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Bernard Hickey highlights the fierce choices facing policy makers as our population ages; shows 'productivity dreamers' can't solve the looming crisis
By Bernard Hickey
This week's conference on the long term sustainability of our government finances reinforced the immense power of ageing.
Treasury forecast the ageing of New Zealand's population would increase health and New Zealand Superannuation spending to 19.1% of GDP by 2060 from 11.3% in 2010.
More importantly, the part of the population paying for this spending with their taxes will be smaller than it is today.
Treasury estimated the number of people aged 15-65 supporting each person aged over 65 would fall from just over 5 in 2010 to just over 2 by 2060.
Without changes in our policies around taxation, the retirement age, universal access to pensions and health, the government's debt is forecast to explode towards 200% of GDP by 2060 and interest costs would rise to 11.4% of GDP by 2060 from around 1.2% in 2010.
The generations voting for and running governments of today have essentially decided they will consume the future now and pass on crushing debts to the next generation.
So why are policymakers and voters, particularly those under 30, so outwardly relaxed?
The assumption raised at this week's conference was that either voters or the financial markets would not allow this situation to develop. I'm not so sure.
This implies voters and financial markets can look over the horizon, or at least several metres beyond their noses, and see the trainwreck coming through the same excellent pair of long range binoculars this conference provided. It also assumes they will do something about it and in enough time to make a difference.
But the history of both financial markets and democracies is that they don't see trainwrecks coming or act to stop them.
Instead, they tend to park on the railway crossing and express surprise in the instant when the train explodes through the dashboard.
Prime Minister John Key remains insistent that New Zealand doesn't need to increase the retirement age in a managed, staged fashion from 65 to 67. He remains popular.
Financial markets are similarly relaxed.
New Zealand 10 year government bond yields are around record lows of 3.5%. The New Zealand dollar is near record highs. Ironically, one of the reasons financial markets are so relaxed is the very ageing of the population itself.
As the population ages, savers get more risk averse the closer they get to retirement, which means they prefer government bonds to stocks. This is one of the major drivers downwards for longer term interest rates.
So how will this story end?
Today's politicians and voters are essentially betting on a brighter future.
They are hoping and praying for a structural shift higher in productivity that will deliver the economic growth needed to dig everyone out of this hole.
The problem for the productivity dreamers is the enormous headwind that the ageing population itself actually creates.
Research presented at this conference showed that as workers age they become slightly less productive in the last 5-10 years of their working lives. Also the national workforce participation rate starts to drop off as the population ages.
So the hoped-for productivity boost to solve the ageing problem has to be even bigger.
The additional disturbing thought from this conference was Treasury is already forecasting productivity growth forecast of 1.5%/year for the next 50 years, well above the 1.1% seen in the last 40 years.
The trainwreck forecast may itself be optimistic.
So how could this trainwreck be avoided?
Increasing the birthrate and increasing migration might help, as would changing the retirement age and encouraging higher workforce participation. But what's ultimately needed is a massive increase in productivity, which have only come in the past with the invention of new technologies or ways of doing business.
The last time western governments achieved that was during the 1940s and 1950s when the threat of losing wars encouraged voters and policymakers to change their ways.
Instead of consuming the future, they chose or were forced to invest in it.
This piece was first published in the Herald on Sunday. It is used here with permission.