Opinion: David Chaston finds most pensioners will soon suck out more in pensions than they ever paid in taxes, leaving the young to pay the bill

Opinion: David Chaston finds most pensioners will soon suck out more in pensions than they ever paid in taxes, leaving the young to pay the bill

Any pensioner alive 30 years after they retired will have received 30% more back in pensions they ever paid in taxes. The young will have to foot the bill.

By David Chaston

Nothing makes New Zealanders more indignant than the idea that "I am paying my share of tax but others are freeloading".

In fact, this indignation seems to be central to the clash of generations over the sustainability of future retirement benefits.

Some politicians have milked this emotion as a central part of the electoral and political cycles of the country.

The experts say that without changes - like raising the retirement age - the present system is not sustainable for people who think they are paying into it now.

But the big failure - the really big failure - has been our longterm affection for 'pay-as-you-go' systems to fund basic and universal retirement superannuation. Pay-as-you-go approaches only work with positive trending demographics. But we have now converted to negative trending demographics where the proportion of claiming retirees rises and the proportion of working age payers diminishes.

The result will a disaster. People will get hurt.

It is a disaster that will be compounded by the fact that we are all living longer.

Life expectancy data disguise the problem - they are based on people who have died. But the living are living much longer now and haven't influenced those tables yet. When they do, the taxpayer will be covering significantly more NZ Super claims than envisaged.

We urgently need to raise the retirement age. We need a demographic response to a demographic problem.

One way to look at the problem is to analyse a working life for someone who retires in 2011.

We have started that project, and are now asking readers to review our data.

It makes concerning reading.

Basically, someone who finished high school with the School Certificate qualification in 1962 will be aged 65 in 2011, and eligible for NZ Super.

Statistics NZ has relevant data of earnings and taxes from 1962 and we can use that data to track the earnings in that working life - and from that data determine the taxes paid over that period.

Essentially, our statisically average person will have earned about NZ$1.4 million and paid about NZ$342,000 in tax, taking home a pay packet of a little over NZ$1 million over those 50 years.

Converting these raw earnings and taxes to 2011 dollars, they earned NZ$2.7 million, paid NZ$620,000 in taxes, and had take-home pay of a bit more than NZ$2 million.

However, for the next 20 years of retirement, they will claim in 2011 dollars NZ Super to the value of NZ$544,000 - or almost 88% of all the taxes they have ever paid.

If they live for 30 years in retirement, they will claim almost a third more than they paid in a lifetime of taxes. They 'break-even' after 22+ years.

That essentialy means someone else has to pay for their lifetime use of all other public services, including their health care needs as they age.

The assumptions are important here; we know no-one earns the statistical average all their life. So we have factored in a proportionate lower level when you are under 30, average from 30 to 40, and a higher-than-average income as you gain experience.

We would like readers who have the tolerance for the detail to look at this document and comment on and suggest what assumptions may need refining.

'PAYE as you go?'

I am not saying that there should be a fixed, hard relationship between taxes paid and retirement claims. Tax systems should be progressive and those with higher incomes should pay proportionately more. But if this 'progressivity' becomes too aggressive, the system breaks down. Further, existing [younger] workers have the option to migrate away if they perceive they are being unfairly taxed or that they won't get their 'fair share'. Such social shifts help make public policy responses really difficult.

And it is doubtful that 'rich pricks' will be able to pick up the tab either. Treasury released data about income levels as part of their Budget 2011 package and that shows almost 90% of taxpayers are below this Cullen definition ( 'rich pricks' were those who he taxed at 39% for earnings over NZ$70,000 pa).

Even if that other 10+% were taxed at a much higher rate, it is unlikely to generate the funding required to pay for a long-but-normal life in retirement at current NZ Super rates; there are just far too many people about to become retired and eligble for their 'fair share'.

Almost half a million will retire in the next ten years and that rate is accellerating. There are more than 550,000 currently retired. But there are only 377,000 earning more than $70,000 in 2011, and while inflation suggests this number will grow, it will be at a far slower rate than the swelling in the retired ranks.

Raise the retirement age

Our only option is to raise the retirement age.

We have left our run too late to adopt a fully-funded approach for people who will retire in the next twenty years. We are stuck with pay-as-you-go over that period.

But we can face up to the fact that most people are in fact healthy and productive at age 65, far more so than their grandparents were when the 65 age was originally chosen as the formal 'retirement' point.

The longer we dawdle to make this necessary decision, the worse the problem becomes, the more real people will get hurt or significantly disappointed. And they will be hurt financially right at the time in life when they will have the least ability to adjust. They will then become social welfare problems.

But they will also have been part of the generation that took far more than their fair share of the wealth of the nation.

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.

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.

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Don't pay the pension to persons that are not retired. The pension is not supposd to be a topup. If you want to work, thats fine, you can draw the pension when you stop.

