Brian Fallow probes National, Labour & NZ First's stances on superannuation and argues they are too relaxed about the snowballing costs

By Brian Fallow*

Competitive complacency on New Zealand Superannuation is the name of the political game these days. 

The National Party has “reset” its position from “No-one touches super on my watch” under John Key to “No need to touch super (apart from a tweak to residency requirements) for 20 years, and barely even then” under his successor Bill English. 

Labour opposes even starting to raise the age of eligibility in 20 years time. Its leader Andrew Little was arguing last weekend that we can ignore scary long-term projections from the Treasury because it is being much too conservative about future economic growth. 

Winston Peters meanwhile points to the fact that New Zealand spends a lot less, as a share of gross domestic product, on the public pension than other developed countries. 

Long-run projections of economic growth come surrounded by considerable uncertainty, of course. But the trend the Treasury has modelled seems, if anything, optimistic. 

It has the annual growth rate in real GDP slowing to around 2 per cent by 2030 and staying just below that thereafter. That is driven by declining growth in the labour force; the assumption on labour productivity growth, steady at 1.5 per cent, is well above the 0.9 per cent we have managed on average over the past 10 years. 

But even if it turns out this is, as Little asserts, too conservative, how relevant is that to the sustainability of the current parameters of NZ super? 

Certainly stronger economic growth would give us more choices. But that is only relevant if one of those choices is to devote a growing share of GDP to taxation and/or debt servicing. 

Otherwise, stronger GDP growth ought to flow through to stronger wage growth and NZ super is indexed to the average wage. 

Happy to see a growing share of economic output taken up in tax?

So unless Little is arguing that wages will be increasingly decoupled from economic growth – an odd concession for a Labour leader – or hinting at an end to wage indexation, his point can only be a conviction that New Zealanders will be happy to see a growing share of economic output taken up in tax. 

The debate about the affordability of super is about the angle of the slice, not the diameter of the pie. 

OECD data supports Peters’s contention that New Zealand currently spends less of its GDP – about 3 percentage points less – on the public pension than rich countries as a whole. 

But that is at least partly because our demographics are better. 

People over 65 make up 14.7 per cent of the population, compared with 16.2 per cent for the OECD as a whole. The proportion is projected to rise to 27 per cent by 2060. 

The flipside of trailing the pack in terms of the demographic transition is that the position will get worse faster. 

Not much less than public spending on education

The International Monetary Fund in its latest Fiscal Monitor reckons that the increase in pension spending plus the increase in health spending by 2030 (from a 2015 base) will be 4.8 per cent of GDP in New Zealand, compared with 3.4 per cent for advanced economies as a whole. And that is by 2030, not 2040 or 2060. 

To calibrate the scale, 4.8 per cent of GDP is about what we spend on NZ super now (gross of superannuitants’ income tax) and not much less than public spending on education. 

And it is not as if the countries that are already spending 7 per cent of GDP or more on the public pension can comfortably afford it out of current revenue. Their fiscal bottom lines are chronically in the red. On average, the IMF estimates, advanced economies will run fiscal deficits of 2.5 per cent of GDP over the next five years, while New Zealand is expected to run surpluses. You could argue they are offloading the higher cost of their pensions onto their future taxpayers in that way. 

The IMF’s numbers are not Holy Writ, of course, and the Treasury is more sanguine, at least about the medium term. It estimates the combined increase in super and health spending by 2030 will be 2.1 per cent of GDP. 

By 2060, however, if there were no changes to policy settings, NZ Super and healthcare cost would both be more than half as large again as they are now – relative to the size of the economy – at 7.9 and 9.7 per cent of GDP respectively, according to the Treasury’s Statement on the Long-term Fiscal Position released last November.

But won’t raising the age of eligibility by 2040, and drawing down the New Zealand Superannuation Fund, reduce the increase in super costs at least? 

Not much, it turns out. Raising the age to 67 by 2040 will cut about 10 per cent from the cost of super, the Government estimates. 

