Tackling the core

NZIER raises an important point regarding New Zealand – the core costs of government look set to increase substantially in the next 15 years.

Now I don’t want to overplay the increase in health costs and superannuation – those will occur, but at the same time a smaller proportion of people in the youth category will lead to relatively smaller costs for education and health care for the young.

However, in net-terms the dependency ratio will increase, and the average “cost” of each dependent will rise.  As a society we will undoubtedly want to look after the most vulnerable among us – but if we are truly serious about that we need to keep in mind what we can afford.

In reality, if society is serious about looking after dependents in the future there is a significant liability in the future – and this is a liability we need to fund now.  Although some may say we should do this by increasing taxes, lets not forget that our current rate of government spending as a % of national income is fairly high.  As a result, we may have to cut back on some of our “golden cows” such as the age of eligilibity for super, the degree of funding for health care, our comprehensive ACC system, and our willingness to give families income through Working for Families.

If the US can get downgraded for not facing up to these challenges, NZ can too – it is best for everyone that we face them now, and try to decide where society as a whole is willing to make cuts to fund these future costs.

So I have to ask, given that economists have been walking around trying to get this issue on the agenda for over the past decade how can we actually inform the voting public of how much of a big issue this actually is?

Update:  Bill Kaye-Blake from NZIER adds the following important point on Twitter:

Another thing to think about is the difference between the size of liabilities – because we are all aging – and who pays

So the size of the liability is increasing, but we also need to remember that the pool of people who will be paying for this liability is shrinking (or at least growing at a much smaller rate).  There are a growing number of “dependents” that society needs to cover for each taxpayer – which is why we really need to fund some of this now.

  • bmk

    I guess by making it clear to people that if it isn’t tackled now then when they come to retire there will be no money left to pay their pension or to provide their healthcare. If people can see that something will directly impact them then they are more inclined to treat it seriously.

    Of the options detailed for dealing with this problem, I think we should look at means testing pensions as well as raising the entitlement age. And more importantly bring in a land tax and if not a land tax then a capital gains tax.

  • Seamus Hogan

    Matt,

    I don’t disagree that we should take demographics seriously before they really start to bite, but one shouldn’t take the comparison with the U.S. too far. Their demographic problem is way more serious than ours, not because their fertility and mortality patterns have been sharlpy different from ours, but because their public health-care obligations rise much more steeply with age than do ours. This is for the simple reason that the majority of U.S. citizens don’t become eligible for public health funding until they reach the age of 65 and are eligible for Medicare.

  • I dunno, Matt, I was kinda hoping my children would be funding my retirement. As long as we raise them right it should be a burden they’re willing to bear.

  • @bmk

    That is true, however it won’t be the case that there will be nothing left – just not as much. With all the uncertainty about it, I get the feeling that it is just easier for people to ignore than for us to discuss the risks – which is a pain.

    @Seamus Hogan

    That is very true – also compared to Europe and the such our demographic trends are quite different, in fact ours look a lot more favourable.

    However, there is still an underlying long-term issue that just isn’t being touched – either because the electorate doesn’t want to think about it, or doesn’t know about it. I genuinely don’t know how to get people thinking about these issues in society …

    @rauparaha

    You’ll have to get those kids out first mate, then you can think about getting them working. You should inform your partner 😉