lies, damned lies and the 2015 igr · 80-84. 90-94. population (millions) - 2015 . males. females....
TRANSCRIPT
Lies, Damned Lies and the 2015 IGR
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
Lies, Damned Lies and the 2015 IGR 2
Agenda • What a Great Idea!
• What can be learned from the 2015 IGR?
• What a Disappointment!
• Calling All Actuaries!
Lies, Damned Lies and the 2015 IGR 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)
Lies, Damned Lies and the 2015 IGR 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.
Lies, Damned Lies and the 2015 IGR 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.
Lies, Damned Lies and the 2015 IGR 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.
Lies, Damned Lies and the 2015 IGR 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.
Lies, Damned Lies and the 2015 IGR 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.
Lies, Damned Lies and the 2015 IGR 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.
Lies, Damned Lies and the 2015 IGR 10
What can be Learned from the 2015 IGR?
Lies, Damned Lies and the 2015 IGR
11
What can be learned from the 2015 IGR?
Power of Productivity
Lies, Damned Lies and the 2015 IGR 12
What can be learned from the 2015 IGR?
Power of Productivity
Lies, Damned Lies and the 2015 IGR 13
What can be learned from the 2015 IGR?
Growing Output Gap
Lies, Damned Lies and the 2015 IGR 14
What can be learned from the 2015 IGR?
Demographic Outlook
Lies, Damned Lies and the 2015 IGR 15
1.5 1.0 0.5 0.0 0.5 1.0 1.5
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
90-94
Population (millions) - 2015 Males Females
Analysis based on IGR & ABS
What can be learned from the 2015 IGR?
Demographic Outlook
Lies, Damned Lies and the 2015 IGR 16
1.5 1.0 0.5 0.0 0.5 1.0 1.5
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
90-94
Population (millions) - 2020 Males Females
Analysis based on IGR & ABS
What can be learned from the 2015 IGR?
Demographic Outlook
Lies, Damned Lies and the 2015 IGR 17
1.5 1.0 0.5 0.0 0.5 1.0 1.5
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
90-94
Population (millions) - 2025 Males Females
Analysis based on IGR & ABS
What can be learned from the 2015 IGR?
Demographic Outlook
Lies, Damned Lies and the 2015 IGR 18
1.5 1.0 0.5 0.0 0.5 1.0 1.5
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
90-94
Population (millions) - 2030 Males Females
Analysis based on IGR & ABS
What can be learned from the 2015 IGR?
Demographic Outlook
Lies, Damned Lies and the 2015 IGR 19
1.5 1.0 0.5 0.0 0.5 1.0 1.5
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
90-94
Population (millions) - 2035 Males Females
Analysis based on IGR & ABS
What can be learned from the 2015 IGR?
Demographic Outlook
Lies, Damned Lies and the 2015 IGR 20
1.5 1.0 0.5 0.0 0.5 1.0 1.5
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
90-94
Population (millions) - 2040 Males Females
Analysis based on IGR & ABS
What can be learned from the 2015 IGR?
Demographic Outlook
Lies, Damned Lies and the 2015 IGR 21
1.5 1.0 0.5 0.0 0.5 1.0 1.5
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
90-94
Population (millions) - 2045 Males Females
Analysis based on IGR & ABS
What can be learned from the 2015 IGR?
Demographic Outlook
Lies, Damned Lies and the 2015 IGR 22
1.5 1.0 0.5 0.0 0.5 1.0 1.5
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
90-94
Population (millions) - 2050 Males Females
Analysis based on IGR & ABS
What can be learned from the 2015 IGR?
Demographic Outlook
Lies, Damned Lies and the 2015 IGR 23
1.5 1.0 0.5 0.0 0.5 1.0 1.5
0-4
10-14
20-24
30-34
40-44
50-54
60-64
70-74
80-84
90-94
Population (millions) - 2055 Males Females
Analysis based on IGR & ABS
What can be learned from the 2015 IGR?