The Cullen fund was intended to ensure baby boomers made at least a partial contribution to the cost of their own super, but an 11-year-long freeze on contributions has largely nullified that. The Treasury estimates that capital withdrawals from the fund would cover only about 4 per cent of superannuation expenses in 2060. 

That trend is not our friend

Assuming taxation remains constant as a share of GDP and no change to policy settings, the primary budget deficit (which excludes interest costs) would be running at 4 per cent of GDP by 2045 and 6.3 per cent by 2060. When interest on a mounting stock of public debt is included the operating deficit would be 8.1 per cent of GDP by 2045 and 16 per cent 20 years later. That trend is not our friend.

Clearly there will have to be a course correction and the later it is left the more hard a-port it will have to be, whether by raising taxes, cutting spending or both. 

Even if National wins the coming election and even if it can then muster the parliamentary numbers for legislation to eventually raise the age of eligibility, there will be six more general elections before its proposed start date for raising the age, 2037. And no Parliament can bind a future Parliament. 

So the most you can say about the Government’s proposed changes is that they would send a signal to the public. 

But people would have to decide for themselves how reassured or sceptical to be and make their financial plans accordingly. 

Michael Littlewood, former co-director of Auckland University's Retirement Policy and Research Centre, says that under our overwhelmingly pay-as-you-go scheme it is future taxpayers who will bear the cost of future super payments and they who will decide how much that will be, in light of their priorities at the time. 

Today’s taxpayers can only appraise the risk that it might be less per capita than now and plan for that contingency. 

And it would be wrong, Littlewood argues, to assume that people are too foolish or feckless to be doing just that.


*Brian Fallow is a former long serving economics editor of The NZ Herald. This is the second article in an election year issues-based analytical series on economic policies he's writing for interest.co.nz.
His first article is here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.

32 Comments

The trends are obvious. Economic growth is non existent; projected super costs are unaffordable.
Our pension funds are currently being spent in some Oil well somewhere to keep the machine ticking over ... but there will be no return on the investment.

You forgot our productivity (GDP per hour worked) has been receding since 2013. Although it seems unrelated to this argument, productivity guarantees that future generations can foot the burgeoning superannuation bill with less effort. We have one of the highest capacity utilisation among OECD nations which means despite record migration, capital investment remains low. The government needs to address these structural issues before expecting high GDP figures.

Is it true that our beloved politicians are going to set an example on Super by increasing their gold plated super scheme from 9 years in parliament to 12 years ??

Being concerned about'' Snowballing costs'' would mean that politicians would have to think well ahead, rather than just 3 years ahead and that ain't gunna happen.

And yet when they do attempt to make a start on projects that will and must take many years to show results, like water quality improvement and indeed like the proposals under discussion, they are accused of kicking the can down the road

uh....actually starting a project isnt can kicking unless the work is out purposely on a slow burner.

up
12

They are accused of kicking the can down the road because that's what they've done for eight years. No limits or decreases in immigration numbers, no capital gains tax, cuts and budget freezes in the police and health sectors, an increase in GST, still no traction for medicinal cannabis, rampant house price increases, increased levels of poverty, stagnant GDP per capita...

up
19

saw this the other day about JK, what makes it funny is it is also true

He came
He saw
He dithered
He left

very good. I would add in .. He selfied ..

Funny that many us us (self included) were impressed at first. Thought someone without a political background but with expertise in finance was just what we needed.

Reminds me of another political leader grabbing all the headlines at the moment...

Little et al ignores Peak oil. Without more oil the world's economy cannot grow, ergo there will be no more growth and indeed shrinkage as world output declines. I wouldnt have voted for Labour anyway I'll admit but this just confirms why not.

Steven,

And just when will Peak Oil actually happen? Like it or not and I don't much-we are not about to hit the wall on oil or gas,whether conventional or unconventional.
I have just completed a course on Global Resource Politics fro Hanyang University and I will give you a few figures to think about;
Unconventional Oil and Gas Production Potential;
(Oil)- Russia-75bn barrels US-58bn China-32bn Argentina-27bn Libya-26bn World Total: 345bn barrels.
(Gas) China- 1115 Trillion Cubic Feet(TCF) Argentina- 802tcf Algeria-707tcf US- 665tcf World: 7.300tcf.

