By Bernard Hickey
This is the year it starts.
Sixty five years ago, New Zealand’s population was about to start increasing dramatically. Servicemen were starting to arrive home as the Second World War was ending. Young men and women around the country were feeling confident enough about the future to want to have children, and lots of them.
It seemed the beginning of a golden age. New Zealand was one of the richest countries in the world.
Untouched by war directly, it was able to produce the meat, wool and dairy products the world needed desperately. Protected by the nations that won the war, New Zealanders felt assured of economic growth, national security and that there would be pensions, education and health care for these new children as they grew up.
This was an age before oil shortages, the end of an open British market or sky high house prices and mortgages.
The following 20 years of economic growth and stability are still seen by many as our golden economic age, before rampant inflation or high unemployment or a housing boom that took the dream of home ownership away from a new generation of child bearers.
Now those children born between 1945 and 1965 are about to start retiring in their droves and the generations behind them will have to start paying for it. It starts from this year and the costs start ramping up from here. Yet this lucky generation of retirees has not prepared for it and is expecting the economic largesse that they were born from to pay for them in their dotage.
It won’t because this lucky generation have used up that largesse and will pass on some assets and an awful lot more debt to the generations that follow.
The Retirement Commission has rightly called for a national debate about extending the retirement age to 67 from 65.
Treasury is forecasting New Zealand’s net foreign debt will rise over 100% of GDP in the next decade, in part because of the extra government spending on health care and pensions for the baby boomers. We are starting this surge of public spending and borrowing from a very weak position.
The government begins this age of spending have already accumulated a structural budget deficit of 4% of GDP, which is about the same as our underlying current account deficit. To believe this is sustainable is simply not credible.
For it to make sense, New Zealand would need to rapidly and permanently ramp up its economic growth rate to over 3% per annum from the 1.5% per annum it has averaged over the last 40 years.
Prime Minister John Key is remarkably confident for someone in a generation that will spend the next 20 years paying taxes to fund the pensions and hip replacements and cancer treatments that will have to be paid for. He is hopeful the changes made in last year’s budget will be enough to transform growth.
The initial signs are not positive, particularly as we enter an era of deleveraging that economists who have studied such periods of after major financial shocks say will produce 5 to 7 years of sub-par economic growth.
Sub-par for New Zealand means 1-2% growth, which is what we’ve seen in the last year. We would also need for many of these baby boomers to not retire, by choice. By not retiring we mean still collecting the pension, but also working for longer.
For many manual workers or those already having health problems, this will not be a choice open to them. Yet this is a national debate that John Key and his baby-boomer backers will not allow. He has threatened resignation and his similarly cowed opposition won’t talk about it either.
Unfortunately, there is no more time to debate how to deal with it.
The great age of retirement and the spending that goes with it has already begun.
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