NZ's private savings need to increase as Boomers start retiring, BNZ says

BNZ economist Mark Walton has argued how crucial it is that New Zealand's private savings levels increase in the face of its aging population of Baby Boomers. In BNZ's latest 'Economy Watch' publication, Walton looked at the 'tough policy decisions' that are going to have to be made in the near future, such as reduced per capita health care spending and the raising of taxes that will be forced by New Zealand's aging population. The need for higher private savings levels is, of course, in the face of tens of thousands of New Zealanders having lost, or had frozen, billions of dollars in failed finance companies over the past few years, along with falls in portfolios of stocks and managed funds.

For most countries, New Zealand included, it'll be less a case of trying to halt the population aging process, and more trying to cope the best we can. In essence, this means that from a fiscal perspective something's got to give; either health spending per capita (much of which is directed toward the aged) will have to fall or tax rates will need to lift (or a combination of the two). Alongside a possible judgment about the retirement age, it's clear that a Government in the not-too-distant future is going to face some tough decisions. As it is, the 2009 Budget forecast a decade of fiscal deficits. The economic consequence of an aging population will be that much more obvious in 10 year's time. Returning to fiscal surplus, even a decade hence, could be considerably more difficult than many currently imagine.

The other thread to this, of course, is the postponement of Government contributions to the New Zealand Superannuation fund. The Budget foresaw a resumption in payments in 2021. One can't help but wonder, however, whether conditions will be any more conducive to making contributions then, than they are at present. All of which serves to highlight how crucial it is for private savings levels to increase. Such sentiments will be anathema to businesses at present "“ it's a lift in consumer spending that many firms will be hoping for to boost revenues.

Walton looked at some solutions that may help with dealing with an aging population, such as raising the retirement age and introducing easier migration policies designed to bring in young migrants to fill the gaps left by older, retiring workers. However Walton concluded that these ideas could not be relied on to solve the problem facing the economy.

Perhaps the most obvious option for remedying the lifting dependency ratio problem is a mandatory hike in the retirement age. But other than the political hurdle "“which will require a certain degree of fortitude to clear, we imagine "“ it's not a step that will address the consequences of an aging population completely. There's plenty of evidence that suggests worker productivity drops off with age. Again, it sounds harsh, but it's a truism that replacing younger workers with older won't be enough.

And on migration:

Easier migration policies might also help. Migrants tend to be younger and, perhaps, have more children (and at a younger age) than the average New Zealander. Indeed, past influxes of migrants show up as smaller morsels in New Zealand's population snake, and have helped keep us young compared to many other developed countries. But New Zealand cannot depend on migration to solve its aging population problems, either. Though net migration has helped New Zealand's population grow at relatively robust rates in the past, much of this growth has been due to sharp falls in departures, rather than higher inflows. This is certainly the case at the moment. It's not clear that falling departures help drag down the overall age of the population in the same way a genuine lift in new arrivals might. We suspect not. And it may sound self-evident, but migrants have to come from somewhere. With the developed world all in the same boat, aging-wise, one suspects all governments will be doing all they can to keep their respective populaces intact. Attracting foreigners to these shores could become increasingly difficult.

So, Walton concludes, without a tradition of corporate contributions to superannuation as seen in the US, and without the historical legacy of a mandatory savings scheme like Australia's (established in 1992); "It's clear higher private savings rates will need to be part of the solution. They could aid the New Zealand situation immensely. And the incentives to save more are as strong as they have ever been."

Because it happens slowly, aging and its issues can be handled tomorrow, surely? Well, not really. Indeed, the rubber hits the road, economically speaking, as soon as 2010 "“ less than six months away "“ when the first of the post-World War II baby-boomers reaches retirement age. This should serve as a wake-up call. It is long, gradual, changes, such as aging, that can have the biggest impacts on the structure of an economy over the long term. It is unfortunate that they are also the most easily overlooked "“ or ignored. But the consequences of not addressing the impacts of New Zealand's aging population now, or soon, will be severe.