Politicians need to face up to reality and discuss the future of NZ Super

Geoff SimmonsTax and Welfare14 Comments

Over the weekend the Retirement Commissioner foreshadowed the launch of a new study. The findings are that despite its success, NZ Super is not sustainable in the long term unless we make some changes to it. This sparked the usual round of denial from politicians, including the Government who claimed that we can afford NZ Super in its current form as long as we continue to “control” (i.e. cut) spending in other areas.

Given the pressures appearing elsewhere in the public sector, this approach simply does not seem plausible without NZ Super eventually taking over all Government spending. We need to look at the options the Retirement Commissioner is putting forward.

The Government’s Plan

According to the Retirement Commissioner, the number of people over the age of 65 (and therefore receiving NZ Super) will double over next 20 years, and the cost of paying for NZ Super will triple over 20 years. There are currently 4.4 people working for every retired people, but this will shift to 2.4 people working for every retired person.

The Government’s response (from Commerce Minister Paul Goldsmith) is to claim that NZ Super is sustainable as long as the spending is “controlled” elsewhere. When you build in the Government desire for tax cuts, that means keeping spending growth under the rate of economic growth, and often under the rate of inflation and population growth. In other words that means other areas of spending will be cut in real terms per person. The Treasury graph below shows how this strategy has looked in the area of welfare spending; NZ Super spending has grown while other benefits have been “controlled”.


Running the Numbers

Lets take a closer look at the Government’s proposal. In the eight years of this Government, NZ Super spending has been rising by 6% per annum, while Government spending has been increasing by closer to 3%. In 2008 NZ Super made up 10.8% of Government spending, now the figure is 16.5%. If those trends continue, by 2060 NZ Super would make up half of all Government spending.

Meanwhile in healthcare, another area of spending dominated by the elderly, spending has been increasing by 4%, and yet there are still cost pressures there. Taking health and Super together, if current trends continue then health and super spending could swallow the whole Government budget by 2074.

Of course, such scenarios are ridiculous and will never happen. But they illustrate the problems with the Government’s approach; in the long run it is mathematically impossible to keep a lid on all spending to allow for NZ Superannuation without increasing taxes.

Treasury’s long-term fiscal forecasts suggest that public sector spending will return to long-term trends. In other words, despite what Government says they can only keep a reign on spending for so long, otherwise they will get voted out. This is not surprising; we are already seeing the pressure to spend building across other areas of government.

The Treasury’s more reasonable long-term fiscal forecasts show that health and NZ Super will be half of Government revenue by 2030, and 2/3 by 2060. By that date, based on current policies our annual government deficit would be a whopping 18% of GDP, and total debt almost 200% of GDP. Clearly the current approach to both healthcare and NZ Super are not sustainable and we need to look at alternatives.

What are the options for reforming NZ Super?

First up we could change the eligibility criteria. One option is to increase the amount of time new migrants have to spend in the country to be eligible. Currently in New Zealand people are eligible after 10 years, but the OECD average is 26 years.

As the Retirement Commissioner points out we are living for longer, are healthier for longer and are working for longer. Another option is to raise the age of eligibility to 67 years. The Commissioner is suggesting a slow transition, raising the eligibility age by 3 months per year over 10 years. We could also recognise that some people over 65 can still work, so they could do so while receiving a reduced NZ Super payment.

The final option is to change the amount received by superannuitants. Currently NZ Super is indexed to wages, while all other benefits are indexed to inflation. Superannuation could be changed to the same basis. Of course this could be offset by making sure people retire with more private savings, for example through Kiwisaver.

Of course, that is just one half of the story; we could also increase government revenue to pay for NZ Super costs. However, that would require dropping the idea of tax cuts raising taxes and putting all that money into the Cullen Fund. Even that may not be enough to pay the eventual bill.

Politicians need to face up to reality and discuss the future of NZ Super was last modified: October 25th, 2016 by Geoff Simmons
About the Author

Geoff Simmons

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Geoff Simmons is an economist working for the Morgan Foundation. Geoff has an Honours degree from Auckland University and over ten years experience working for NZ Treasury and as a manager in the UK civil service. Geoff has co-authored three books alongside Gareth.

14 Comments on “Politicians need to face up to reality and discuss the future of NZ Super”

  1. People need money in their pockets before they retire. They need savings and assets. But these things are only for the rich now. The rest will be working until they die (if they can find a job).

  2. Well this system sucks how about we get rid of the whole stupidest lifestyle system ever. Show me a plan about that!

  3. 34 year old here. Totally fine with working until 67. Granted, I’m an office worker, but 1) medicine will be even more advanced by the time I hit 65 and 2) I work with a bunch of guys over 65 *already* and they seem to be doing fine, so…
    Bugger what the Boomers think; they won’t be the ones asked to retire later. Let the younger generation decide how long they want to work.

    1. Fine, but don’t expect the boomers who are stuffed from 50 years of hard manual work to agree with you.
      You may well find as you get older and your health goes you will change your mind about retirement age, but by then your generation will have given it all away, in return for tax cuts.

      1. 1) I don’t want tax cuts.
        2) No-one is asking them to. The question isn’t “Make retirement at 67 tomorrow!” it’s “Can we make retirement at 67 in 30-40 years, gradually phased in a month at a time?”
        It’s the gradual phase-in people forget about in the rush to condemn the plan.

        1. I don’t agree with forcing the manual labourers of the future to retire later either. I think it is something younger generations will regret.
          A much better idea is, of course, a universal UBI, then the current issues disappear.
          Also there will not be enough work with increasing automation to keep everyone employed, in any case.

      1. I’ll admit I’m talking from a position of some privilege. I’ll also note that people are *already* working past 65, because they have to, because the economy is skewed in weird ways that provide perverse incentives.

  4. Or it could be given to those who actually need it. Over my working life I thought of it more as an insurance policy (like ACC), not a savings scheme so made other arrangements and could happily manage without it now. The amount is not enough to encourage SAYE (spend as you earn) so I doubt there would be widespread effort to qualify for a pension.

  5. The usual one sided discussion
    This conversation talks about the increased percentage of pensioners and the effect on the budget

    However as the population ages and the percentage of pensioners increases the percentage of under 18’s goes down – when you look at it the reduction in cost of having less children to support almost completely balances out the increased cost of the pensioners

    We do need to monitor this but it is not nearly as bad as some people make out

  6. I remember the same sweeping statements from the experts 40 years ago. We are somehow not able to mobilise the resources to keep the elderly out of poverty as a PAYGO scheme.
    But we can magic them up if we save ahead of time in speculative financial ponzi schemes. which, as US pensioners’ have found, evaporate.

    You would have thought, economist’s would have got the message by now that tax cuts for the rich make everyone worse off long term.

    Pensioners in New Zealand constitute an otherwise unpaid labour force which returns way more than we pay in net super.

  7. Need to raise retirement age, as most countries are already doing. Also increase number of years have to have lived and worked hete before you are entitled. Then increase number of younger migrants in under 45.

  8. Not only did National stop paying into the Super Fund in 2008, but it has been taking money out in the form of taxes. Typical National, grab the goodies now, let someone else worry about the future!

  9. I believe strongly that reform is urgent and looking at the political party policy options is depressing to say the least. ACT are the only one who suggest reform with a proposal to increase the age two months every year which would take us to 67 in 12 years and seems likely to hurt very few as it is so gradual. For a small party they have some good proposals and you would think that some of the larger parties would have the resources to come up with at least an alternative to doing nothing as at present.

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