Ageing problem could dwarf GFC

Investing

"Uneasy reality" of demographic time bomb behind Mercer's call for suite of changes including raising age of retirement from 65 to 67

5th Jun 12, 3:32pm by Amanda Morrall

By Amanda Morrall

The financial impact of New Zealand's ageing population could dwarf the global financial crisis unless Government takes steps now to address the problem, superannuation specialists are warning.

In a discussion document, entitled "Security Retirement Incomes", Mercer New Zealand (a default KiwiSaver provider) calls on Government to raise the age of eligibility for New Zealand Superannuation from 65 to 67. It also suggests Kiwis be encouraged to defer retirement to age 70, as well as introduce a plan for the "decumulation'' phase of KiwiSaver, whereby retirees spend their KiwiSaver funds.

At present, KiwiSaver members, many of whom will qualify to access their savings next month, are able to withdraw the entire amount and there is no provision for gradually withdrawing that money to ensure it lasts in old age.

Between 2010 and 2050, the number of recipients on New Zealand Super is set to balloon from 500,000 to 1.3 million.That's compounded by a fivefold increase in the number of people 85 years old and over.

The health care costs of an ageing population, on top of a diminished base of taxpayers to finance the current payment structure of the pension (which is a pay as you go model) is a crisis in the making, Mercers and others, including the Commission for Financial Literacy and Retirement Income, have warned. (See also Amanda Morrall opinion piece on age of retirement here).

Research has found the annual health-care costs for a person over 65 are three to four times greater than for someone under 44. Alarmingly, they're 12 times greater for a person over 85.

Too big to solve

Martin Lewington, head of Mercer NZ, said the problem facing the nation is so big it will take collaborative approach to resolve.

Ultimately, the industry, government, and individuals must come together to solve the national retirement issue and do what is best for New Zealand's future generations.''

In its paper, Mercer proposes that New Zealanders be encourage to defer retirement until age 70, and estimates that such a move could save as much as NZ$2.4 billion.

"Such huge savings cannot be ignored and every individual needs to be made aware of their role in relieving our looming retirement crisis,'' said Lewington in a release accompanying the paper.

With the first set of KiwiSavers eligible to begin drawing down on their retirement savings next month, Mercer has also raised the issue of establishing an annuities market, to help retirees make their savings last in old age. At present, there is no provision for a "decumulation" phase in KiwiSaver to guard against a lump sum withdrawal sand spending blow outs.

Modelling done by Mercer suggests that extending the age of eligibility for retirement by one year could increase personal savings for retirement by between one and two years.

The global consulting firm also highlights the need for employers and human resource experts to come up with workplace solutions better suited to an ageing workforce, for example job sharing, flexible work hours, or incentives for deferring retirement.

Prime Minister John Key continues to maintain that the New Zealand Superannuation, in its present form, is not in jeopardy and is adequately funded through to 2020. (For the latest story on John Key's position in NZS see this story by Alex Tarrant.)

He has also dismissed previous calls by the Opposition party, and Diana Crossan (with the Commission for Financial Literacy and Retirement Income) to consider gradually shifting the age of eligibility for NZ Super from 65 to 67.

Such a move, according to the Commission, would lower the projected cost of New Zealand Super from about 7.3 per cent of gross domestic product to 5.3 per cent in 2035. Currently, around 4.2 per cent of GDP goes on NZ Super.

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25 Comments

by scarfie | 5th Jun 12, 5:14pm 1338873292

I thought the news from Spain recently have a bit of an indication of the way this might be solved. Seems their hospitals haven't been paying their bills, so the drug company's are restricting the supply.

by Optimist | 5th Jun 12, 5:15pm 1338873357

This population demographic time bomb is the very large elephant in the room. the government needs to be vigourously disccuing this, and how to avert it. Instead the problem is being swept under the carpet by our leaders. The first thing that would be useful would be to get the whole popultaion to understand that the pension is currently a "pay as you go model". It is frustrating when I hear people say "I've paid my taxes now I'm entitled to the pension - with the belief that their taxes were put in a big saviong account for when they retired - their taxes were not!

They paid for the much smaller number of pensioners while they were working and all their tax money has been spent. The younger workers now will have a much larger, unsustainable tax load on them in the future if nothing changes.

A suggestion: there needs to be determined a certain maximum percentage of the population that is reasonably expected to be supported by the rest of the population. Say ?10%, ?20%. And the retirement age and benefit entitlements are adjusted to keep that percentage stable.

You can not have an ever increasing pension percentage of population expecting to be supported by an ever decreasing percentage of taxpayers. Its very basic economics 101. The politics around the pension needs to stop. It is a mathematical certainty that there is an ageing time bomb, and it needs urgent attention. Its time for "facts" to take the place of "fiction" in our politicians and economic planning.

by Matt in Auck | 5th Jun 12, 8:00pm 1338883258

well said

by Gummy Bear Hero | 5th Jun 12, 9:49pm 1338889756

.... I dunno , ... . a timebomb inside a very large elephant inside a room ....... does not paint a pretty picture to me .......

