Longevity and the challenge for public policy
An application to housing policy
Andrew Coleman
Motu Economic and Public Policy Research
The challenge
• Increasing longevity raises issues about the funding of
pensions and healthcare in “old age.”
• It also has major implications for young and working
age people as they fund their own or others’ old age
expenditure.
• If we maintain our defined benefit pension policy, we
will have higher taxes on working age people. This may
have unforseen implications.
The challenge
• Our current institutions were designed for one age
structure and may not work well for a different age
structure.
• As longevity increases, we may need to rethink and
redesign our political and social institutions (Diamond).
One path forward: computer based modelling
• Agent- based modelling provides a means of exploring
how different policies will simultaneously affect people
who differ by age, income and wealth……..and who
expect to age themselves.
• The basic framework is the Modigliani-Brumberg
lifecycle model (1953), aggregating agents with many
different characteristics and attitudes.
Example: longevity, pensions, and housing
• In recent work, I have explored how pension design
may affect housing choices (and welfare) as longevity
increases.
• Increasing longevity is likely to increase demand for big
houses as old people live for longer in the big houses
they lived in when they were 60
Increasing
Longevity
Increasing
Longevity
more
people
Increasing
Longevity
more
people
more
pensions
Increasing
Longevity
more
more
people
medical
more
pensions
expenses
Increasing
Longevity
more
more
people
medical
more
pensions
Higher taxes
expenses
How does increasing longevity affect younger people?
Increasing
Longevity
more
more
people
medical
more
pensions
Higher house
prices
Higher taxes
expenses
How does increasing longevity affect younger people?
• There is likely to be a squeeze on young
people as they face higher house prices and
have lower take home pay…..
…..offset by the need to save more
Modelling technique
• Design an overlapping generation lifecycle
model with four cohorts, each with 400
forward looking agents differing by income
and wealth
• Careful modelling of housing market (rental,
ownership, different sized houses), borrowing
constraints, and tax system.
Modelling technique
• Analyse how the effect of pension design and
housing supply affect housing choices and
welfare when longevity increases by 8 years.
Perfectly elastic
supply
(Prices constant)
Elastic Supply
No increase in
total pensions
No new taxes
Young owning:
+2%
Young large:
+1%
Old large
+29%
% new houses large
90%
Young owning:
-6%
Young large:
-4%
Old large
+32%
% new houses large
100%
Pension
spending rises
New labour
taxes
Young owning:
-6%
Young large:
-7%
Old large
+30%
% new houses large
80%
Young owning:
-16%
Young large:
-9%
Old large
+28%
% new houses large 88%
(Prices rise 20%)
Perfectly elastic
supply
(Prices constant)
Elastic Supply
No increase in
total pensions
No new taxes
Young owning:
+2%
Young large:
+1%
Old large
+29%
% new houses large
90%
Young owning:
-6%
Young large:
-4%
Old large
+32%
% new houses large
100%
Pension
spending rises
New labour
taxes
Young owning:
-6%
Young large:
-7%
Old large
+30%
% new houses large
80%
Young owning:
-16%
Young large:
-9%
Old large
+28%
% new houses large 88%
(Prices rise 20%)
Perfectly elastic
supply
(Prices constant)
Elastic Supply
No increase in
total pensions
No new taxes
Young owning:
+2%
Young large:
+1%
Old large
+29%
% new houses large
90%
Young owning:
-6%
Young large:
-4%
Old large
+32%
% new houses large
100%
Pension
spending rises
New labour
taxes
Young owning:
-6%
Young large:
-7%
Old large
+30%
% new houses large
80%
Young owning:
-16%
Young large:
-9%
Old large
+28%
% new houses large 88%
(Prices rise 20%)
