Richard Lyon & Randy Amidharmo Richard Lyon & Randy Amidharmo This presentation has been prepared for the 2016 Financial Services Forum. The Institute Council wishes it to be understood that opinions put forward herein are not necessarily those of the Institute and the Council is not responsible for those opinions.
Intergenerational Report Released at least once every 5 years 40-year projections: economic, demographic, fiscal outlook Intent: Assesses long-term sustainability of Government policies in the context of economic & demographic challenges 4 reports released so far: 2002, 2007, 2010, 2015 2
Agenda What a Great Idea! What can be learned from the 2015 IGR? What a Disappointment! Calling All Actuaries! 3
What a Great Idea! Periodic review to assess long-term impact of current & proposed Government policy Facilitates a national conversation shapes how economy & society operate NHS in UK (1948), Compulsory Superannuation in Australia (1992) 4
What a Great Idea! Legislation Charter of Budget Honesty Act 1998 (Section 21) An intergenerational report is to assess the long term sustainability of current Government policies over the 40 years following the release of the report, including by taking account of the financial implications of demographic change. 5
What a Great Idea! Legislation Charter of Budget Honesty Act 1998 (Section 21) An intergenerational report is to assess the long term sustainability of current Government policies over the 40 years following the release of the report, including by taking account of the financial implications of demographic change. 6
What a Great Idea! Legislation Charter of Budget Honesty Act 1998 (Section 21) An intergenerational report is to assess the long term sustainability of current Government policies over the 40 years following the release of the report, including by taking account of the financial implications of demographic change. 7
What a Great Idea! Legislation Charter of Budget Honesty Act 1998 (Section 21) An intergenerational report is to assess the long term sustainability of current Government policies over the 40 years following the release of the report, including by taking account of the financial implications of demographic change. 8
What a Great Idea! Legislation Charter of Budget Honesty Act 1998 (Section 21) An intergenerational report is to assess the long term sustainability of current Government policies over the 40 years following the release of the report, including by taking account of the financial implications of demographic change. 9
What a Great Idea! Legislation Charter of Budget Honesty Act 1998 (Section 21) An intergenerational report is to assess the long term sustainability of current Government policies over the 40 years following the release of the report, including by taking account of the financial implications of demographic change. 10
What can be Learned from the 2015 IGR? 11
What can be learned from the 2015 IGR? Power of Productivity 12
What can be learned from the 2015 IGR? Power of Productivity 13
What can be learned from the 2015 IGR? Growing Output Gap 14
What can be learned from the 2015 IGR? Demographic Outlook Analysis based on IGR & ABS Population (millions) - 2015 Males Females 90-94 80-84 70-74 60-64 50-54 40-44 30-34 20-24 10-14 0-4 1.5 1.0 0.5 0.0 0.5 1.0 1.5 15
What can be learned from the 2015 IGR? Demographic Outlook Analysis based on IGR & ABS Population (millions) - 2020 Males Females 90-94 80-84 70-74 60-64 50-54 40-44 30-34 20-24 10-14 0-4 1.5 1.0 0.5 0.0 0.5 1.0 1.5 16
What can be learned from the 2015 IGR? Demographic Outlook Analysis based on IGR & ABS Population (millions) - 2025 Males Females 90-94 80-84 70-74 60-64 50-54 40-44 30-34 20-24 10-14 0-4 1.5 1.0 0.5 0.0 0.5 1.0 1.5 17
What can be learned from the 2015 IGR? Demographic Outlook Analysis based on IGR & ABS Population (millions) - 2030 Males Females 90-94 80-84 70-74 60-64 50-54 40-44 30-34 20-24 10-14 0-4 1.5 1.0 0.5 0.0 0.5 1.0 1.5 18
What can be learned from the 2015 IGR? Demographic Outlook Analysis based on IGR & ABS Population (millions) - 2035 Males Females 90-94 80-84 70-74 60-64 50-54 40-44 30-34 20-24 10-14 0-4 1.5 1.0 0.5 0.0 0.5 1.0 1.5 19
What can be learned from the 2015 IGR? Demographic Outlook Analysis based on IGR & ABS Population (millions) - 2040 Males Females 90-94 80-84 70-74 60-64 50-54 40-44 30-34 20-24 10-14 0-4 1.5 1.0 0.5 0.0 0.5 1.0 1.5 20
What can be learned from the 2015 IGR? Demographic Outlook Analysis based on IGR & ABS Population (millions) - 2045 Males Females 90-94 80-84 70-74 60-64 50-54 40-44 30-34 20-24 10-14 0-4 1.5 1.0 0.5 0.0 0.5 1.0 1.5 21
What can be learned from the 2015 IGR? Demographic Outlook Analysis based on IGR & ABS Population (millions) - 2050 Males Females 90-94 80-84 70-74 60-64 50-54 40-44 30-34 20-24 10-14 0-4 1.5 1.0 0.5 0.0 0.5 1.0 1.5 22
What can be learned from the 2015 IGR? Demographic Outlook Analysis based on IGR & ABS Population (millions) - 2055 Males Females 90-94 80-84 70-74 60-64 50-54 40-44 30-34 20-24 10-14 0-4 1.5 1.0 0.5 0.0 0.5 1.0 1.5 23
What can be learned from the 2015 IGR? Demographic Outlook Analysis based on IGR & Population (millions) - 2015 Males Females 90-94 80-84 70-74 60-64 50-54 40-44 30-34 20-24 10-14 0-4 1.5 1.0 0.5 0.0 0.5 1.0 1.5 Analysis based on IGR & ABS Population (millions) - 2055 Males Females 90-94 80-84 70-74 60-64 50-54 40-44 30-34 20-24 10-14 0-4 1.5 1.0 0.5 0.0 0.5 1.0 1.5 24