You are depriving someone of a job and the country of a taxpayer.

and

Raise the retirement age, like Capital Gains Tax, its not poltical suicide. (We have or will soon reach the tipping point)

The young will have to pay for us oldies? Good, they better get cracking then.

The only changes that I would agree with to National Superannuation at the present time is that it should not be paid to those who are in full time paid employemnt. You can have one or the other, not both.

Here we go again - more and more often I read it in columns like this...analysis is one thing, but I notice a disturbing trend of vitriol towards anyone who has a grey hair on their head.

As to the pension payments, because we have a Universal-qualitfying type scheme, there will be a wide spectrum of individual circumstances...

Case in point: my mother was a non-earning stay-at-home wife, now aged 88. Certainly she will have received many years worth of payments.

[Subject for debate here: refer Gareth Morgan's article yesterday about values placed on non-wage/volunteer activity in society].

Case in point at the other end: My late husband who was a wage earner for many years-he collected his pension for just FIVE MONTHS.

Any I have news for you. Take a look around you. The rates of cancer, diabetes and other diseases are increasing year by year. Remember, a cancer 'cure' according to the establishment is not the dictionary meaning of the word, merely survival for five years.

As the baby-boomers enter the retirement age bracket, they will thin out far more quickly than our parent's generation if they continue to follow the American (now NZ)  Standard Diet.

Yes, circumstances vary widely.  So what?  Do you imagine that the Government can or should take every aspect of an individual's life into account - including how long they are going to live - and provide them with a pension tailored to their individual circumstances?

Yes, it is certainly a possibility that the established consensus among professional demographers is completely wrong and that life expectancy is overstated and/or will decline rapidly, so that in future the average number of years spent collecting a pension will reduce. 

But do you think it is a good idea to base policy decisions on that assumption?

Anne

You make a good point about many different circumstances.

But David, who few has a few grey hairs just like me, is talking about the overall group.

It's also hard to to deny that people are living longer.

Your point about diabetes is interesting. What may happen is today's retirees actually are retired much, much longer than their kids.

There is a real issue to be addressed here.

The young are increasingly grumpy about this. They can see what's coming. And they feel powerless to do anything about it while the demographics of democracy are against them and the politicians of the day refuse to debate it.

If you want a preview of what could happen. Check out the Los Indignados or 15M movement now sweeping Europe.

http://en.wikipedia.org/wiki/2011_Spanish_protests

cheers

Bernard

"The young are increasingly grumpy about this. They can see what's coming. And they feel powerless to do anything about it"

Notice how it is those "young" who happen to be constructivly employed?  not the 27% who are not...see my post below...

Notice how the young hit in on the elderly rather their own generation or more accurately the children of their generation?

And the issue Anne mentions about diet obesity..and what is the current cost of that to our taxpayer? What happens when the excesses of diet (and a lot of other stuff) by the younger generation is taken out of the equation?

Booze, tobacco get taxed becaused of the cost to socitery both in health and taxpayer cost...now lets start to tax the younger generations crap diet.

There are a lot of negitive factors along these lines that the younger generation induldges in, and in their selfish, 'I am" generation not prepared to give up....yet those retiring  (ed) did so to provide a generation that in all history has never had it so easy or soft.

We had a technical term for this years ago...now what was it?  oh yeah  selfish brats.

Before going off 1/2 cocked, knocking the BBs, a very good look must be taken at the excesses of the younger generations...Look at the overall situation from dietsa, obseity, unemployment...THEN access the situation

Steptoe, where to start.... I would expect a large percentage of the 27% you refer to will have no idea this sort of web site exists, let alone have much in the way of a life skills tool box. Many are the casualties of policies which generations ahead have not only created for their own advantage ( I appreciate this is not yourself creating), nor had to deal with or be disadvantaged by said policies. Add to this the inevitable family structure and probable financial limitations, and in many cases we should be looking to understand and empathise with what are deteriorating systems & standards to deal with.

Taxing diets is simply not an option in silo because in many cases junk food is what they can afford and what they have been exposed to and what they know (see lack of tools in the box). Some might be as you say "spoilt brats", however the issues are much too complicated for simplistic labels such as that. Society has been dismantled, and many are now seeing the results of the social engineering and politicising of society.

It is not possible to know what the health system in Nz might look like in years to come, my guess is more privatization in the industry also, which would further disadvantage the disadvantaged more often than not. The chances of a state pension existing for Gen X,Y etc are almost zero , and without a major shift in the quality of NZ government strategy & planning across many of our structures , including job opportunities, how do you propose that younger generations prepare themselves for 5 years ahead let alone 30-40 or more years? Having it easy or soft is up for serious debate Steptoe, do you pay attention to what is going on the real world? By that I mean outside of TVNZ, TV3 SKY and NZ Herald or any other corporate propaganda machines which tell nothing but lies & BS which is absorbed then regurgitated by morons.

