This month, New Zealand is holding a referendum on the issue of
replacing the present taxfunded public pension - New Zealand
Superannuation - with a Compulsory Retirement Savings Scheme which
will pay a retirement annuity. The Savings Scheme is being mooted
under continuing claims that New Zealand Superannuation is becoming
unsustainable.
The Prime Minister, Mr Bolger, was reported (8 September, National
Radio, 9 am) as having said that "you don't need to be a
Rhodes Scholar in economics to know that by the middle of next
century the proportion of retired people will be double what it
is today and the workforce will be half".
In response, one can say that you don't need to be a Rhodes Scholar
in mathematics to refute Mr Bolger's assertion.
To make the point, we can divide the population into three groups:
(A) the retired, (B) the employed and (C) the rest. Group C includes
children, the unemployed, and those of working age who are not
in the labour force.
If Group A gets bigger, we can be sure that either
group B will get smaller, or group C will get smaller, or both
B and C will get smaller. But we cannot be certain that group B would get smaller.
It is quite possible that both groups A and B will
be bigger next century, with only group C getting smaller.
One likely scenario for the next century is that the numbers
of working-age jobless will fall as the numbers of retirement
age rise. That seems more like a solution than a problem to me.
The proportion of the population employed, taken on a fulltime
equivalent basis, will probably continue to hover around the 40
percent mark.
One way to analyse this demographic question is by examining "dependency
rates". Jim Bolger and Treasurer Winston Peters are concerned
that the ratio of working age population to population of retirement
age will rise from 4:1 to 2:1. This ratio of 2:1 implies that
New Zealand's adult dependency rate next century
must be at least 33 percent; that is, we can be sure that at least
onethird of adults resident in New Zealand will necessarily
be classed as dependent.
While I am not comfortable with labelling people over an arbitrary
age as "dependent" - most sixtysomethings are
ablebodied and contribute to New Zealand society in many
ways, paid and unpaid - I am happy to accept that all people over
60 (or 65 at the very most) should have the choice of unconditional
retirement.
The accompanying graphs show dependency rates since World War
2. Figure 1 shows the adult dependency rate. Adults are defined
as all persons aged over 15. Part-time workers are classed as
half-dependent. Figure 1 shows that adult dependency rates have
been at least ten percentage points above the 33% margin for over
50 years. The main reason for rising dependency rates in the 1980s
is involuntary unemployment, not aging. That is the problem policymakers
should be addressing.
Figure 1 also shows that the "official" labour force
data - that recorded by the Household Labour Force Survey - overstates
the true level of employment, as recorded in the census, and hence
understates the true dependency rate. It should be noted that
the Australian Bureau of Statistics adjust their survey data to
conform with census data, and that this is an important reason
why Australian Labour Force statistics show lower employment rates
than New Zealand statistics.
Figure 2 gives a fuller picture, allowing for children under 15,
who are by definition dependents. In revealing total dependency
rates of over 63 percent in 1961 and 1992, it is clear
that societies can easily support themselves with less than 40
percent of their populations in full-time employment.
In 1961, when the baby boom peaked, today's orthodox views on
"sustainability" - as reflected in the views of Dr Donald
Brash, Governor of the Reserve Bank, as well as Messrs Bolger
and Peters - would suggest that economic growth then should have
been nonexistent, and inflation rampant. In fact it was
a time of nearrecord growth and inflation below one percent.
If we could prosper with a dependency rate of 63% in 1961, we
can prosper with the dependency rates which will be the norm in
the twentyfirst century. We can look forward to lower labour
force participation rates as part of the solution, and not as
the problem.
The most likely scenario for the future is simply that the composition
of adult dependents will change, with more being retired and fewer
being jobless, noting that the jobless today include the rapidly
growing numbers of sickness and invalids beneficiaries. That is
not a scenario which should be leading to panic on the part of
New Zealand's political leaders.
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