Patrick Nolan: Baby Boomers could drive us bust

On his 60th birthday Woody Allen is supposed to have joked that "practically a third of my life is over".

This quip not only illustrates his optimism but two important changes taking place. Baby Boomers - people born between 1946 and 1964 - are reaching pension age in growing numbers and people are living longer.

Just how much longer was shown in data from Statistics New Zealand released last Friday. This data updates their 2011 population projections and highlights the growing role that demographic constraints will play in public policy.

Consider the changes in New Zealand's population over the last decade. In 2003 the population was just over 4 million and 12 per cent of people were aged 65 or older.

By 2013 the total population had increased by around a 10th to reach close to 4.5 million. But the number of people over 65 had increased by almost 29 per cent. As a result the share of the population aged 65 or older had grown to 14 per cent. If there was such a thing as an average New Zealander they would now be aged just over 37, up from 35 in 2003.

The projections released last week show that these changes are not just a short-term thing. Based on the median scenario, between 2014 and 2068 the number of people aged over 65 will increase by more than a million to reach 1.7 million. It is projected that in 2068 something like 27.5 per cent of the total population will be aged over 65 - up from 14.4 per cent now.

Obviously it is better for people to be living for longer than the opposite. And people who enter retirement now tend to be healthier, wealthier and more active than previous generations of retirees.

But these changes also mean we need to think carefully. This is especially true of the pension and health systems, given the growing need to care for people with long-term conditions. The tax base will also come under pressure with the share of the population who work and pay taxes being expected to fall.

An older population will also make lifting productivity more important. As the population gets older and the relative size of the workforce shrinks it will become harder to increase wealth through simply working more. Success will increasingly depend on lifting productivity. Faster productivity growth can, as public policy think-tank the New Zealand Initiative has shown in a recent report, "make everything more affordable".

Population ageing, however, not only makes productivity growth more important but trickier too. Businesses will, for example, need to understand the implications of an ageing workforce and the potential increase in competition for skilled workers. Managers will need to utilise and combine the skills of both younger and older workers.

As people live longer, the world of retirement will change too. Based on last week's projections, the Productivity Commission estimates 42 per cent of the people who reached 65 in 2014 could expect to live to 90 and so have a retirement of at least 25 years. Over time these odds will improve, so a person who retires at 65 in 2042 would have a 58 per cent chance of living to 90.

Although these figures do not account for any future increases in the pension age they do indicate how much longer people could potentially spend in retirement. Many people can expect to spend as long in retirement as they spent paying off their mortgage. But managing money in later life provides its own challenges and, as the Commission for Financial Literacy and Retirement Income and the University of Auckland's Retirement Policy and Research Centre have both shown, too many Kiwis are unprepared for this phase in life.

On the bright side, according to HelpAge International's Global Agewatch Index, New Zealand is the 10th best place in the world to grow old, behind Norway, Sweden, Switzerland, Canada, Germany, Netherlands, Iceland, the US and Japan. This is partly due to high employment of people over 60, and the longer and healthier lives people can expect.

However, New Zealand ranks lower on income security. This indicates that the relationship between population ageing and living standards is not a simple one.

Indeed, population ageing could push down living standards by up to 15 per cent over the next 40 years.

This not only highlights the inherent uncertainty of projections of the national economic impact of ageing, but also the value of getting the policy response right. As well as getting older, we need to get wiser too.

Patrick Nolan is principal adviser at the New Zealand Productivity Commission.
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