By Peter Cordtz*
So who gets what, and who pays? That’s one of the key questions we’re asking as part of this year’s Review of Retirement Income Policies. As the Interim Retirement Commissioner I’m required by law to undertake this exercise every three years to advise government on whether its policies are working to ensure New Zealanders have a good standard of living as they age, and recommend how things could be made better.
The terms of reference for each Review set out the areas the government of the day thinks are important. Every Review has been asked to look at how the country can continue to afford the growing cost of NZ Super, and this year’s study is no different. The issue is becoming increasingly important as our population ages.
There is always plenty of conjecture about the impact various policy adjustments could have and the role that economic growth could play in containment of costs if NZ Super is considered as a percentage of GDP, but the demography that underpins the debate is irrefutable.
Lower birth rates and longer life expectancy mean that if nothing changes in terms of government spending and tax income, the long term numbers don’t add up. Those two population trends, together with the ‘boomer bubble’, means that by 2060 the number of over 65s doubles.
Another key statistic is the shift in what we call the “dependency ratio”. This is the number of 16 to 64 year olds relative to those 65 and over. That number is currently 4:1, but our ageing population means that over the next 20 years, that reduces to 2:1.
At the heart of the “who pays” question, is the reality that it’s today’s taxpayers who fund today’s Superannuitants. Right now that figure amounts to $39 million a day. During the period that the dependency ratio halves, it increases to $120 million a day. You don’t have to be a statistician or economist to see why that becomes a problem for all of us, if there isn’t a plan to ensure Super is sustainable.
The default discussion in previous years has revolved mainly around the relative merits of increasing the age of eligibility (most recently from 65 to 67) and means testing. Both issues have tended to fire up an emotive debate and as a result, become politically ‘tapu’.
This year, we commissioned research from University of Auckland’s Retirement Policy and Research Centre to explore issues and options in this area. Susan St John and Claire Dale delivered a paper, with a ‘blue sky proposition’ that is worthy of consideration.
Their paper assessed that raising the age of eligibility or reducing the amount received by Superannuitants could create new problems, and means testing was discarded. Instead, they suggested a special tax scale for those over 65, that could help claw back NZ Super from high income earners.
One scenario would see a top tax rate imposed of 39%, whereby the Superannuitant would have to earn $123,000 before the ‘break even’ point was reached. To be clear, this is the amount of earned income over and above the payment of NZ Super they would still receive. A two-tier tax scale, with a lower rate of 17.5%, would protect the majority of Superannuitants with only modest extra income.
The latter point is important as while we know that New Zealand has one of the highest rates of workforce participation by over 65s in the OECD, we also know that many of those people are not working full time. Some are working simply to make retirement more comfortable.
St John and Dale worked out that if their suggested tax regime had been in place in the 2017-18 financial year, together with an alignment of the single and married Super rate, around 16% of the cost of Super could be saved.
One of the key benefits of this proposal is that it preserves NZ Super as a universal basic income for those in retirement. Our system is envied worldwide for its simplicity and universality, so why would we compromise that? While some might argue the proposed tax scale is means testing in disguise, it does not take into account assets, so isn’t the ‘wealth test’ applied in other countries. It focuses on income tax, which has always been the key mechanism for redistribution of wealth.
Another advantage this approach has over tinkering with the age of eligibility is the potential time frame for action. Any shift toward an older age would require a phased approach over decades, which doesn’t address the issues we face in the near future. While we’re not saying the sky is falling now, 20 years is too long to wait to start on the direction of travel required to ensure NZ Super is sustainable for future generations.
We’re interested in any ideas that could preserve Super as a backstop for our children and grandchildren – this is one that might be worth exploring.
While my whakapapa is anchored in the north (Ngati Wai/Ngati Hine), the most relevant whakatauki I’ve used to stress the importance of this work, comes from our Ngai Tahu whanaunga down south.
Mō tātou, ā, mō kā uri ā muri ake nei – for us and our children after us.
If you want to have your say on this and other areas of focus for this year’s Review of Retirement Income Policies, visit cffc.org.nz. Public submissions close on October 31. My report and recommendations will be delivered to government in December.
*Peter Cordtz is New Zealand's Interim Retirement Commissioner.