Opinion: Why NZ still has time to debate its pensions crisis before the debt wave overwhelms us

Prime Minister John Key has done his best to shut down any debate about reforming New Zealand's pension system.

This is a pity, but the good news is there is still time to solve our problems before public debt overwhelms us in a Greek-like wave.

Key's pledge to resign if the retirement age was ever raised from 65 or the New Zealand Superannuation income was cut from its current 66% of median incomes has blocked any discussion at a political level.

So it was great to see policymakers, rather than politicians, continue to debate the need for reform at a conference in Wellington on Retirement Income Policy and Generational Equity last week run by the Retirement Commission and Victoria University.

Senior Citizens Minister John Carter stuck closely to his script about how everything was just fine and we should just lie back and think of higher GDP growth to solve any problems there might be. He opened the conference with a Polyannish speech which even denied there was any issues with younger generations being forced to repay debts in future that were being incurred now by older generations.

Treasury, however, was not so sanguine. Deputy Chief Executive Gabs Makhlouf told the conference Treasury had redone its long term fiscal projections that worried so many when it was released in 2009.

Back then, in the midst of the Global Financial Crisis, Treasury forecast net public debt would rise from around 20% now to an unsustainably high 223% by 2050 unless New Zealand changed its policy settings on free public health and universal pensions. Treasury warned New Zealand faced sharply higher interest rates, higher taxes and slower growth unless it reformed its pensions and health system and/or reformed the economy.

The ageing population and an increase in the dependency ratio would stunt New Zealand's growth and the resulting budget deficits would quickly build up debt to the point wher our foreign creditors would turn off the taps But since last year, things have improved somewhat. The starting point for debt is not so high and the growth outlook is better. But Makhlouf said the outlook was still not sustainable. Fresh projections after the May Budget 2010's tax reforms show net debt would still accelerate to over 100% by 2050 and be rising.

This was a Greek-like situation, he reminded the conference. The ageing population and an increase in the dependency ratio would stunt New Zealand's growth and the resulting budget deficits would quickly build up debt to the point our foreign creditors would turn off the taps.

Treasury is, of course, right and this was acknowledged by most at the conference, although the best solutions and the extent of the problem remain topics for hot debate.

Options include a later age to start receiving NZ Superannuation, a lower pension payout, means testing or some sort of surcharge for high earning pensioners.

But the most attractive and effective options may be in other areas. An improved labour participation rate, which means older people working and earning for longer, could help soften the fiscal pain. Simply strengthening economic growth now is also crucial. Most are long term solutions for a long term problem.

We should all be debating them now.

Your view?

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4 Comments

Charles,

Good point. There is a big moral hazard problem with universal pensions and means testing.

A later retirement age seems fairer, but also penalises those socio-economic groups who don't live as long (eg Maori and manual workers)

cheers

Bernard

Hi Bernard,

 

Means-testing the age benefit appears a bit like a quick-fix - a golden bullet type of option, but how much would it truly save?

 

Are there any figures available to help understand if it is an option worth promoting?

 

Phil

Useful link here to David Choat's summary of the Pensions conference at Policy Progress.

http://www.policyprogress.org.nz/2010/07/new-zealands-super-future/

cheers

Bernard

Nice compilation of commentary here from David Choat at Policy Progress

http://www.policyprogress.org.nz/2010/07/weekend-reading-30-july-2010/

cheers

Bernard