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Longevity and the Public Purse is a major policy s Longevity and the Public Purse is a major policy speech delivered on 26 September 2024 by Dominick Stephens, Chief Economic Advisor at the New Zealand Treasury. The address examines how rising life expectancy and population ageing will reshape New Zealand’s public finances, economy, labour market, and intergenerational sustainability over coming decades. It synthesizes long-term fiscal projections, demographic trends, and macroeconomic risks to illustrate why existing policy settings are becoming unsustainable—and what shifts will be required.
Central Argument
New Zealanders are living longer, healthier lives—a triumph of social and economic progress. But longevity also places increasing pressure on the public purse, because:
The population is ageing rapidly
Government spending on older people greatly exceeds their tax contributions
National Superannuation is both universal and generous relative to OECD peers
Health expenditure rises steeply with age
As the share of over-65s grows, without policy change, public debt will escalate to unsustainable levels.
1. Demographic Reality: Ageing is Slower in NZ, But Still Costly
New Zealand ages more slowly than many OECD countries due to:
Higher fertility
Higher migration
Yet ageing remains expensive. The old-age dependency ratio has shifted from 7 workers per retiree in the 1960s to 4 today, and is projected to reach 2 by the 2070s. Government transfers to seniors far exceed seniors’ tax contributions, intensifying fiscal strain.
2. Fiscal Sustainability: "The Story Is Evolving"
Since 2006, the Treasury’s Long-term Fiscal Statements (LTFSs) have warned of long-run unsustainability. The 2025 LTFS will incorporate a new Overlapping Generations Model, reflecting realistic life-cycle patterns (work, saving, consumption, retirement, dissaving).
Four key developments shape today’s fiscal outlook:
A. Higher debt than previously anticipated
Actual net core Crown debt in 2020 was double what Treasury projected in 2006 and continues to rise. Structural deficits—not just cyclical weakness—are driving the increase.
B. Older people working much more than expected
Older New Zealanders’ labour force participation rates have risen dramatically:
65–69 age group: projected 38% by 2023 → actual 49%
70–74 age group: projected 19% → actual 27%
NZ is now one of the highest in the OECD for 65+ participation, helped by universal, non-abatement superannuation that does not penalize continued work.
C. Larger population due to high migration
Net migration consistently exceeded Treasury assumptions. Between 2014–2023, net migration averaged 47,500 annually, producing a population 10.5% larger than earlier projections. This eased fiscal pressure—but only temporarily, as migrants also age.
D. Lower global interest rates
Falling interest rates reduced debt-servicing costs from the 1980s–2021. But with global ageing and changing capital flows, future rates are uncertain and may trend upward.
3. What Governments Must Do: No Silver Bullet
Because ageing touches every major spending area, no single policy can restore fiscal sustainability. A serious adjustment will require a suite of changes, including:
A. Managing healthcare spending
Health costs are rising due to:
Greater demand from older citizens
Labour-intensive services
Technology-driven expectations
Smaller efficiencies are possible via prevention and system improvements, but significant long-term relief may require adjusting entitlements.
B. Reforming superannuation
Treasury’s modelling shows significant fiscal savings from:
Raising the eligibility age
Indexing payments to inflation rather than wages
But even these major adjustments alone cannot close the fiscal gap.
C. Increasing revenue
Tax increases can help but carry economic costs. Repeated small increases would be required unless spending is also restrained or redesigned.
D. Improving public-sector productivity
Delivering existing services more efficiently is equivalent to raising national productivity—and is essential to making long-term spending sustainable.
E. Boosting economy-wide productivity
Low productivity growth (0.2% over the past decade) constrains living standards. Higher productivity would expand fiscal room to maneuver, even though it does not eliminate demographic cost pressures.
4. A Critical Insight: Younger New Zealanders Will Decide the Future
Long-term fiscal sustainability depends heavily on younger generations, whose future willingness and capacity to support older New Zealanders is at risk.
Warning signs include:
Sharp declines in reading, maths, and science performance
High and rising mental distress among 15–24-year-olds
Growing NEET rates
Widening wealth gaps driven by housing market pressures
Rising material hardship for children (but low for seniors)
Investing in young people’s skills, wellbeing, and productivity is essential—not just for equity, but for the national ability to support an older population.
Conclusion
The speech ends on a hopeful note: longevity is a gift, not a crisis, but adapting to it requires honesty, discipline, and early policy action. New Zealand has strong institutions and a history of successful reforms. With timely adjustments and renewed focus on younger generations, the country can sustain its living standards and social cohesion in an era of longer lives.
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