The grey area of our ageing population

As the world population ticked over 7 billion this week international focus has turned to population issues. It is with some irony that this is the context in which our ruling party has confirmed that it will not raise the age of superannuation entitlement.   It is a populist move which ignores the demographic and fiscal realities of a burgeoning older age population.  That most predictions of the future superannuation costs are based on very conservative projections of growth in older people makes the move even more irresponsible.

As the baby boomers start moving into retirement age and life expectancy continues to climb, the number of people of 65 years and above will increase rapidly and with it the superannuation bill.  Treasury estimate that without any changes to superannuation policy the cost will double from about 4% to 8% of GDP by 2050.  This would need to be funded by substantial increases in tax or commensurate drops in spending on health and education, the two other large budget items.

The Labour Party’s proposed policy of gradually increasing the age of superannuation eligibility to reach 67 in 2033 will significantly reduce the future cost of superannuation and make it more sustainable.  We should even consider linking the eligibility age to life expectancy as will be done in Finland from 2027.

The risk associated with much, if not all, analysis on the size of the older age population and the cost of superannuation is that it is based on official population forecasts which tend to be very conservative. There is a risk that the old age population will blow out further than we expect and with it the cost of providing superannuation.

Population forecasting is extremely difficult and our past record indicates that we tend to considerably underestimate population growth.  Statistics New Zealand produces a range of population projections using a different mix of assumptions of mortality, fertility and net migration.  They are not supposed to be judgements on expected outcomes but rather plausible scenarios.  However, Statistics New Zealand’s middle-of-the-road or ‘medium’ scenario tends to be used by policy makers as the most likely scenario.

Statistics New Zealand’s medium population projection in 1987 was for the population to reach 3.6 million by 2006.  It turned out to be 4.2 million.  Even the highest 1987 population growth scenario projected a population of 3.9 million in 2006 and did not reach 4.2 million until 2021, fifteen years after the fact.  The government’s 2003 report on Population and Sustainable Development published suggested that the population would reach 4.4 million by 2021, a level reached ten years earlier.

Statistics New Zealand latest medium projection is based on the conservative assumption that average life expectancy at birth will increase by only 1.6 years per decade up until 2061. Yet life expectancy increased by 3 years per decade over the past twenty years.  American economists Mullin and Philipson have shown that that life insurance companies predict that life expectancy will continue its rate of increase rather than slow down as official forecasts suggest. They believe that life insurance companies are better demographic forecasters than official agencies as their livelihood is directly tied to the accuracy of their longevity forecasts.  If they under-estimate life expectancy they risk charging premiums that are too high and will lose market share to their competitors; over-estimate and they will end up paying more than expected in claims.

The Labour Party justifies their proposed policy for increasing the age of eligibility for superannuation with population projections which look similar to Statistics New Zealand’s medium population scenario.  In their manifesto they suggest that by 2050, the number of people aged 65 and over will double to 1.35 million. Should life expectancy continue growing at its historical rate then this group will be closer to 1.5 million in size.

That New Zealand’s population has grown much faster than we previously expected is probably a positive indicator of the state of our nation. It reflects that we are living longer, that we have confidence in our future to have more children and that we are experiencing higher net migration than we had previously expected.  Having a faster growing population gives us more choice regarding who we let in to the country and, should we wish to exercise it, the ability to have more control over the size of our population.

However, our policy makers should be aware that we have a record of erring on the conservative side of population projections and that future growth of the older age population may well be much faster than we generally assume in policy formation.   

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