Kaaaa-bloooooooomie ! ............ splat , splat , slork , shluck shluck , schlizzle ..... shlorp....

by Justice | 5th Jun 12, 8:07pm 1338883650

Nice points

by powerdownkiwi | 5th Jun 12, 5:23pm 1338873833

Given that the aged are the holders of the 'wealth', one can't see the unaged/unwealthed voting for pensions to get bigger any time soon.

Events will overtake the argument, though. That demographic also cherry-picked the best of the planet. Then expect to be supported by those who have been left the dregs.

by scarfie | 5th Jun 12, 9:48pm 1338889727

I suspect that another imbalance will occur as a result of this one. Those under 40 but older than 20 will be sent off to war which will hollow out that demographic even more. The elderly and infirm will die off quickly when the supply of food, medicine and caregivers are diverted to war efforts. Gen X will be left going "what the hell happened"?

by Patricia | 5th Jun 12, 7:09pm 1338880170

If a person continues working after the age of 65 at which age they also collect the pension should not that be deferred until they actually do retire?

by Matt in Auck | 5th Jun 12, 8:00pm 1338883229

duh! Of course this is a major issue, but we have morons governing the country who are cowards and aren't prepared to tackle it

The age should be increased and it should be means tested. We have a family friend, probably with assets of around $30 million - who thinks it is ludicrous he receives a pension

by Justice | 5th Jun 12, 8:05pm 1338883538

Matt, correct me if I'm wrong but your family friend can decline to take a pension if I'm not mistaken?

Totally agree on your above points

by Stephen L | 5th Jun 12, 8:35pm 1338885329

Justice, A common argument is used that people who believe they shouldn't get the pension are always free to decline it. I suspect most people in such a position would be happy not to receive the pension as long as everyone who met the same income/wealth criteria also did not receive it. Noone wants to be the only sucker; and realises that even if they were, their pension wouldn't make much difference on its own.

by Haggis Hague | 6th Jun 12, 12:08am 1338898100

Stephen L

You've gone to the heart of our country's problems, but maybe you should add that those with most to lose are precisely the ones who would venture into that long-lost world of doing what is right and bugger the consequences if they were able. They are not but as you rightly point out, many are.

How many examples in history do we need before we realise that real change has only ever come from a few committed individuals who don't give a rat's arse what the crowd is doing? So what if one person's refunded super makes no difference monetarily? Would it make a difference to the way they see themselves? Yes. Would it make a difference to the way other people saw them? Yes. Would it provide inspiration and leadership for others to follow? Yes.

Would a CGT make a difference to the way I see our government's commitment to the productive sector at the expense of the investment/speculative sector (even though I accept Mr English at his word that it would make sweet f-a's difference monetarily?) Yes it would: I might even vote for them on the strength of that one thing. New Zealand politicians have been making policy from the rear view mirror for too long. Has pragmatic policy failed us? Yes it has. Would a failure of policies based on sound humanitarian and ecological principles be any more palatable to the electorate? HELL YES. So why not give it a go?

Last time we looked out the fogged-up state windscreen on a frosty day we banned nuclear ships. At the time, may kiwis believed we were more screwed economically and politically than turned out to be the case. Many also believed it would make bugger-all difference. Both arguments were overblown, but much of the electorate were prepared to accept the negative consequences anyway. We need an injection of moral fibre and risk-taking in this country, now, on a personal and national level.

Here's a Scruples question for the box: You represent a pension fund. You will only partially solve a balance sheet problem if you achieve the aim of increasing the retirement age and encouraging people to work for longer beyond that new threshold. Youth unemployment has reached alarming levels. Do you make the recommendation anyway?

I'm all for rucking the French but that Monsieur Hollande's windscreen is fog-free.

by steven | 6th Jun 12, 7:29am 1338924583

LOL a "sucker" what an interesting mind set you have. Declining a pension is a justified argument, so you know not act like a Lemming be a Leader....stand out and say "dont pay me I have no need of it"....start a discourse........show some moral fibre.

regards

by steven | 6th Jun 12, 7:34am 1338924869

Yes, moral hazard...an interesting argument

Not least is encourging ppl to hide income Of course trying to ensure you have some monies behind you rather than live on a state pension is prudent......not that I think there will be many pensions paying out once this Great Depression really starts if you were wise and did your own thing you have a decent chance of [protecting] that, no one else I suspect.....the money will all be lost.

regards

by Rob | 11th Jun 12, 3:16pm 1339384571

I have been discussing this with some people who have recently retired, who have saved. The people I spoke to came to the conclusion that between the start of retirement, and the time when they may need to go into a rest home, it is best to run down your assets to the minimum (approx $210k). The problem is working out the time this is going to take, as you can't predict when youwillneed to go into a rest home. This means spending it on holidays and consumables. These people have saved and gone without in order to save, while other people have spent and not saved. So they may as well now enjoy it. If they go into a rest home and have too many assets, those will just get depleted to pay for their care, while whose who haven't saved, but have spent, get a full subsidy. It does seem like the elderly with assets needing rest home care do get a bit of a raw deal, when prisoners in our jails don't have to pay for their own care if they have assets. Possibily some form of loans scheme for prisoners could be an idea, as they cost far more to keep, than people needing rest home care.

by ngakonui gold | 6th Jun 12, 9:16am 1338930972

i agree with what you say but these smart people create trusts so that they can avoid rest home fees and i am presuming means testing

by Rob | 11th Jun 12, 3:17pm 1339384659

They can claw it back out of trusts, if that has happened. Not sure how often that happens though.

by PJK | 6th Jun 12, 10:09am 1338934183

Should the pension be means tested?

