This paper explores the long-term fiscal effects of an aging population in New Zealand
and considers several options available to government for containing and financing its
future liabilities. Using the New Zealand Treasury long-term fiscal model, the paper
analyzes the baseline fiscal outlook and its sensitivity to several economic,
demographic, and policy assumptions. The results are presented from two different
perspectives: In a balanced budget-tax rate (or zero net debt) approach, which shows
the dynamics in the annual tax revenues that would be needed to balance future
budgets; and in a constant tax rate (or tax smoothing) approach, which shows the
dynamics in the government financial position when tax rates are held constant.
Based on the survey of international literature and the sensitivity tests, the paper
derives several policy options for alleviating both the demographic pressures on the
future fiscal balances and the problem of government financing in the long term.
Attention is given to a calculation of the government gross implicit pension debt, to the
tradeoff between a pre-funding of future spending and future tax increases, and to the
fiscal and behavioral implications relating to the level of New Zealand Superannuation
(NZS) benefits.