Raising the Age for Superannuation: Fine for Big Ted, but what about Manu?

Jess Berentson-ShawUncategorized3 Comments

With an aging population and people living much longer than they did we are in a position of having more people not working than working- which is a problem because it is working people that pay for super. In addition with superannuation indexed to wages (the amount of super paid increases as wages increase) we have a bit of a problem with money. The way we are going our national debt is going to blow out a lot (2 times our national income actually) and we will have to borrow even more to pay for anything else. Which means a huge squeeze on infrastructure, social spending, health, and education. So the Government has popped its head of the sand briefly and now says that in 20 years we will increase the age of superannuation to 67. Winston Peters, the official champion of the elderly, well he is ok with all the cash going to those over 65 and the rest can go hang.

Rising Costs

By the time most of us retire the taxes we paid over our lifetime would have been well spent on other Government services we all use. There is no nest egg waiting for us with our nametag attached to it. Rather the people working while we are retired are paying for our Superannuation. If you think about it, it has a “nice circle of life” aspect to it. The problem is that when there are more older people than working people and they are living longer than ever then things get pretty dicey. When universal superannuation was first introduced in the 1970’s the average lifespan was about 75 – look at where we are at now in terms of life expectancy- that is a lot more money to pay to a person over their retirement. As people live to over 100 years increasing numbers of people will get Superannuation for longer than they worked.

 

 

Below are the costs of Super modelled just for the next few years. We can see that as we spend more of our finite supply of tax other spending has to be pared back. Spending for example on children. If we don’t invest in children when they are young then we don’t get adults with all the skills we need and the wellbeing they need to be productive, then collectively we don’t have the productive, wealthy society we need to support older people in their retirement. Which is kind of ironic. Something then does need to be done.

 

So lets look at raising the Superannuation age to reduce costs and consider what the impacts might be.

Raising the Age Works for the Well Off & Healthy 

In the graph above on life spans, you will see that Maori men and women have shorter life spans than Pakeha men and women. They also earn less over their lifetime, and are more likely to work in manual or physical industries – the traditional blue-collar worker. Raise the age of superannuation and those who get hits hardest are those who are least able to accommodate it – because we have a problem with equality in New Zealand.

Lets talk about Manu.

Manu is a childcare worker; she is qualified but is paid quite low wages. She took time out of work to raise her family, and later she took time out to look after her elderly parents. Manu has made a huge contribution to New Zealand society. The unpaid caring work she did has measurable value. Unpaid work contributes at least $40billion to our economy each year according to Statistics New Zealand – women do 65% of this unpaid work. Women tend to do their unpaid work during the years they could be working (men tend to do it after retirement). Manu has less saved at retirement than her friend Big Ted because she earned less and because she took time out to care for others. She is tired at 65, she has done a lot of physical work with small children and older people over her life, yet she will need to continue to work for another 2 years to get her Superannuation, which she will relay on to pay her on-going costs. Manu will in all likelihood die before Jemima (her Pakeha friend) and so will receive less superannuation overall. Manu also has less wealth as a lower income New Zealander, and has not been able to buy and pay off a house in her lifetime. At 65 she is still paying for her rented accommodation and will continue to do so until her death. This sucks for Manu- a woman who has contributed in many positive and productive ways to New Zealand society over her lifetime. Ultimately, Manu’s wellbeing (or lack of it) is also going to be expensive for New Zealand in terms of health care and social costs.

Now Lets talk about Big Ted.

Big Ted is from a comfortable middle class family. He has worked hard like Manu. He worked in middle management and during the years when his kids were young, and his partner Humpty took time out of his career to raise them, he worked his way up the income and experience ladder. By the time he was 42 he was a CEO. He was paid very well. Nearing retirement age he now sits on a few boards and has a very comfortable retirement fund, plus two fully paid off investment properties. At age 65 Big Ted decides he won’t retire, he loves work and has a lot to contribute still. Ted continues to sit on a number of boards well into his 70’s – which he is paid well for. Big Ted collects his Superannuation payment at 67, but having to wait those additional two years makes little difference to him. Each year Humpty and Big Ted use their superannuation to go on a motorbike trip somewhere exotic. Big Ted is likely to live a long life- the wealthy better off tend to live longer than those who have experienced a lifetime of economic doldrums. Retirement is good to Big Ted and he can easily absorb a change in age of eligibility.

