Age Dependency next Century? A Global Perspective.

Published in: the NZ Herald, 20 May 1997.

Keith Rankin, Economics Dept., University of Auckland, 10 April 1997.

On the 3rd of April [ref. Herald, April 4], Prime Minister Jim Bolger reintroduced the spectre of age dependency haunting New Zealand in the second quarter of the 21st century. The claim is that the ratio of elderly to working age people will be such that today's public superannuation scheme will become unsustainable. The underlying connotation is that we should start cutting New Zealand Superannuation now, and move towards private retirement provision, or a quasi-private option like those favoured by NZ First and ACT. Mr Bolger's demographic argument should be challenged on historical and economic grounds.

In the late 1930s, New Zealanders had every reason to fear an age dependency problem from the 1940s to 1960s. Not only were the 1870s' and 1880s' baby boomers moving into retirement age, but birth rates had been falling since the 1890s, and were especially low in the early 1930s, the years of the Great Depression. Although the population projections made in the late 1930s turned out to be hopelessly wrong, the unpredicted baby boom actually caused the population aged 15-64 to be an even smaller proportion of the total population than had been expected.

Nevertheless, New Zealand coped very well. Indeed, it was from the late 1930s that New Zealand turned towards rather than away from universal welfare provision. New Zealand embraced rather than spurned its dependents. The 1950s' roll-call of dependence included many full-time mothers and severely disabled veterans from two world wars, in addition to the young and the retired. Dependency had yet to become a pejorative term.

In 1961, a year of rapid economic growth and record low inflation, 58 percent of the population was aged 15-64, and 36 percent of the population were employed (on a fulltime equivalent basis). In 1991, both numbers had risen, to 66 and 37 percent respectively. Each employed person was producing 50 percent more, on average, in 1991. With similar productivity growth in the future, the New Zealand economy will be able to produce 50 percent more per person in 2040 with just 30 percent of the population employed.

The experience of the 1950s and 1960s suggests that age dependency is not a problem. And the experience of the 1930s and 1980s suggests that the proportion of the population employed is not simply determined by the age structure.

The rhetoric of dependency equates being old with being useless and infirm. Reality couldn't be further from the truth. My grandfather was not working in the early 1930s. But he did work in the 1950s, past his 70th birthday. He was healthy, and the incentives in place did not discourage him from making a contribution at a time of labour scarcity. Whereas universal superannuation in the future will likewise encourage older people into phased retirement, a highly targeted approach will force people in their sixties to work full time up to a certain age and then oblige them to completely stop working.

Having been part of a government that projected 410,000 new jobs in the mid-1980s, Mr Bolger should be more aware than most of the difference between projections and forecasts. The population estimates for 2040 are not forecasts. They are projections based on a strictly limited set of status quo assumptions about fertility, mortality and migration. The reality will be that New Zealanders, individually and collectively, will respond to changing circumstances, bringing about population outcomes significantly different from today's projections. Indeed, both cut-backs to public retirement income and fears of such cutbacks, will in themselves change the age structure of the population.

It is true that the elderly population of 2040 has been born already. Nevertheless, in the global village, we cannot predict how many people born in the world before 1980 will be living in New Zealand in 2040. It is even harder to predict how many young people will be in New Zealand in 2040. What we do know is that birth rates are consistently higher in countries which lack comprehensive retirement insurance. The belief being seeded among today's young adults and teenagers - that they stand to face an impoverished retirement - is in itself likely to be a spur to larger families. Furthermore, we are increasingly being faced with subtle messages telling us to look to our own families, rather than to the state, for economic security.

Changes to social policies implemented over the last ten years may also have a significant impact on mortality rates. Demographic historian Richard Easterlin, in a book called Birth and Fortune: the Impact of Numbers on Personal Welfare, presented an hypothesis that life chances are determined by the relative size of one's generation. Thus he suggested that baby boomers would be more likely to be unemployed and, if employed, more likely to be overworked. He also suggested that they would face higher age-specific death rates, at all ages of their lives.

Part of Easterlin's mechanism was that individuals of a baby boom generation would become more self-centred, in the face of heightened peer competition. As such, they would tend to favour lower taxes, and reduced social welfare. Much of Easterlin's hypothesis has come true. Death rates have indeed risen, especially for males born in New Zealand between 1950 and 1975. The problem appears even worse in Great Britain, where, according to a recent BBC Panorama documentary, increasing numbers of men in their thirties are having heart attacks, and are often slow to recover. Demoralised people have impaired immune responses to stressful events such as major surgery.

Of course, increased mortality can never be a solution to any real or alleged problem of age dependency. For those who believe we really do face an age dependency problem and who, as Mr Bolger does, believe that unfettered globalisation is a good thing, the solution is obvious. The international marketplace will provide. For them, there should be no need for any new policy initiatives, at least at the national level, because the market supposedly solves problems better than any government can.

Whatever one feels about globalisation, there is no reason for anyone to believe that the ratio of old to young people in the world will be unsustainably high next century. In the global labour market, migration flows will adjust according to supply and demand, just as they always have. Furthermore, creditor nations - which will have a disproportionate share of the world's elderly population - will be able to utilise the labour of debtor nations without their needing to accept workers from those nations as immigrants. Their imports will exceed their exports.

The real challenge for the rich nations with ageing populations will be to make sure that, having utilised the labour of poor nations with young populations, they then distribute their national incomes in an equitable manner. Their problems can best be addressed by a social policy structure based around universal entitlements. Rich nations are rich because of the collective and individual endeavours of their past generations. The division of income in such nations should reflect that social inheritance and not the corporate power of particular individuals.

In New Zealand, a rich debtor country, we will need to export goods and services to our creditors as well as provide for our own population. Creditor dependency is more worrying for us than is age dependency. It is mainly on account of our need to pay profits and interest overseas that New Zealand will need a substantial future workforce. The best policy mix for New Zealand will therefore be universal social welfare and education, combined with flexible immigration criteria.


© 1997 Keith Rankin

Rankin File