so that the aggregate population size is fixed, thereby concentrating on ‘pure’ demographic effects.
It is found that expected population ageing and changes in labour force participation affect mainly the composition of the income distribution and the age-incidence of tax and spending. It is not likely to affect overall income inequality, however measured. The incidence of net tax and government spending across age groups is expected to be more skewed towards older age groups. People aged 65 and over are likely to represent a larger proportion of the total population and receive a higher share of total welfare expenditure in the form of New Zealand Superannuation (NZS). However, if they continue to earn relatively low market incomes, they will be a larger proportion of lower-income deciles. As a result, NZS will constitute a higher proportion of total benefits received by lower income households.
These findings are subject to several caveats. Inequality and poverty are determined by a large range of factors. This study isolates the impact of only two of many such factors and does not take into account the many social, economic and technological changes that may occur in New Zealand over the next 50 years. There is considerable uncertainty regarding these changes.