What we need is less arguing amongst all facets of society regardless of age, gender, race, religion etc, because if we cant break through the fact that we people are picking at each other mostly because of external interference then chance of improvement to the fabric of society in Nz is slim to none…

Lets cut out this in-fighing and then see what we can really achieve , and hold those who have played the largest part in the failings to account, and demand better!

"The rates of cancer, diabetes and other diseases are increasing year by year."

This may make the problem doubly worse as it drives up the cost of health care at the same time as the government of the day goes bankrupt paying pensions.

To an extent it doesnt matter for individuals....right now the retirees are about 13%, that climbs to 24%+....illnesses, well they cost a lot more to treat and deal with....so Im afraid the system has to change and the logical thing is to raise the retirement age to start with.....Baby boomers health, friad not there is little sign this will be the case....even if that were the case bear in mind they are double the present numbers....

regards

I suppose it is silly to be amazed at how well Baby Boomers or those with grey hair continue to serve themselves first. The Incidence of cancer is increasing in some age groups rather than the rate- ie the more old people we have who do not die of other causes such as car accidents, work related accidents, heart disease etc, the more those people who should be dead by now will succomb to cancer- you gotta die of something right...

The rates of lifestyle related cancers are increasing as you rightly point out. YEARS of obesity, complacency abiout health, increased alcohol intake in women causing breast cancer, lack of activity are catching up on the baby boomers (as a group) and are putting strains in health service budgets as demanding baby bommers believe and expect 'the best''. Never has one generation gone less quietly and with a complete lack of whimpers into their older years. 

So just as we ( yes- late baby boomer) writing this, expect pensions to compensate for low savings, poor investment decisions and a great lifestyle but we also drain the health service of funds which should be going to the babies and children who are suffering from third world diseases such as rheumatic fever.

It is so disheartening to read the comments to this excellent article which are generally so negative in terms of how the nations tax resources are to be distributed. Our age group hase done very well by and large and the welfare state has been there boots and all along the way. This is no longer sustainable. We have had our share. I would much rather see taxes going to the young to help them along in their life. Stop subsidising old people (over 55s) in tertiary education- subsidise brilliant childcare for working families.

Stop subsidising end of life expensive health interventions and instead subsidise intensive literacy programmes in prison.

Reduce gold card payments to six months of the year and subsidise school bus transport.

The money should follow youth with a future not the old who have had theirs and still want more.....SHAME.

And adress the issue of 27% unemployment of those under 25 yrs

And not with bloody PC training pre job coases...what is it? out of 80 apprenitices only 3 had pre appenticeship coarses. Tradesmen are just not interested in these pre trianing people looking for a days 'work experiance' a week.

Right now we are in a slow time, many self employed tradesmen are just making ends meet, which means they have more time to spend training the future skilled works of this nation.

Now instead of adding to the 'pre training coarse ' rort that is milking taxpayer money left right and center, give that to the qualifiid trades men, over seen by MTA, building associations, and appreniceship boards...this is a chance of a life time for a generation of youth that previous governments since the 1980s screwed up....a basic system that not has been tested for generations but for thousands of yrs.

That youth has a chance, turn up for work regular, on time, actually forfill his contract to work and be trained...no work ethics, hes out, no unemployment, no hand out, no BS.....he may learn his lesson, re apply for another apprenticeship..and live up to his end...if not put on the rubbish heap where he has put himself....beyond the help of the social welfare system.

Bottom line, much of our unemployed youth needs to grow up, or ship out....because we cant afford to support them AND those who are retiring.

And NZ cant afford not to have skilled tradesmen.

"Bottom line, much of our unemployed youth needs to grow up, or ship out....because we cant afford to support them AND those who are retiring.

And NZ cant afford not to have skilled tradesmen."

Very true....."fine art degrees", load of crap....study something of use....I think engineers and tradies are looked down on, yet most ppl are so useless in looking after or repairing anything it beggers belief....boy are they in for a shock in the next decade or so....

regards

To what effect did govt. fiscal policies have in causing the high youth unemployment and lack of skilled tradespeople?

I recall my parents and many other relatives were all part of the NZ Defence forces when i was but a baby.  They joined straight out of school and learnt trades and skills, discipline and a hard working ethic that could be transferred into the private sector after completing 20 + years of service.  This option is no longer available.

What effect the massive cost cutting of our defence forces in order to pay increasing welfare/govt spending in non productive areas?

Meh: I'm warming to you more and more every day. What can be deduced from your posts is that you are a 2nd or 3rd or 4th generation kiwi. And you are not a baby-boomer. Translated that means you are not a blow-in like many of the people here who bring their prejudices with them and don't bother to learn the history of New Zealand. It is noticeable that non-blow-ins are more forgiving to our way of life, and way it has been, and less prejudiced. One stand-out being a Canadian named David Chaston.