What other options are there to pay for our Super bill that does not suck for Manu?

We could income test it (or put a higher tax rate on high earnings over 65). This is unpalatable to many, comes with bureaucracy and could miss a lot of people who minimize their incomes. It could hit those people who still need to work because they have to pay for their housing for example hard. It may also deincentivise work in older people and we want them contributing in an aging population.

We could asset test for superannuation. This is also unpalatable, but mainly to the wealthy, it comes with some bureaucracy but gets to peoples’ real wealth base better and means people cannot minimise their income and still claim super.

We could close tax loopholes that incentivise investment in unproductive things like housing and encourage people to invest in productive enterprise instead. Greater productivity will help, but with super tied to wage increases this will mean we still have a bigger super bill to pay. We could look to index it to inflation instead.

We could increase immigration and population size and bring in more

skilled workers to pay the bill. This approach increases our diversity, keeps up with the need to have younger workers helping support the elderly, but remains controversial in some communities in New Zealand.

We could build our productive economy with greater investment in children. Investing in the children we do have is really important to ensure when children become adults they have everything they need to thrive and hence support older people. We tend in this country to treat children a little like cicadas. They remain out of collective sight and out of mind (and responsibility) during their key development years. We then complain when they emerge and make noise that we don’t like.

Investing in children (all children not just the so called ”vulnerable” ones) will help with our productivity issue, but we would still need to do some if not all of these other things.

It is up to New Zealanders how they want to manage this looming crisis, if we don’t want to create even more problems for ourselves, looking to ensure the changes we make support those who need it most seems like good long term governance.

Raising the Age for Superannuation: Fine for Big Ted, but what about Manu? was last modified: March 6th, 2017 by Jess Berentson-Shaw
About the Author
Jess Berentson-Shaw

Jess Berentson-Shaw

Dr Jess Berentson-Shaw is a science researcher working for the Morgan Foundation. Jess holds a PhD in Health Psychology from Victoria University.Jess has over 10 years’ experience working on applying science and evidence to public policy. She worked on improving the use of science in public health practice in NZ, before working as a Research Fellow at University College in London, where she researched how doctors and clinicians translate scientific evidence into their clinical practice. While in the UK she also developed a national data collection system, which was used to determine what factors contribute to poor outcomes for women and babies during pregnancy and birth. On her return to New Zealand she directed a research group that specialised in the independent evaluation and application of research and science to health policy and practice. Jess loves science and what it can do to make the world a fairer place.

  • Peter

    Invariably it’ll have to be a mix. The attraction of the NZ universal super is that it has a lost cost of administration but once you start asset testing or invoking other criteria you need a bigger bureacracy to run it. If you had a UBI this would in theory save a lot of money wasted on administrating the endless conditions and rules associated with benefits and working-for-families now but then you’d just end up redirecting that to asset testing the wealthy, especially as they’ll try to hide it in Trusts and overseas etc. However, it doesn’t make sense like we do at the moment of allowing people to collect both Super and a largish wage or salary, especially as you point out that few of us actually pay enough tax for our own Super. Whatever, we do, it’s need to be reasonably equitable and not horrendously expensive to run. Trouble is, will the turkeys vote for Xmas!

  • kiwiallan

    I agree that the unconditional NZ Superannuation will increasingly distort our welfare spending priorities in the decades ahead and some response is needed.

    I am retired and my profile would better match Big Ted than Manu. I’m comfortably off and could manage without the NZ Super. However, it is not as black and white as Jess portrays. Because Big Ted is choosing to work and has investment income his taxes will more than off-set the cost of the NZ Super that he receives. So at the very top there is no net cost to the State. In my own case I pay about half of the NZ Super I receive back in taxes and to a greater or lesser extent this will apply to many retired people. On the other hand it is highly likely that Manu (and those around her) will have received significant welfare payments over the course of her working life that Big Ted will not have received. These payments should also be factored into the total of State benefits received over a life-time. So I’m not saying there is not an issue here, but the picture is a bit more complex than portrayed.

  • Duncan Cairncross

    The argument that we can’t afford to spend more money on Super is flawed
    Yes we will have more pensioners per worker BUT with a population that is not growing we will have less kids (0 – 20) – and they actually cost a lot directly and also indirectly
    The two cost changes just about cancel out