For any group of people the lifetime cost can be considered in terms of the number of people in the group and the lifetime cost per person. Through this report we use the term average lifetime cost to refer to the per person lifetime cost for a group of people.
As discussed elsewhere, while the model does simulate the lifetime trajectory of each individual, it is only intended that results ever be considered for a similar group of individuals – either in total or on average for that group. Over time, as the model is developed further, the size of the group for which results are meaningful and statistically robust may reduce, enabling increasingly granular outputs.
Overall results
In considering total and average lifetime cost results, the following points should therefore be noted:
• The actuarial valuation model is designed as a whole of population model with the purpose being to produce population and population group information rather than information for defined individuals. As such it captures the different risk characteristics that are important at a population level, but does not reflect all the factors that may result in different outcomes or different levels of payment for individual people.
• The total lifetime costs and averages can be assessed across the whole population or groups of people, within the following guidelines.
– Such groups should include at least 1000 people.
– Group level results will be more reliable when the groups are homogeneous. For example, results could be calculated for all the following groups:
◦ Female age pensioners
◦ Female age pensioners who are 70-75
◦ Female age pensioners who are 70-75 and are partnered
◦ Etc.
As groups are more highly specified, the more similar the people are within them. This means there is less variability in expected average lifetime cost within these more highly specified groups.
• The ability of the model to differentiate average lifetime costs between different people is limited by the extent of the factors included in the model.
– In the foundation model the main factors we have used to differentiate outcomes are the person’s starting class and their age and gender. Further differences will reflect the differential mortality assumptions used for indigenous people and disability pensioners.
– For the final risk based model used in this report, further factors have been included such as people’s partner status, family composition and welfare history.
– Even where characteristics are not explicitly analysed within the assumption setting process we may be able to see some differences in average lifetime cost if other factors operate as proxies. For instance, the average lifetime cost for 30 year old people in the working age class currently living in one part of the country may differ to an equivalent group living somewhere else, although we have not explicitly included geographic location as a predictor in the model. The difference could arise if these groups have different demographic profiles or if features of their welfare history such as the average past duration in the payment system were different.
• Even for the most homogenous possible group, the average lifetime cost is the average of a range of costs each arising from a different possible future life trajectory. Many important determinants of costs such as future family composition and the length of a person’s remaining life cannot be known with certainty, and can only be represented by probability distributions.
8.3 Total lifetime cost
The estimated total lifetime cost for the whole population as at 30 June 2015 is $4,764 billion dollars. This figure is the net present value of the in scope payments expected to be made over the remaining natural lifetimes of the full model population. In calculating the net present value, the projected payments are discounted to current dollar values. So, for example, payments projected to be paid during the 2017/18 year would be discounted by 3 years to represent the value of these payments in current dollars.
This is a substantial figure; by way of comparison the in scope payments made in the 2014/15 year totalled
$108.8 billion. Hence the total lifetime cost is over 40 times the size of recent annual payments. Such a multiplier is perhaps not unreasonable given that we have included the age pension in the valuation, which a
Overall results
significant proportion of the model population are expected to receive in the future for many years post retirement.
As an alternative frame of reference we could compare the lifetime cost to the latest GDP figure, which is
$1,620 billion9 as at June 2015.
Table 11: Summary of key valuation results (30 June 2015 baseline valuation)
Population segment Number in
starting
The valuation model considers people’s basic age pension, energy supplement and pension supplements and models each of these elements separately. The information shown above for the age pension part of the average lifetime cost reflects all the payments made to people whilst in receipt of the age pension.
The average payment in 2014/15 is understated owing to the data maturity issues with FTB and family payment data. This has a particular impact on the average payments for people in the family non IS and other non IS classes; we would expect these amount to ultimately be larger than the figures shown.
The above table shows the contribution of each class and population group to the total lifetime cost, which reflects the number of people in that class and their average lifetime cost. The average lifetime cost for people in each class is driven by the probability of an average person in that starting population entering, remaining in or leaving the system in each future year; combined with the type and amount of payments they are likely to receive. A few comparative indicators have been included in the table to help explain the results:
• The average age of the starting population is shown – obviously, younger people have a longer period over which they may receive benefits, but also a greater potential to move out of the system and become self-reliant at some stage, compared to older people. Also, the age pension costs for younger people are further into the future and so are lower as they are discounted more;
• The proportion of people in the starting population who have been in that class for more than 4 years is an indicator of how likely people are to remain in that class – for example, as expected, age pensioners are very likely to remain as age pensioners for the remainder of their lives. This is also true of disability support
9 http://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/5204.02014-15?OpenDocument
Overall results
pensioners, but as would be expected those who are studying are quite likely to move out of that class in a few years (and either out of the system or into another class);
• The average total payment received by people in each class in 2014/15 is shown, which as can be seen is quite different by class, reflecting the nature and mix of the payments received and the “average” eligibility criteria of people in that class;
• The ratio of the average lifetime cost to the annual payment is shown for current welfare recipients – this ratio will reflect the average number of years on benefit projected for people in that class, along with the extent to which future payment levels will change based on people transitioning into different classes or changing their circumstances. For example, the age pension ratio of 12 would mainly reflect the number of years that the current population of age pensioners are likely to remain in receipt of payments, along with some variation in payment as people age and their circumstances change. The ratio of 29 for studying payment recipients would reflect the fact that while many in this class will exit the system within a couple of years, this is swamped by the long term cost of the people who transition to other classes after studying, or return to the system at a later stage of their lives, particularly as they retire and go onto the age pension.
(Note that the ratio in this calculation compares the average lifetime cost, which has been discounted so that payments are equivalent to current dollar values against the actual 2014/15 payments. As these values are both in current dollar values, they are comparable and the ratio is therefore mostly reflective of the features discussed above, rather than any economic differences.)