The pension is only a small amount - and moving to means testing will simply result in additional attempts to hide assets and wealth in trusts and other vehicles. Means testing would mean bigger government, invasive government and more complex rules. None of that seems a good idea.

Isn't it easier to simply take individual responsibility? Your friend who is worth $30m could simply accept the pension and donate it (plus additional funds?) to worthwhile local charities. It's more likely to do some good that way than simply handing it back into general government coffers to be wasted by beauracrats.

by deepred | 5th Jun 12, 8:24pm 1338884658

Classic turkeys and Thanksgiving scenario.

At the very least, some form of means/asset testing would be in order, so as to smooth the path for lifelong manual workers and those who are required to retire early by law.

The alternative would probably be a Stalinist/3rd Reich/Mormon populate-or-perish regime.

by mike | 5th Jun 12, 10:25pm 1338891950

DNA test all those who get a handout from taxpayer whether national super or domestic purposes, unemployment sickness etc and if they've fathered some child make them responsible for providing for there offspring after their 10 minutes of fun. It's called user pays. Cut the accommodation benefit. Why should beneficiaries be entitled to have accommodation provided. Make them live in a house with a couple of others or get dormitories built and stack them up in that.

by Gummy Bear Hero | 5th Jun 12, 10:00pm 1338890426

Well , of course , Gareth Morgan is right on the button : NZ Universal Super is affordable !

...... what is screwing us up in knots is the idiotic KiwiSaver scheme , and all that money stashed in the Sir Cullen fund ( most of which is invested offshore , when it really belongs in the pockets of the taxpayers from whom it was stolen ) ........

by Matt in Auck | 5th Jun 12, 10:27pm 1338892035

We can look smugly at greece / Europe and say glad it's not us.

But are we really THAT different?

We aren't THAT different, in that we are living beyond our means, and our welfare entitlements are too great.

Now, of course the scale of the problem is different.

But, the issue is the same - pollies buying votes, lying, delaying the hard decisions, that will only come when things truly turn to shite

Pollies really give me the shits, whether they are left or right

A large proportion of them are ex-lawyers (what I call "Intelligent used car salesmen") - that might explain things

by Andy Rodgers | 6th Jun 12, 10:32am 1338935537

MiA - Basically it's the current democratic voting system that is the problem. When over 50% of the population are net receivers of Gov't transfers, they are going to vote for the politicians that are giving them free money. This problem is going to be very difficult to solve for all the OECD welfare countries.

by Wolly | 6th Jun 12, 5:20pm 1338960056

"Between 2010 and 2050, the number of recipients on New Zealand Super is set to balloon from 500,000 to 1.3 million.That's compounded by a fivefold increase in the number of people 85 years old and over."

Key and mob are waiting for the demand for these changes to come from a majority of voters...then they will say let's do this because it's a great idea....

I suspect Key will skip town before the 017 farce with his knighthood...likely tootle off to do the grand speaking tour in the States and Europe...leaving Bill to make the promise before the election, to raise the age..because as he will say..."the vast majority of New Zealanders both understand the need to make these adjustments and will fully support National in doing so" blah blah blah.

On the other hand one cracking viral epidemic, could wipe out half the old coots and oh what will Winston do then.

by Bernard Hickey | 8th Jun 12, 9:49am 1339105759

FYI from reader:

We hear a lot about the rapidly growing aged demographic, and what a financial drain we all are on the country (actually, the 'retirement fund') - but what about our contributions? I am sure I am not alone in having an impressive curriculum vitae in the 'real life' stakes - never mind the balance sheets! Reared four children, all good people, all have partners, all working. They have eight children between them and the ones of working age are all working. One family member looks like qualifying for the next dictator vacancy, but we can't have everything.

What have I done to 'earn' superannuation? Served 12 years (free!) in various roles at Play Centres, several years on PTA committees (free!). If I was to divide the years of daily physical work in marriage into paid working days it comes to $3.75 per day. Contributed to the successful transition in a troubled university department (paid). Made a significant contribution to scholarship in my chosen field (free), and cared for a sick husband until his sudden death (on my pension). Gravity is against me - as my eyelids descend to my knees - but a bright smile and cheerful greeting is required as social exchange. In all of the above, and more, I am not alone.

Many of us in my vintage, as Marilyn Waring has said, were 'counting for nothing' - but were not aggrieved - we loved our families to bits. All this while we continue to pay taxes, even from superannuation. With escalating health costs, food costs and charities to support, it is a fortunate 'oldie' who can just tread water! The capital I had three years ago has dwindled at frightening speed, and after two more tooth crowns it will be gone. So don't pile guilt onto us - just remember all the loving care and sacrifice that got you where you are!