THE DISTRIBUTIONAL IMPACT OF POPULATION AGEING Affording Our Future - - PowerPoint PPT Presentation

THE DISTRIBUTIONAL IMPACT OF POPULATION AGEING

Affording Our Future Conference 10-11 December, 2012 Omar A. Aziz, Chris Ball, John Creedy and Jesse Unger

LIVING STANDARDS: THE HEART OF OUR POLICY ADVICE

Sustainability for the Future Increasing Equity Social Infrastructure Reducing Risks

HIGHER LIVING STANDARDS

Assess the impact of policy across key living standards dimensions Economic Growth

• FINANCIAL AND PHYSICAL CAPITAL
• NATURAL CAPITAL
• SOCIAL CAPITAL
• HUMAN CAPITAL

Intra-generational income inequality Inter-generational equity

What impact does population ageing have on:

• 1. Income inequality
• 2. The incidence of tax and spending by age-groups

CENTRAL QUESTIONS

INCOME DISTRIBUTION Possible determinants: Policy settings / changes Demographic change Skills Technology Globalisation Household formation rates Labour Market Participation ...and possibly many others...

INCOME DISTRIBUTION Possible determinants: Policy settings / changes Demographic change Skills Technology Globalisation Household formation rates Labour Market Participation ...and possibly many others...

Why? Two most important assumptions of the LTFM

Age Groups as a Proportion of Total Population (LTFS Assumption)

Labour Force Participation by Age (LTFS Assumption)

Isolate the impact of population ageing and LFP... ...on the income distribution 2010 (base year) 2020 2030 2040 2050 2060 Data: Household Economic Survey (HES) 2009/10 FRAMEWORK FOR ANALYSIS

Same number

• f people as in

2010 i.e. Total population constant at

• approx. 4.2

million... Different mix of age-groups And Labour Force Participation

Median Market Income by Age-Group: 2010 Peak Earning Years Relatively Low Market Incomes

Proportion of Older Age-Groups by Income Decile Predominantly ages 80+ Predominantly ages 65 - 79

Market income Final Income Indirect Tax

• GST
• Excise

$-Value of In-Kind Social Services

• Health
• Education

Direct Tax Income Support

• Working-age Benefits
• Working for Families
• NZ Super
• Housing Subsidies

Disposable Income + + _ _

Redistribution Redistribution

Wages and salaries, investments, self-employment Cash-in-hand Income measure of economic well-being of individuals / households

Gini Coefficients by Income Type

Percentage Change in Gini Measure Across Incomes Year Market to Disposable Disposable to Final 2010

• 31%
• 9%

2020

• 32%
• 10%

2030

• 33%
• 11%

2040

• 34%
• 11%

2050

• 34%
• 12%

2060

• 35%
• 12%

What impact does population ageing have on the distribution of tax and spending across age-groups?

AGE-INCIDENCE OF TAX AND SPENDING

TAXES Direct and Indirect Taxes (GST, Excises) SPENDING Welfare (core benefits, WfF, supplementary payments) NZS Health Housing (AS, IRR) Education (ECE, Primary, Secondary, Tertiary)

AGE-INCIDENCE OF TAX AND SPENDING

Excludes Defence Justice Transport Arts/Culture etc.

NET FISCAL IMPACT

NET FISCAL IMPACT

YEAR NET FISCAL IMPACT (Billions) 2010

• $8

2020

• $8

2030

• $11

2040

• $13

2050

• $13

2060

• $15

LIVING STANDARDS: THE HEART OF OUR POLICY ADVICE

Sustainability for the Future Increasing Equity Social Infrastructure Reducing Risks

HIGHER LIVING STANDARDS

Assess the impact of policy across key living standards dimensions Economic Growth

• FINANCIAL AND PHYSICAL CAPITAL
• NATURAL CAPITAL
• SOCIAL CAPITAL
• HUMAN CAPITAL

Intra-generational income inequality Inter-generational equity

YEAR NET FISCAL IMPACT (Billions) 2010

• $8

2020

• $8

2030

• $11

2040

• $13

2050

• $13

2060

• $15

Gini Coefficients by Income Type

Contribution to gap in a single year Cumulatively around 5% of GDP by 2060

YEAR NET FISCAL IMPACT (Billions) 2010

• $8

2020

• $8

2030

• $11

2040

• $13

2050

• $13

2060

• $15

Gini Coefficients by Income Type

Redistributive policies... at a point in time... will be increasingly funded by debt

POLICY RESPONSE TO GROWING FISCAL GAP

2010 2020 2040 2060

Any policy choice to close the fiscal gap will have distributional consequences... Both income inequality and inter-generational equity will be affected by a policy response but... ...we can moderate the extent to which this happens

Fiscal Gap: X%

• f GDP

Policy response

TWO TYPES OF POLICY RESPONSES

2010 2020 2040 2060 Fiscal Gap: X%

• f GDP

Policy response

Two extreme response scenarios: 1. Short n sharp: consequences for intra-generational income inequality, poverty etc; inter-generational equity less of a concern 2. Gradual changes over long time horizon: intra-generational income inequality may not be affected; consequences for inter-generational equity

• ver transition period

TWO TYPES OF POLICY RESPONSES

2010 2020 2040 2060 Fiscal Gap: X%

• f GDP

Policy response

Two extreme response scenarios: 1. Short n sharp: consequences for intra-generational income inequality, poverty etc; inter-generational equity less of a concern 2. Gradual changes over long time horizon: intra-generational income inequality may not be affected; consequences for inter-generational equity

• ver transition period

INEQUALITY AND EQUITY Intra-generational Income Inequality Inter-generational Equity

Interaction Policy can be used to moderate this interaction

SUMMARY

Change in composition of income distribution - “who ends up where” Lower-end dominated by superannuitants Inequality in distribution of market income Stable distribution of disposable / final income More generous cash and in-kind transfers to the lower-end

SUMMARY

Timing and duration of response to fiscal challenges has important distributional consequences Policy can be used to moderate the effects of the response on inequality and inter-generational equity Great value judgements involved... Agreement on a course of action will require much public debate

QUESTIONS