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Q: I was reading an Aussie website that was discussing Aussie house prices. It said they were about to go down because of the effect of all the baby boomers wanting to sell up and downsize and there not being enough younger people to buy them, so prices would start trending down as in Japan and some other countries.
It said the median age of all Aussies is about 37.5 and going up. Do you know what the median age for New Zealand is?
Also, when will retirees outnumber the workforce in New Zealand?
And do you know what the "dependency ratio" - retirees and children compared with workforce - is for New Zealand?
It will be interesting to see the effect this has on Auckland house prices, where there is high demand at the moment, compared with smaller towns around the country where the demand is smaller and not pushing up prices so much. What do you think?
A: First, the numbers. The median age of New Zealanders in 2006 was 36 - similar to Australia. That's up from just 23 in 1901, when families were big and people died youngish. The median is expected to be 45 by 2045.
As it happens, the Treasury has just released a report, Affording Our Future, that looks into the effects of an ageing population.
"The number of people aged 65 years and over, for example, has doubled since 1980," it says. "Statistics New Zealand projects that this age group will double in size again by 2036, numbering between 1.18 million and 1.25 million in that year. By 2061, it may number between 1.44 million and 1.66 million."
The increase in 65-pluses is partly - but only partly - because of the post-war baby boom. Says the report, "The size of this generation is not the cause of population ageing, although it does accelerate the trend. The fall in the birth rate and the trends towards lengthening lives mean the population would still be ageing, even if there had been no post-war baby boom."
On comparing retirees with the workforce, the report notes that, "Currently, around 66 per cent of the population is in the 15-64 age group. In 2061, that proportion might be more like 58 per cent." Meanwhile, people 65 and over are expected to rise from 14 per cent of the population to between 22 and 30 per cent by 2061.
So you can relax a little. We're not looking at oldies outnumbering workers, or anything near that. The working age population is still expected to be about twice as big as retirees in 2061.
When we add children into the mix, the current dependency ratio is about three dependants to six workers. By 2061 it will be about three dependants to four and a bit workers (say four workers plus one arm).
Affording our Future notes different trends among Maori and Pasifika. They "have higher birth rates and tend to give birth at younger ages and to die at younger ages, so they are ageing more slowly than other ethnic groups".
It also says that "some regions of New Zealand - often rural areas - are ageing much faster than the national average because of the departure of young adults or an inflow of older people wishing to retire".
This leads to your comment about house prices. Some demographers are predicting long-term falls in house prices in smaller towns and cities.
To some extent, demand for houses in these places may be sustained by retirees fleeing Auckland to free up a few hundred thousand dollars because of house price differences. But funnily enough retirees have a tendency to die - or at least move into retirement villages or rest homes - putting their houses back on the market.
How will this affect Auckland house prices? The bigger the Auckland/elsewhere gap grows, the more we might expect retirees to move elsewhere - along with some younger people, if they can find work.
This must put some downward pressure on Auckland prices. But there are many other factors that affect house prices, a big one being immigration. Forecasting Auckland house prices is about as easy as forecasting the value of the kiwi dollar. Who knows?
No reason to stop saving
Q: Of late, I have read a number of times that in 20 years or so, there will be no superannuation as there is now. I assume this means that it will be means-tested like other benefits and only for the needy.
If that is true, what is the incentive for saving for retirement and contributing to the KiwiSaver scheme? I know that having retirement savings may ease things a little, but surely the government will always look after the needy as it has always done.
It irks me that people who conscientiously save for the future are the ones who always seem penalised by those who have been foolhardy.
A: I think we should be careful about judging non-savers. Some are foolhardy, but some are unlucky. Walk a mile in other shoes ...
In any case, even if means testing is introduced, I can't imagine a future government setting things up so that those who don't save are as well off as those who do. Think of the message that would send to younger people, who would then have a great excuse to save nothing.
This is another issue addressed in the Treasury's new Affording Our Future report. The report includes a graph with two lines. One shows government spending if it grows at the historical average rate - a level that is not sustainable into the future. The other shows lower spending at the level the Treasury says New Zealand should aim at.