These are the technically recoverable figures,so not all of it will available,but equally,it is very unlikely that all the potential resources have been found.You can forget peak oil for some time yet.

It's a wasted cause trying to tell Steven and Ham & Eggs that we don't have an oil crisis.
Steven didn't even believe that OPEC had control over the oil price the other day.
Ham & Eggs doesn't believe that the futures market is correctly pricing oil.

You can give these two all the facts, but they only listen to one person; 'Gailtheactuary'.

linklater ... surely you realise "technically recoverable" is a meaningless term?
There may be Oil on the moon that is "technically" recoverable ... but it might "cost" 1000 barrels per "technically recoverable" barrel to get it. You might want to ponder why the economic "miracle" that is shale appears to be restricted to the US ... hint US$

If you are an Oil co its in your interests to continue the story that theres plenty more where that came from .. and can I have some more of that debt now please....

As for new discoveries ... this graph might alarm you

https://www.bloomberg.com/news/articles/2016-08-29/oil-discoveries-at-a-...

did you realise that new discoveries peaked some 70 years ago ... 1947 ...

Contrary to nymads diatribe, theres plenty who see trouble brewing ..

https://srsroccoreport.com/continental-resources-example-of-what-is-horr...
https://srsroccoreport.com/the-blood-bath-continues-in-the-u-s-major-oil...
http://www.artberman.com/oil-prices-lower-forever-hard-times-in-a-failin...

and even from a bank
http://observer.com/2017/01/brace-for-the-oil-food-and-financial-crash-o...

As for Nymad - did you take your medication today?

Correct me if I'm wrong, but "technically recoverable oil" refers specifically to oil that is able to be recovered economically.
Tight oil extraction isn't limited to the US, it has been adopted everywhere. Hell, go for a drive to Taranaki and see it in the flesh. The problem was that OPEC realised the risk it represented at higher oil market prices. Thus, they drove the price down to a level below marginal cost for the tight oil plants.

The new lack of new discoveries of conventional oil? Well, what a revelation.
Look at a graph of new tight oil discoveries to see something that is relevant.

So, OPEC is achieving exactly what they were intending?
What a surprise.
The reason the revenues/profits are down (along with CAPEX) is purely because OPEC is driving them into the ground. This has been a well publicised cartel strategy for the last few years.

Doesnt look like Saudi are that keen on the strategy
https://www.forbes.com/sites/timdaiss/2016/08/30/saudi-arabia-burns-thro...

They're only not happy because they are having to cut production in order to compensate for the other members who aren't.
Plus, it doesn't matter. They're playing a long game; there was always going to be a negative economic effect in the short to medium term. They did it because they know long term economic benefits will be greatest.

Nymad - heres a nice explanation of technically recoverable v economically recoverable.
https://www.eia.gov/todayinenergy/detail.php?id=17151

ham n eggs,

I agree that it is not all actually recoverable and said so. For China,there are major geological and water problems for example. I also accept that oil discoveries have fallen sharply-primarily due to the substantial fall in price. Nevertheless, I don't believe that the oil supply is about to fall off a cliff. Any sustained price rise,would see three things happen; more supply coming on stream,more exploration activity and a slowdown in demand from an already fragile global economy.
Of course,at some point,the world will have to come to terms with a post carbon future and that process is underway,through more efficient use of energy-smart buildings for example and renewables.

Linklater - the problem with the scenario you have painted above ... ie higher prices & more supply coming on stream (apart from the deflationary force on the world economy .. a big problem) is WHERE are they going to actually store this increased supply ? The simple answer is in the ground ...
I just cant see how you can possibly get "sustained higher prices" with soft demand and brim full storage.

Odd that he left out TOP policy that proposes to introduce means testing immediately;

http://www.top.org.nz/top7

Happy to be corrected but:
- The fund was only started in 2001 so no one presently benefiting or likely to benefit in the near future has "paid their dues." It's simply a mechanism of transferring wealth from those working (the young) to those heading for retirement (the old.)
- The National government suspended contribution to the fund in 2009 so worse than that the fund is going to rely even more heavily on younger workers to support retirees in old age. Surely an issue with funding is of their own manufacturing?
- Worse than that until normal funding resumes in 2020 people retiring are drawing fund they've not actually contributed towards in a decade.

