The Grey Wave is coming!

What happens when a quarter of the population retires?

According to a recently released briefing paper completed by the Reserve Bank NZ, by 2050, nearly a quarter of the population is expected to be aged over 65. This change will have a huge implication on the overall economy.

Demographic changes

In NZ the ratio of work age individuals (16-64) to those of retirement age (65+) is currently 4 to 1, by 2050 it is projected to be 2 to 1. In 1977 when NZ Super as we know it today started the ratio was 5.5 to 1!

This change is driven by several factors, including an increase in the older worker participation rate and a decline in birth rates. While the birth rate is declining, life expectancy is increasing, leading to a larger proportion of the population in older age brackets. 

Economic Impact

• A smaller proportion of working-age individuals supporting a larger proportion of retirees will strain the economy and could affect government spending on social security and healthcare. Health expenditure is currently 7% of GDP which is expected to grow to 10% while superannuation costs will rise from 5% to 7.7%, that’s another 25 billion dollars per year!

• Workforce: The older population will become a larger part of the workforce. With ageism alive and well in NZ this will require an attitude change from employers.

• Retirement policies: The current retirement age and associated policies may need to be reviewed and potentially adjusted. 

Housing Market

Older households will begin to sell off their larger family homes and buy single storey smaller properties. However, with the slower growth in the working age population demand for these larger homes may fall, raising the question of who will want to buy these homes. These changes could also affect the composition of new housing construction.

·       The number of older people in the private rental sector is projected to increase, leading to a greater demand for rental properties suitable for seniors. This will also impact their financial security in retirement.

·        Increased demand for accessible housing as the population ages, there will be a greater need for housing that is accessible and adaptable to the needs of older people, including those with mobility limitations. This includes features like single-story living, wider doorways and grab bars.

·        At the same time as there is an increase in demand for rental property, there will also be a reduction of property available to rent as retirees sell down their rental investment properties to fund their retirement. Currently 72% of private landlords are 50 or older, with almost a third being 65 or older!

Financial Market

Retirees will begin to convert their housing assets and other investments into cash which will lead to

·       a higher overall savings rates and lower interest rates on term deposits.

·       lower neutral interest rates, which is the rate that neither stimulates nor restricts the economy lending to a lower OCR.

·       less demand for riskier assets such as shares due to the need for a steady income stream and to protect against having to sell assets at a time when prices are low.

·       Lower demand for mortgages.

·       Consumption preferences may shift away from goods and towards the services sector as individuals get older further reducing the need for credit.

·       And as life expectancy increases, older people may become more inclined to explore other options to ensure a stable flow of income during their retirement, such as reverse mortgages which no major bank currently offers.

Over the next decade the grey wave will necessitate that both Government and individuals will have to make some hard decisions