Perfectly elastic
supply
(Prices constant)
Elastic Supply
No increase in
total pensions
No new taxes
Young owning:
+2%
Young large:
+1%
Old large
+29%
% new houses large
90%
Young owning:
-6%
Young large:
-4%
Old large
+32%
% new houses large
100%
Pension
spending rises
New labour
taxes
Young owning:
-6%
Young large:
-7%
Old large
+30%
% new houses large
80%
Young owning:
-16%
Young large:
-9%
Old large
+28%
% new houses large 88%
(Prices rise 20%)
Perfectly elastic
supply
(Prices constant)
Elastic Supply
No increase in
total pensions
No new taxes
Young owning:
+2%
Young large:
+1%
Old large
+29%
% new houses large
90%
Young owning:
-6%
Young large:
-4%
Old large
+32%
% new houses large
100%
Pension
spending rises
New labour
taxes
Young owning:
-6%
Young large:
-7%
Old large
+30%
% new houses large
80%
Young owning:
-16%
Young large:
-9%
Old large
+28%
% new houses large 88%
(Prices rise 20%)
Perfectly elastic
supply
(Prices constant)
Elastic Supply
No increase in
total pensions
No new taxes
Young owning:
+2%
Young large:
+1%
Old large
+29%
% new houses large
90%
Young owning:
-6%
Young large:
-4%
Old large
+32%
% new houses large
100%
Pension
spending rises
New labour
taxes
Young owning:
-6%
Young large:
-7%
Old large
+30%
% new houses large
80%
Young owning:
-16%
Young large:
-9%
Old large
+28%
% new houses large 88%
(Prices rise 20%)
Perfectly elastic
supply
(Prices constant)
Elastic Supply
No increase in
total pensions
No new taxes
Young owning:
+2%
Young large:
+1%
Old large
+29%
% new houses large
90%
Young owning:
-6%
Young large:
-4%
Old large
+32%
% new houses large
100%
Pension
spending rises
New labour
taxes
Young owning:
-6%
Young large:
-7%
Old large
+30%
% new houses large
80%
Young owning:
-16%
Young large:
-9%
Old large
+28%
% new houses large 88%
(Prices rise 20%)
Perfectly elastic
supply
(Prices constant)
Elastic Supply
No increase in
total pensions
No new taxes
Young owning:
+2%
Young large:
+1%
Old large
+29%
% new houses large
90%
Young owning:
-6%
Young large:
-4%
Old large
+32%
% new houses large
100%
Pension
spending rises
New labour
taxes
Young owning:
-6%
Young large:
-7%
Old large
+30%
% new houses large
80%
Young owning:
-16%
Young large:
-9%
Old large
+28%
% new houses large 88%
(Prices rise 20%)
Perfectly elastic
supply
(Prices constant)
Elastic Supply
No increase in
total pensions
No new taxes
Young owning:
+2%
Young large:
+1%
Old large
+29%
% new houses large
90%
Young owning:
-6%
Young large:
-4%
Old large
+32%
% new houses large
100%
Pension
spending rises
New labour
taxes
Young owning:
-6%
Young large:
-7%
Old large
+30%
% new houses large
80%
Young owning:
-16%
Young large:
-9%
Old large
+28%
% new houses large 88%
(Prices rise 20%)
Summary: in the model increasing longevity
• reduces the fraction of young (25-45) households owning by 16
%
• reduces the fraction of young households in large houses by 9%
• increases the fraction of older households in large houses by
30%
• requires 80- 90% of new houses to be large
• Approximately half of the effect comes from taxes increase, and
half from prices
A few NZ facts
• In NZ data: fraction 65+ living in 3brm houses
increased 9% between 1996 and 2006
• Homeownership rates for 30 yr olds have declined by
20% since 1991
• Most new houses are “big”
Most new houses are big houses
Floor size of new residential construction in NZ 1991 - 2007
70%
<200m2
60%
50%
40%
30%
<100m2
20%
10%
0%
1991
1993
1995
1997
1999
2001
2003
2005
2007
Conclusion
• Our current institutions were designed for one age
structure and may not work well for a different age
structure.
• Models suggest increasing longevity, in conjunction
with the current pension system, may lead to
increasing housing pressure on young people
Summary Haiku
“The young pay taxes
So the old live in mansions
They wanted when young”.