The report then looks at several examples of policy changes that would help to close the gap between the two lines. They're not Treasury recommendations, but are designed to show people the sort of trade-offs we're going to have to make - and the sooner the better. Social issues such as fairness and well-being are considered as well as economic issues. One approach is to raise taxes - through higher rates, a new tax, adding income subject to income tax, or simply not adjusting tax rates as inflation pushes people into higher tax brackets.
Another approach is to reduce the growth in government spending. The report looks into various possibilities. But there are no prizes for guessing which areas of spending growth are the big worries: health care and NZ Super.
Spending on health care just keeps growing, as new treatments - some very expensive - become available. This is exacerbated by the ageing population. Old people tend to have more health problems.
But you - and many others - are particularly interested in NZ Super. The report considers several ways to reduce the costs of super. The two given most prominence are:
• Gradually raising the age of eligibility from 2019-20, so that four years later it would be 67. I think most people expect a change along those lines.
• Slowing the rate at which NZ Super payments increase over the years. Currently, payments keep pace with average wages. The report proposes keeping pace with inflation, which usually rises more slowly.
Number crunching shows that the second is about three times as powerful as the first at curbing government spending increases. If we made both changes, that would go a long way towards closing the gap.
And on the face of it, the second change looks benign. Super payments would continue to buy as much in goods and services. However, over the years the incomes of retirees relying largely on NZ Super would fall further and further behind wage earners. Still, KiwiSaver might help, in that fewer people will be in that situation.
Either change would encourage people to work longer, which could help economic growth. And that might be no bad thing, given lengthening life expectancies.
Affording Our Future also looks at other possibilities, including the means testing you worry about. It acknowledges that means testing would be likely to cause disincentives to work or to save, as you say. It adds, "Means tests are usually complicated to apply in practice, as people sometimes hold houses and other assets in trusts. The government would have to examine people's private arrangements carefully to get a clear picture of their 'means'.
"Further, some people are likely to spend effort and money trying to avoid means tests, which would be both expensive and unproductive. So while some people might find a means-tested retirement income system appealing on the grounds that it directs the state's resources to those who need them the most, the practical barriers are difficult to get around."
That's hardly a ringing endorsement of the idea. Nobody knows what future governments will do, but I suggest you don't stop saving in anticipation of means testing.
Some other interesting points made in Affording Our Future:
• The outlook is hardly gloomy. "On average, people will be richer, healthier and will live longer."
• While we might expect education costs to become less important as young people become a smaller group percentage-wise, that might be countered by a tendency for more to go into tertiary education.
• "Contrary to what may be the general perception, New Zealand's recorded crime rate has been falling since the early 1990s - similar to trends around the world. Although we are not sure of the exact reasons for this fall, the recent focus on crime prevention and rehabilitation in New Zealand may have helped." Given that young men are the largest offender group, the crime rate may fall further as the population ages.
The report also considers the following "solutions" that sound plausible but won't help much:
• Higher-than-expected productivity growth. "If our economy grows more quickly than expected, on a permanent basis, the higher tax revenue would be useful in managing future fiscal pressures. However, most spending areas would face additional pressures - both from wages being higher and from payments such as NZ Super being linked to wage growth." Of course, if NZ Super was linked to inflation instead, as discussed above, that would help here.
• A higher birth rate. "Before they become taxpayers, contributing to government finances, those extra children would need medical care and education, increasing cost pressures in those areas. Eventually they would become taxpayers, but we will need to address our long-term fiscal pressures before then."
• Preventative medicine. Many conditions that are expensive to treat are also preventable. However, "preventative treatment is notoriously difficult to target effectively. And even when it is effective, it can sometimes end up costing more than the treatment for the prevented disease. That isn't a reason not to explore preventative care - it's better if people don't get sick - but we shouldn't assume that prevention always saves money."
Oops! I've filled the column with stuff on this report. But it's important stuff. I should state here that I worked on the report, so I'm biased. But I think it's readable, thought-provoking and somewhat reassuring. You might want to check it out, and the background papers, here.
• Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.
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