1 Introduction

The aim of this paper is to analyse the potential impact of two factors that are expected to play a role in determining the distribution of income in New Zealand over the next 50 years. These factors are long-term demographic change - population ageing - and expected changes in rates of labour force participation. Income inequality is of course affected by many interacting factors such as social changes, household structure, the domestic and international economic environment, labour and goods markets and government tax and spending policy settings. The concentration on just two of those influences is warranted in view of their potential importance and the fact that they can be anticipated with some degree of confidence (particularly the extent of population ageing) relative to other changes.

There are two broad aims. First, the paper investigates whether population ageing and assumptions about future increases in labour force participation are likely, in isolation, to have a significant effect on aggregate measures of income inequality and poverty. Second this paper examines how tax and various forms of government spending (including health and education) are currently distributed across age groups and how their future distribution may change as a result of population ageing and changes in rates of labour force participation.

The approach adopted here is to apply the Statistics New Zealand projected demographic and labour force participation profile of New Zealand for the years 2020, 2030, 2040, 2050 and 2060 to data from the 2009/10 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, applied to the 2009/10 HES, to reflect the demographic and labour market participation profiles for future years. However, the weights are also scaled so that the aggregate population size is fixed.[1] In this way it isolates the effect of population ageing and expected changes in labour force participation while holding a

range of factors constant. The results can therefore be interpreted as showing the implications for the income distribution and the age-incidence of tax and spending, if future demographic and participation rate assumptions were to be realised in the year 2009/10. While acknowledging the vast range of factors that may influence distributional outcomes in the long-term, the advantage of this approach is in isolating the pure impact of future demographic and labour market changes.

In isolating these two influences, the strong assumption is made that households in the HES retain their demographic and labour market characteristics. The only variables that are allowed to change are the sample weights attached to each individual and household in aggregating from sample to population values. In other words, households in the hypothetical 2020, 2030, 2040, 2050 and 2060 population are similar to those in 2010, while the proportion of distinct household types varies. Hence, potential general equilibrium effects, for example on wage rates, private savings and social expenditures, are not considered.[2] The resulting distributions are cross-sectional in nature, as no longitudinal information is available about the experience of individuals and their life cycles.[3]

Section 2 describes how the demographic profile and patterns of labour-force participation across the working population of New Zealand are expected to change over the next 50 years. The methodology and assumptions used are detailed in Section 3. Sections 4 and 5 discuss the empirical results and the extent to which measures of income inequality and poverty might be affected by population ageing and associated changes in labour force participation. The current and expected future distribution of tax and a number of components of government spending across age groups is also presented. Section 6 concludes.