The New Zealand workforce has changed dramatically over the past 24 years.
In mid-1990 our workforce was young and energetic with 338,500, or 22 per cent, of all employed workers in the 15 to 24 age bracket. By mid-2014 the total number of 15 to 24 year old workers had declined to 325,700 or just 14 per cent of the workforce.
This development has been mainly due to a dramatic increase in the number of 15 to 24-year-olds undertaking additional, post-secondary school education.
Energetic grey-haired men and women have replaced young employees in shops, offices, medical centres and other areas of employment.
Based on current trends there is a strong possibility that by 2054 there will be more individuals from the 65 plus age group in full or part time employment than 15 to 24-year- olds.
This has major implications for our economy, NZ Superannuation and KiwiSaver.
The accompanying table shows how employment trends have changed since mid-1990, particularly as far as the 15 to 24 and the 65 and over age groups are concerned.
The first point to note is that the unemployment rate is the number of individuals who are actively looking for a job but cannot find one.
The second point is the participation rate, which is the percentage of an age group in the workforce, both employed and unemployed.
The participation rate for the 65 and over age group has soared from just 6.9 per cent in 1990 to 20.6 per cent in the June 2014 Household Labour Force Survey. The 65 years- plus male participation rate has risen from 10.6 per cent to 26.5 per cent while the female rate has increased from 4 per cent to 15.3 per cent over this 24-year period.
There are more elderly New Zealanders in the workforce than in most other countries. For example, our 65-plus participation rate is 20.6 per cent compared with 18.7 per cent in United States, 12.1 per cent in Australia and just 9.8 per cent in the United Kingdom. Europeans retire much earlier, with France, Germany, Italy and Spain having 65 years of age-plus workplace participation rates of 2.3 per cent, 5.5 per cent, 3.5 per cent and 1.8 per cent respectively.
Only Chile, Iceland, Mexico and Korea have a higher percentage of the 65-plus age group in the workforce than New Zealand.
There are a number of reasons why more and more of the 65-plus age group are remaining in the workforce.
• Health – individuals are healthier and living longer.
• Education – highly educated people work longer and our workforce is far better qualified than it was in 1990.
• Occupations – there are more and more clerical, non-manual jobs, that suit older workers.
• Financial – New Zealanders are concerned about their low level of savings and rising health costs, particularly health insurance.
• Rules and regulations – the removal of the mandatory retirement age in 1999 and the introduction of anti-discrimination rules as far as older workers are concerned.
• Family dynamics – a high percentage of women stay in the workforce until their husbands retire as do individuals, particularly women over 65, after a marriage breakup.
• Employer preferences – employers seem to have a liking for 65-plus-year-olds because this age group has a 1.6 per cent unemployment rate compared with 14 per cent for the 15 to 24 age group and 5.4 per cent for the total workforce.
But New Zealand Superannuation is one of the main reasons why such a high percentage of the population stay in the workforce after they reach 65 years of age.
NZ Super is relatively unique because it applies to everyone once they reach 65 years of age, is not subject to any income test or means test and is not contingent on retirement.
Thus, there is a strong incentive for individuals to stay in the workforce until they reach 65.
However, lowly paid workers are effectively incentivised to retire when they start receiving NZ Super because this represents a high percentage of their preretirement income.
Conversely, highly paid individuals have a strong incentive to stay in the workforce because NZ Super is neither income tested nor means tested and represents a much smaller per cent of their employment income.
In other words, NZ Super is an extremely effective culling system because it encourages unskilled workers to leave the workforce while enticing the highly skilled to stay.
In addition, most New Zealanders have the majority of their wealth tied up in residential property, which doesn’t generate income if it is the family home. Thus, they are incentivised to continue working because of the low level of income generated from their property-dominated investment portfolio.
What will be the long-term impact of KiwiSaver on the country’s workforce, particularly the number of 65-year-olds and over that will want to remain working?
Overseas studies show that individuals in a defined contribution superannuation scheme (a scheme where the outcome is unknown and is determined by investment returns) usually work longer than individuals who are in a defined benefit superannuation scheme (they received a fixed income every week or month regardless of investment returns).
As KiwiSaver is a defined contribution scheme it should not have a major impact on the willingness of our over 65s to continue working.
However, there is a strong argument that compulsory superannuation in Australia, which is also a defined contribution scheme, is encouraging our transtasman cousins to retire earlier because of the huge lump sums they have built up.
However, if employers here are willing to make a voluntary contribution to KiwiSaver schemes after their employees reach 65, it would be a huge incentive for New Zealanders to remain in the workforce.
Recent studies, particularly an AMP survey, indicate that a large percentage of KiwiSaver members want to use KiwiSaver to repay their mortgage and other borrowings. This suggests that KiwiSaver is not going to discourage the 65 years and over age group from remaining in the workforce.
There is no doubt that a greying workforce is a positive development for the New Zealand economy. This is because it helps retain our more highly skilled workers, it enables younger people to obtain additional education and it keeps the pressure off wage increases, inflation and interest rates.
However, one of the country’s main challenges is to raise our overall skills level, particularly in information technology where older workers have limited abilities.
It is depressing to note that 371,500 individuals, representing 16 per cent of the total workforce, have absolutely no formal qualifications, either school or post-school.
These individuals will find it increasingly difficult to find gainful employment in the modern economy.
Conversely, this gives the highly skilled 65-plus age group more and more opportunities to remain in the workforce.
Brian Gaynor is an investment analyst and the Executive Director of Milford Asset Management.