Demographic Outlook
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1.5 1.0 0.5 0.0 0.5 1.0 1.5
0-410-1420-2430-3440-4450-5460-6470-7480-8490-94
Population (millions) - 2055 Males Females
Analysis based on IGR & ABS
1.5 1.0 0.5 0.0 0.5 1.0 1.5
0-410-1420-2430-3440-4450-5460-6470-7480-8490-94
Population (millions) - 2015 Males Females
Analysis based on IGR &
What can be learned from the 2015 IGR?
Demographic Outlook
Migration
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What can be learned from the 2015 IGR?
Participation Rates
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What can be learned from the 2015 IGR?
Health Spending
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What a Disappointment! • Unsustainable “sustainability”
• Narrow thinking
• Invisible intergenerational equity
• Household-style budgeting
• Where is the rest of the economy?
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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]
Lies, Damned Lies and the 2015 IGR 29
What a Disappointment! Unsustainable “sustainability”
2015 IGR Overview (p. 17)
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]
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What a Disappointment! Narrow thinking
• Simple, deterministic projection model
• Limited sensitivity analyses
• No feedback loops (formal or informal)
• No scenario testing
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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
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What a Disappointment! Household-style budgeting
Lies, Damned Lies and the 2015 IGR
Source: https://www.whitehouse.gov/omb/budget/Historicals (Table 1.2)
33
What a Disappointment! Where is the rest of the economy?
Lies, Damned Lies and the 2015 IGR
Source: AIHW: 25 years of health expenditure in Australia 1989-90 to 2013-14
34
Calling all Actuaries! • The public good
• Build a better mousetrap
• Measure and assess intergenerational equity
• Apply scenario testing
• Get involved
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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?
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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
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Calling all Actuaries! Measure and assess intergenerational equity
Lies, Damned Lies and the 2015 IGR
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
Disposable income follows a clear trend over a lifetime
38
Calling all Actuaries! Measure and assess intergenerational equity
• Opportunities: – Probability of equity – Some form of
appraisal value approach?
• Intergenerational
Holistic Equity Index
Lies, Damned Lies and the 2015 IGR
Source: http://www.actuaries.digital/2015/08/06/why-future-generations-depend-on-us-rethinking-the-old-age-pension/
39
Calling all Actuaries! Apply scenario testing
• Coherent “real-world” scenarios
• Looking for evidence of flexibility and adaptability
SUSTAINABILITY
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Calling all Actuaries! Get involved
What can YOU do to improve the national conversation on a sustainable
future?
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Supplementary • The proxy model
• Sensitivity analysis
• Age Pension eligibility age
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Supplementary The proxy model
• Population derived from ABS projections
• Participation rates derived from IGR
• Productivity from IGR
• Calibration to fit
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Supplementary The proxy model
Lies, Damned Lies and the 2015 IGR
Close fit to the IGR after calibration:
44
Supplementary The proxy model
• Revenue % GDP as per IGR
• 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
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Supplementary The proxy model
Lies, Damned Lies and the 2015 IGR
Expenditure fits IGR by definition – resultant Budget Surplus is close
46
Supplementary Sensitivity analysis
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Lower longevity or higher migration would reduce expenditure as % GDP
47
Supplementary Sensitivity analysis
Lies, Damned Lies and the 2015 IGR
Fertility has little effect, but productivity is very significant
48
Supplementary Age Pension eligibility age
49 Lies, Damned Lies and the 2015 IGR
Eligibility age increases constrain demographic growth in pensions cost up to 2035
Supplementary Age Pension eligibility age
50 Lies, Damned Lies and the 2015 IGR
Continuing increases in eligibility age would constrain pensions costs up to 2055
Supplementary Age Pension eligibility age
Lies, Damned Lies and the 2015 IGR
Continuing increases in eligibility age would constrain pensions costs up to 2055
51
Supplementary Age Pension eligibility age
Lies, Damned Lies and the 2015 IGR
Continuing increases in eligibility age would deliver clear savings to the budget
52
Supplementary Age Pension adjustments
53 Lies, Damned Lies and the 2015 IGR
We can play with Eligibility Age, long-term indexation rate and old-age participation rates: