Lies, Damned Lies and the 2015 IGR · 80-84. 90-94. Population (millions) - 2015 . Males. Females. Analysis based on IGR & ABS . ... Lies, Damned Lies and the 2015 IGR 29 . What a

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!


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)


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.






















What can be Learned from the 2015 IGR?


11

What can be learned from the 2015 IGR?

Power of Productivity



Power of Productivity



Growing Output Gap



Demographic Outlook


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


Demographic Outlook


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




Demographic Outlook


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




Demographic Outlook


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




Demographic Outlook


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




Demographic Outlook


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




Demographic Outlook


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




Demographic Outlook


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




Demographic Outlook


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




Demographic Outlook


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



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


Analysis based on IGR &


Demographic Outlook

Migration



Participation Rates



Health Spending


What a Disappointment! • Unsustainable “sustainability”

• Narrow thinking

• Invisible intergenerational equity

• Household-style budgeting

• Where is the rest of the economy?


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]


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]


What a Disappointment! Narrow thinking

• Simple, deterministic projection model

• Limited sensitivity analyses

• No feedback loops (formal or informal)

• No scenario testing


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


What a Disappointment! Household-style budgeting


Source: https://www.whitehouse.gov/omb/budget/Historicals (Table 1.2)

33

https://www.whitehouse.gov/omb/budget/Historicals

https://www.whitehouse.gov/omb/budget/Historicals

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

Calling all Actuaries! • The public good

• Build a better mousetrap

• Measure and assess intergenerational equity

• Apply scenario testing

• Get involved


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?


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


Calling all Actuaries! Measure and assess intergenerational equity


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

http://www.theguardian.com/world/ng-interactive/2016/mar/07/whos-winning-find-out-how-your-income-compares-with-every-other-generation

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

http://www.actuaries.digital/2015/08/06/why-future-generations-depend-on-us-rethinking-the-old-age-pension/

Calling all Actuaries! Apply scenario testing

• Coherent “real-world” scenarios

• Looking for evidence of flexibility and adaptability

SUSTAINABILITY


Calling all Actuaries! Get involved

What can YOU do to improve the national conversation on a sustainable

future?


Supplementary • The proxy model

• Sensitivity analysis

• Age Pension eligibility age


Supplementary The proxy model

• Population derived from ABS projections

• Participation rates derived from IGR

• Productivity from IGR

• Calibration to fit




Close fit to the IGR after calibration:

44


• 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




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

49 Lies, Damned Lies and the 2015 IGR

Eligibility age increases constrain demographic growth in pensions cost up to 2035



Continuing increases in eligibility age would constrain pensions costs up to 2055



Continuing increases in eligibility age would constrain pensions costs up to 2055

51



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:

Documents

Lies, Damned Lies and the 2015 IGR · 80-84. 90-94. Population (millions) - 2015 . Males. Females. Analysis based on IGR & ABS . ... Lies, Damned Lies and the 2015 IGR 29 . What a