What can be learned from the 2015 IGR? Demographic Outlook Migration 25
What can be learned from the 2015 IGR? Participation Rates 26
What can be learned from the 2015 IGR? Health Spending 27
What a Disappointment! Unsustainable sustainability Narrow thinking Invisible intergenerational equity Household-style budgeting Where is the rest of the economy? 28
What a Disappointment! Unsustainable sustainability 2010 Intergenerational Report (Chapter 6) Sustainability requires that at least the current level of wellbeing be maintained for future generations. The Government s policies seek to do more than this. The Government s goal is to improve the wellbeing of current and future generations. Wellbeing and sustainability are multi-dimensional concepts that go beyond material living standards. In this report wellbeing and sustainability are assessed through the prism of the stock of economic, environmental, human and social resources. [emphasis added] 29
2015 IGR Overview (p. 17) What a Disappointment! Unsustainable sustainability The first two scenarios show a very significant deterioration in the Budget. The third scenario shows that the Government s current set of policies would bring the Budget back to a sustainable path over the medium to long term. [emphasis added] 30
What a Disappointment! Narrow thinking Simple, deterministic projection model Limited sensitivity analyses No feedback loops (formal or informal) No scenario testing 31
What a Disappointment! Invisible intergenerational equity GDP based on hours worked, with no distinction by value Can t measure contribution to economy by generation Tax revenue a flat percentage of GDP Can t measure contribution to revenue by generation Success measured by overall budget surplus Can t see the position by generation 32
What a Disappointment! Household-style budgeting Source: https://www.whitehouse.gov/omb/budget/historicals (Table 1.2) 33
What a Disappointment! Where is the rest of the economy? Source: AIHW: 25 years of health expenditure in Australia 1989-90 to 2013-14 34
The public good Calling all Actuaries! Build a better mousetrap Measure and assess intergenerational equity Apply scenario testing Get involved 35
Calling all Actuaries! The public good We helped to provide for widows, orphans, the sick and the retired Profession now engulfed in scandals (e.g. pensions mis-selling and The Equitable in the UK; current major issues in Australia) Feeble political debate about Australia s future Perhaps there has never been a better time for us to remember our commitment to the public good and to seek to honour it? 36
Calling all Actuaries! Build a better mousetrap Many opportunities to improve the IGR model, including: track revenue and expenditure for cohorts build feedback loops test with economic cycles extend to steady state expand to include other governments and private sector allow for distribution of income within cohorts Very actuarial 37
Calling all Actuaries! Measure and assess intergenerational equity Disposable income follows a clear trend over a lifetime Source: http://www.theguardian.com/world/ng-interactive/2016/mar/07/whos-winning-find-out-how-your-income-compares-with-every-other-generation Based on data from Luxembourg Income Study from 1985 to 2010 38
Calling all Actuaries! Measure and assess intergenerational equity Opportunities: Probability of equity Some form of appraisal value approach? Intergenerational Holistic Equity Index Source: http://www.actuaries.digital/2015/08/06/why-future-generations-depend-on-us-rethinking-the-old-age-pension/ 39
Coherent real-world scenarios Calling all Actuaries! Apply scenario testing Looking for evidence of flexibility and adaptability SUSTAINABILITY 40
Calling all Actuaries! Get involved What can YOU do to improve the national conversation on a sustainable future? 41
Supplementary The proxy model Sensitivity analysis Age Pension eligibility age 42
Supplementary The proxy model Population derived from ABS projections Participation rates derived from IGR Productivity from IGR Calibration to fit 43
Close fit to the IGR after calibration: Supplementary The proxy model 44
Revenue % GDP as per IGR Supplementary The proxy model Expenditure % GDP as per IGR split into demographic & non-demographic components Applied adjustments as required for sensitivity testing e.g. High/Low longevity modelled by calibrating population adjustments 45
Supplementary The proxy model Expenditure fits IGR by definition resultant Budget Surplus is close 46
Supplementary Sensitivity analysis Lower longevity or higher migration would reduce expenditure as % GDP 47
Supplementary Sensitivity analysis Fertility has little effect, but productivity is very significant 48
Supplementary Age Pension eligibility age Eligibility age increases constrain demographic growth in pensions cost up to 2035 49
Supplementary Age Pension eligibility age Continuing increases in eligibility age would constrain pensions costs up to 2055 50
Supplementary Age Pension eligibility age Continuing increases in eligibility age would constrain pensions costs up to 2055 51
Supplementary Age Pension eligibility age Continuing increases in eligibility age would deliver clear savings to the budget 52
Supplementary Age Pension adjustments We can play with Eligibility Age, long-term indexation rate and old-age participation rates: 53