The Australian Economic Review, vol. 38, no. 1, pp. 19–39 © 2005 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research Published by Blackwell Publishing Asia Pty Ltd Abstract As the population ages there will be potentially significant implications for a wide range of economic variables, including in particular the fiscal costs of social expenditures. Long-term fiscal planning requires estimates of the possi- ble future path of public spending. This article presents projections for 14 categories of social spending. These projections are based on de- tailed demographic estimates covering fertil- ity, migration and mortality. Distributional parameters are incorporated for all of the major variables, and are used to build up prob- abilistic projections for social expenditure as a share of gross domestic product using simula- tion. Attention is focused on health expendi- tures which are disaggregated into seven broad classes. In addition, we explore the im- pacts of alternative hypotheses about future health costs. While it can be predicted with some confidence that overall social expendi- tures will rise, the results suggest that long- term planning would be enriched by recognis- ing the distributions around point estimates of projected social costs. 1. Introduction This article presents projections for social ex- penditure in New Zealand over the next 50 years. Projecting social expenditures requires a range of assumptions about future paths of fer- tility, mortality, migration, labour force par- ticipation, unemployment and productivity growth, together with assumptions about the social policies governing future expenditures. There is substantial uncertainty surrounding projections of these underlying variables. De- mographic projections typically recognise this uncertainty by conducting a sensitivity analysis using, for example, high, medium and low val- ues for some of the key variables. 1 In contrast, this article examines the statistical properties of social expenditure projections. By specifying distributions of the relevant variables, simula- tion methods are used to translate the inherent variability of the component variables into variability of the projected social expenditures. The results therefore contribute to the informa- tion on which such policies can be based and can be regarded as an exploration of stochastic demographic and expenditure modelling. The analysis is motivated by widespread ex- pectation that the fiscal costs of meeting public social expenditures will rise in most industria- lised countries as their populations age. 2 Poli- cies are already being implemented to deal with the increased share of the gross domestic product (GDP) expected to be devoted to meet- ing social expenditures. Some countries have reduced eligibility for publicly provided ser- vices and transfers, while others have reduced the level of benefits. In the case of the universal Population Ageing and Social Expenditure in New Zealand John Creedy and Grant M. Scobie* Department of Economics, The University of Melbourne; and New Zealand Treasury, respectively * The views expressed in this article are those of the au- thors and do not necessarily reflect the views of the New Zealand Treasury. The authors acknowledge assistance from Ivan Tuckwell and Statistics New Zealand in provid- ing data, John Bryant and Grant Johnston for help with the health costs, Malcolm McKee for help with social expen- ditures, and research assistance by Vito Schultz. Earlier drafts were presented at the Biannual conference of the New Zealand Society of Actuaries, the Australian Confer- ence of Economists and the New Zealand Treasury. We are grateful to Ian McDonald and two referees for constructive comments.