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© The Treasury
New Zealand Superannuation -
Long-term Projections & Scenarios
April 17 2014 Presentation to
Retirement Incomes Policy Forum
Matthew Bell
New Zealand Treasury
© The Treasury
What are projections?
Projections begin where forecasts leave off
But they aren’t the same thing
Forecasts are a best attempt to predict the future, via
comprehensive modelling & expert opinion
Projections are potential paths, using assumptions
based on historical averages of growth or levels
Depend greatly on forecast base & assumptions used
Usually no policy changes or behavioural response but
may reflect an alternative scenario
© The Treasury
NZS expenditure – past & future?
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1992/93 1997/98 2002/03 2007/08 2012/13 2017/18 2022/23 2027/28 2032/33 2037/38 2042/43 2047/48 2052/53 2057/58
% of Nominal GDP
Year ended 30 June
AGGREGATE GROSS & NET NZS TO NOMINAL GDP - 20 years of History & 50 years of Projections
Aggregate NZS gross expenditure
Aggregate net (of tax) NZS expenditure
© The Treasury
Demographic trends behind rise
-2%
-1%
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1%
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5%
1996/97 2001/02 2006/07 2011/12 2016/17 2021/22 2026/27 2031/32 2036/37 2041/42 2046/47 2051/52 2056/57
annual % growth
Year ended 30 June
KEY DEMOGRAPHIC DRIVERS BEHIND THE RISE OF NZS EXPENSES
Total population
Total labour force
NZS recipients, grown at rate of "65 & over age group" beyond 2017/18
© The Treasury
Some explanations
Natalie has covered demographic trends & our ageing
popn structure so I’ll just cover the “mechanics” here
NZS expenses & nominal GDP both have the same
“per capita” drivers, at least in projections
These are labour productivity growth & inflation, which
combined drive the nominal wage growth to which
NZS rates are indexed each year
Hence they differ only in their demographic drivers –
labour force for GDP & 65 & over age group for NZS
Previous graph illustrates how their future paths differ
© The Treasury
So what does this do (potentially)
to public finances?
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120%
1993/94 1998/99 2003/04 2008/09 2013/14 2018/19 2023/24 2028/29 2033/34 2038/39 2043/44 2048/49
% of Nominal GDP
Year ended 30 June
CORE CROWN NET DEBT, REVENUE & EXPENSES -2013 Long Term Fiscal Statement Resume Historic Cost Growth Projection
Core Crown expenses (includes NZS) Core Crown revenue (dominated by tax)
Core Crown net debt
© The Treasury
Not all caused by NZS but it is
one of the “pressure” areas
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10%
NZS Health Education Non-NZS welfare Other Finance costs
% of Nominal GDP
Core Crown Expense categories
CORE CROWN MAJOR EXPENSE CATEGORIES IN 18 YEAR INTERVALS -2013 Long Term Fiscal Statement Resume Historic Cost Growth Projection
1993/94 2011/12 2029/30 2047/48
© The Treasury
What causes some expense
types to rise and others to fall?
NZS we have already explained – pure demographics!
Health more complex & a mixture of several factors:
• ageing population (higher average spend on over 65s);
• demand for new treatments as they become available;
• labour & other input costs often higher than in other areas;
• Health spending normally lifts as incomes do.
Whatever the causes, projected path reflects history
Education & Other largely grow in line with GDP
Non-NZS welfare drops due to inflation indexing rates
Finance costs product of debt; no rise if debt managed
© The Treasury
What about the NZS Fund?
NZS Fund (NZSF) is a pool of public money invested in
order to partially “prefund” the cost of future NZS
Fund allows “tax smoothing” – it invests some tax paid
by Kiwis now to earn returns to reduce tax burden on
later generations in paying for NZS in the future
NZSF is a significant & growing public financial asset
NZSF contributions/withdrawals are not operating
expenses/revenues so not shown in Crown accounts
or fiscal projections as increasing/reducing NZS cost
Fund not an asset subtracted in net debt measure as
not available to offset present fiscal pressures
© The Treasury
NZS Fund is a significant &
growing public financial asset
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5%
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30%
35%
2001/02 2006/07 2011/12 2016/17 2021/22 2026/27 2031/32 2036/37 2041/42 2046/47 2051/52 2056/57
% of Nominal GDP
Year ended 30 June
NEW ZEALAND SUPERANNUATION FUND ASSETS AS % OF GDP -2013 Half Year Economic & Fiscal Update Projection
© The Treasury
Modelling NZS changes –
Changes to age of eligibility
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2008/09 2013/14 2018/19 2023/24 2028/29 2033/34 2038/39 2043/44 2048/49 2053/54 2058/59
% of Nominal GDP
Year ended 30 June
CHANGES TO NZS - Increasing Age of Eligibility with different lead-in times
NZS gross expenditure under current policy
Raising eligibility age to 67 in 2023/24 & then a further year each decade
Raising eligibility age to 70 from 2016/17 by six months each year for a decade
© The Treasury
Modelling NZS changes –
Changes to rate indexation
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2008/09 2013/14 2018/19 2023/24 2028/29 2033/34 2038/39 2043/44 2048/49 2053/54 2058/59
% of Nominal GDP
Year ended 30 June
CHANGES TO NZS - Decreasing Indexation of Payment Rates under different growth paths
NZS gross expenditure under current policyReducing indexation of payment rates to CPI-based inflation from 2016/17 onwardsReducing indexation of payment rates to average of CPI-based inflation and wage growth from 2016/17 onwards
© The Treasury
Other options to reduce future
NZS expenses
Graphs ignore labour force, & hence GDP, impacts as
people alter work intentions in response to changes
Also do not depict some increased costs, such as more
older people on unemployment & other benefits
More behavioural-affected policies are options like a
return to abating NZS via assets or non-NZS income
Modelling suggests (ignoring such impacts) abating
NZS at 20% on income > $60,000 p.a. affects 5.5%
of superannuitants & saves around 2% of NZS cost
> $40,000 p.a. affects 9.5% recipients & 3.5% of cost
© The Treasury
Raising GDP via productivity &
labour force participation helps
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-0.5%
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2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060
% annual growth
Year ending 30 June
Aggregate Labour Force Annual Growth
Budget 2013 aggregate labour force annual growth
Budget 2000 aggregate labour force annual growth