Voters are currently opposed to any material reduction in super, so any politician who tries will be out of a job.

Politics is only the art of the possible.

I dont think the projected costs are actually that onerous. We would be better off spending some time addressing productivity, ensuring we increased New Zealander ownership our land and businesses, and changing the policy imperative to bettering the direct interests of citizens. (instead of vaguely related things like the world economy)

The article seems to completely ignore the effect of kiwisaver - i.e. personal compulsory superannuation. Over time as the full population will have kiwi saver and the need for government to provide the same level of government super will naturally reduce.
This is the way it should be. Super should be in the hands of individuals and out of the reach of politicians.

To FALLOW.
What Snowballing Costs. The ChCh Press reported last week.
The Annual Cost of Superann in NZ is 4.2% of GDP.
The Average Cost of Superann in OECD Countries is 9% of GDP.
Projected NZ Cost of Superann to 2036 is 5.8% of GDP
Projected NZ Cost of Superann to 2015 6.1 % of GDP.
It all looks affordable to me !!!! Retiring at 65 years that is !!!!

NZ Super is the single largest NZ Govt expenditure. Because it is not fully-funded and Pay-As-You-Go, the costs are rising fast. In fye 2013 NZ Super cost $10.2 bln. This rose to $12.9 bln in fye 2017, a +26.5% rise in just four years. As a proportion on taxes collected, that is a rise from 15.4% to 16.1%.

If we all live longer, get cost-of-living increases, etc. NZ Super will eat an ever higher proportion of the tax take. And those longer lives will also require higher and higher provision for the health budget (which is the second largest Govt expenditure item).

As Michael Cullen was reported observing; in the end the economy will exist just to fund the health system and pensions. It may seem affordable if you are receiving the benefits. It is not sustainable for those not on the receiving end.

Relating it to GDP is actually a bit perverse because so much of our GDP is driven by pension and health spending. Of course that relationship won't show the real stress.

And one other thing; for almost everyone getting the PAYG pension and health benefits, these amount to more (much more) than all the tax they paid during their lifetime. If you take out more than you put in, PAYG only works if the rest of society is in a faster growth mode. That is rarely sustainable. And when it stops, an 'issue' becomes an existential crisis. People will get hurt unless adjustments are made early. (And the ones who will get hurt are the ones who have fewest options.)

This is why young Kiwis are pissed off about housing being set up to favour investor-voters while at the same time they're asked to pay a universal pension to these same folk.

Something needs to give. Some measure of equitable treatment needs to be balanced out.

It is affordable for everyone (those paying and those benefiting) - provided we means test.

I suspect the cost would half immediately - as that 50% of 65+ folks would realise they wouldn't pass the means test, and simply wouldn't register for it.

To David Chaston: Thanks for your explanation of the Cost of Nat Super. The accompanying figure for the Current Cost of NZ Govt Super given in the ChCh Press was $9 Billion, but had no date.

To Rick Strauss: I don't think there was a set up to favour investor-voters to purchase houses, it seems to me to just be poor Govt Control of Immigration Numbers. The huge price rise of Houses in Auckland is the big increase in Immigrants. 70,000 + in the last year. 33,000 of those chose to live in Auckland.
Its no wonder the place is busting at the seams. Then think of all the extra cars in Auckland going onto the Auckland roads as a result or this.
Clearly the rise in Auckland House Prices has caused rises in the rest of NZ.
Also there was also quite a number of Kiwis who came back to NZ to live last year.

Why is the budget surplus not being invested in the Cullen Fund /

The surplus is our money , not for politicians to spend on pet projects

I TOTALLY AGREE Boatman.
If its one thing National (Bill English) has not seen as prudent to do, is to try to put
more Money into the Cullen Fund.
That is certainly a Blot on National's 8 to 9 year tenure.