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16 Aug 2013

The Economic Effects of an Ageing Population

Like lots of countries, New Zealand's population is ageing. This has a number of implications for health care, superannuation, and the general economy, as seen in the latest Treasury statement on New Zealand's long-term fiscal position. While Treasury Secretary Gabriel Makhlouf was careful to avoid the issue of ageing directly, the significant change in population demographics raises a number of questions about the relationship between taxation, government debt, and overall economic output.

The number of people aged 65 and over has doubled in New Zealand since 1980. While this statistic is staggering in itself, amazingly, this number will double again by 2036. According to Statistics New Zealand, the biggest changes will occur between 2011 and 2036, as baby boomers born in the post-war period move into this age bracket. According to this data, the 65+ demographic will grow from 14 percent to between 21 and 24 percent of the overall population between 2012 and 2036.

While there is little doubt that the changing nature of the population will profoundly affect the New Zealand economy, politicians continue to be careful about raising this issue. The recent statement on New Zealand's long-term fiscal position illustrated a number of concerns, however, including a widening projection of deficits and an increasing debt burden that will have to be met by an ageing population. According to the statement, net government debt will become unsupportable over 50 years at current levels of government spending and taxation, with the overall level growing from 26 percent now to twice the size of the economy by 2060.

As you can imagine, this imbalance is unsustainable and could create some big problems for the New Zealand economy. The Treasury statement outlined a number of possible policy choices to help deal with these issues, including changes to superannuation and health care. The ageing population of New Zealand will be most affected by changes to these key areas, which could account for up to two-thirds of taxation spending by 2060. It seems clear that significant changes to age-related spending need to be addressed.

In terms of superannuation, Treasury statement sketches include possible changes to the eligible age for NZ Super, reductions to pension rates, and changes to means testing. Rising health care costs are another hurdle for the government to overcome, with estimates of growth from 6.8 percent to 10.8 percent of GDP by 2060. While medical advances driven by economic growth have helped to increase the ageing population, this growing demographic is in turn placing more pressure on the health care system.

While the issues raised by an ageing population need to be addressed, the evolving nature of New Zealand society can also be seen in a positive light. Not only are people living longer and healthier lives, they are also contributing to the economy for longer. According to Makhlouf, "In many respects the debate on the age is more or less over ... People are just choosing, because they are healthier, to keep on working. Increasingly, young people are recognising, I think, that at some point there will be a change and the question is how much notice people are given."