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New Zealand Superannuation -

Long-term Projections & Scenarios

April 17 2014 Presentation to

Retirement Incomes Policy Forum

Matthew Bell

New Zealand Treasury

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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

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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

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Demographic trends behind rise

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-1%

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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

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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

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So what does this do (potentially)

to public finances?

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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

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Not all caused by NZS but it is

one of the “pressure” areas

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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

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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

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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

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NZS Fund is a significant &

growing public financial asset

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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

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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

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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

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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

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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