Fiscal pros and cons of baby boomers

Friday 1st November 2019

Baby boomers are usually considered a huge fiscal problem as they retire and start drawing ever more superannuation and health spending just as the working-age population available to support them dwindles.

For former Bank of New Zealand chief economist Tony Alexander, though, baby boomers may be the answer to the Reserve Bank's prayers in the next economic downturn.

"Everybody at the moment is thinking when the next downturn comes along, monetary policy will be worthless, and I agree with that," Alexander says.

The RBNZ has cut its official cash rate to 1 percent and financial markets currently have priced in a 50 percent chance of another cut on Nov. 13 when it next reviews monetary policy.

During the GFC, RBNZ cut the OCR from 8.25 percent in mid-2008 to 2.5 percent in April 2009 and held it at that level through to April 2010.

It now lacks room to cut much further and has already signaled that it has been looking at unconventional monetary policy tools, although it doesn't expect to have to use them.

Like many other central banks around the world, RBNZ has been suggesting the government needs to step in by spending more to stimulate economic activity.

"Everyone's worried about the ageing population and it's generally a negative thing. Very few people are thinking about positive things," Alexander says.

"We have the same doom-mongers getting easy headlines warning about a fiscal hole to be created by the aging population," he says.

"Sorry, what was that? In New Zealand we already have a mechanism in place to boost government spending in a sustained ultra-low interest rate and debt-servicing environment.

"Thank goodness for the aging boomers. They'll save us all."

Alexander also notes that more and more boomers are eschewing retirement with 23 percent of those aged 65 and over still working and paying taxes, up from 7 percent two decades ago.

But the gradual increase in retired boomers should help smooth the usually slow response of governments to economic downturns.

"In the past, when governments would try to use fiscal policy to stabilize the economy, they can end up exacerbating the problem," he says. "By the time the stimulus added to the economy, in the past we would already be going back up anyway."

"Ironically, that which people see as a problem is at least partly a solution."

Alexander's comments come as the government launches its "Better Later Life" policy aimed "to ensure New Zealand is prepared for and makes the most of our ageing population," according to Seniors Minister Tracey Martin.

"Better Later Life takes a fresh look at what is required to ensure everyone gets the chance to live well as they get older and help ensure we create opportunities for everyone to participate, contribute and be valued as they age," Martin says in announcing the new policy.

She estimates that within the next decade there will be a million seniors and that, by 2034, there will be 1.2 million aged over 65 and they will account for a quarter of the country's population.

The number of those aged 85 or more has risen from nearly 50,000 in 2001 to nearly 87,000 last year and is forecast to reach 179,000 by 2034.

Seniors currently account for about 6.2 percent of the workforce and that number is expected to almost double by 2033 when they will make up about 10.6 percent of the workforce.

Martin's officials estimate that by 2031, seniors will contribute $35.5 billion to the economy through paid and unpaid work, up from $17.5 billion in 2016.

She says a key area of the strategy is to support seniors in the workplace and to look at how businesses can better recruit and retain older people.

"We want to make sure that older people can work if they wish or need to. Current trends show that some older workers who lose their jobs take longer to re-enter the workforce, which impacts on their wellbeing and their income," Martin says.

"Ageism, discrimination, negative stereotypes and attitudes towards older people all impact on the quality of later working lives and are considered in the strategy," she says.

But ASB Bank's chief economist, Nick Tuffley, says while he has "some sympathy" for arguments in favour of using fiscal stimulus, rather than forcing central banks to push interest rates closer to the floor, those baby boomers are going to be darned expensive.

"It's pretty hard to argue against the pressure of demographics and that will put pressure on the fiscal balance," Tuffley says.

"You're going to have people living for longer, demanding superannuation for longer and needing to keep people alive for longer."

While medical innovation keeps increasing, it's also coming up with more expensive ways of keeping people alive.

Tuffley presented the numbers to the NZ Aged Care Association's annual conference last month and highlighted Treasury's forecast that the cost of NZ Superannuation will rise from just under $8 billion in 2009 to almost $18 billion by 2023.

He says Treasury projects health expenses will rise from about 6 percent of GDP in 2015 to about 9.5 percent by 2060, while superannuation costs will rise from less than 5 percent of GDP to about 8 percent over the same time frame.

(BusinessDesk)

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