What caused this to happen?...a generation, my generation, of liberals PC  BS people who destoried a system where by the 'dummies' at school went into technical classes to go into trades ..the back bone of any society.. to run their own business.. employ more 'school dummies', and live in above ave flash houses, several cars, boat and race a stock car...not a bad future for a school dummie realy (?)

But the system was destoried and we now have 27% unemployed being trained in training coarses at are no more than a rort on the system....who happen to be the core of what has happened in Britain in recent days.

Get trades people back into schools, cut the PC crap in our schools....dump these pre work /trades coarses, put that money into wages to those employed with tradesmen in appreceships ..ideal time to train these kids when work is not as busy.

Biggest soln of all, get our pollies get around the morning tea table with what is left of our tradesmen..AND listen to them.

The maths behind this article has quite a few inaccuracies and assumptions. Take these points for example:

  • It ignores the fact that people more often than not pay a significant amount of GST over their life, not to mention a bundle of other taxes and duties that contribute to  Government coffers
  • It assumes that this person's partner doesn't work a day in her life
  • If the title is to be believed, it also assumes that this person AND their partner live well over a decade beyond their life expectancy, without going to a rest home or hospital
  • It ignores that a good portion of the pension paid will usually come back as GST
  • It assumes that this person hasn't put any money away into investments which generate a return (e.g. a savings account) which would then have them paying tax
  • It assumes that all tax paid is spent immediately, rather than put into a superannuation fund generating a return above inflation

Indeed, it makes these assumptions for MOST people - so MOST people live to at least 87 when the life expectancy is 72-75? Massive inaccuracy.

Let's see it with some real figures. How about the partner starts working at 45 and does 20 years work. How about they spend 30% of their income on items which attract GST. How about one of them (unfortunately) passes away at 72?

To be fair, you'll also need to divide the cost of various Government portfolios (everything outside of welfare?) by the number of taxpayers too. Similarly, divide the Government income from items other than previously considered (PAYE, GST) and consider that too.

Might give you a valid argument. I suspect you'll need to change the title.

As at 2005 -2007 life expectancy for a 65 year old male was 78 and for a woman, 82 (source:  Sorted, from Statistics New Zealand).

The title claims that "most" pensioners will suck more than they paid in tax. The article says "break even" is at 22 years. So this says that "most" people will live at MINIMUM 22 years of their retirement.

Your figures say 13-17 depending on gender, so thanks for reinforcing my point.

The other thing to note, is I assume you're interpeting the figures wrong too. Looking at the numbers here they say 82.7 and 78.8 - roughly the same as yours. However, read the whole sentence - a NEWBORN girl or boy. The numbers we're looking at is for a person retiring in 2011, so you should be looking at life expectancy stats from 65 years ago, for a person born in 1946. Something like this.The graph on page 65 suggests something like 67 and 72 for males and females - an average of 4-5 years, rather than the 22 required for this title to be anywhere near true.

It's a fair point as far as it goes.

However, the problem that a large and growing number of retirees are claiming a large portion of the total tax paid in a lifetime is still valid because it's clearly not sustainable.

I think you need to read those tables again, Ms de Meanour. It is the children born between 2005 and 2007 who can expect to live to 78 years of age for men and 82 years for women, not those who are currently 65 years of age.

But regardless of the best guestimates for the future, life expectancy is an average measure, meaning that by the designated age, of those born in that year, half are dead already.  It doesn’t mean that everyone lives to 78 and 82 and then they start to die.

http://www.stats.govt.nz/browse_for_stats/population/births/new-zealand-...

David: Are you saying the attrition rate is 50% not making it to 65?

No I'm not. What I mean is that 50% of people don't make the projected life expectancy as it’s an average value. So if it is 80 for women, then 50% of women will die before they turn 80. But as you can imagine, it is a projection fraught with difficulty trying to project something that far out. It usually ends up underestimating life expectancy, will it did in the last century probably due to the advances in medicine. For example, 50% of the people born way back in 1925 actually lived longer than what their initial life expectancy projected.

When you talk about averages the point is that it is at the 50% mark.  50% will die before the average and 50% will die after, this was the same in 1925, 1825, 1725 etc. this is why it is an average.

Think you'll find that you're talking about the median there, not the average. If it was a perfectly even distribution that'd be true, however it obviously isn't If the life expectancy for a 70 year old today is 70, that means for every baby that died at 1-2 70 odd years ago, there'd be someone living to 138-140. This might prove to be true, but I strongly doubt it.

That said the average life expectancy is probably a fairly good approximation for the median life expectancy if full data isn't available.

Fair cop - I was mis-reading the table.  Thanks

Ms d M,

Do you happen to have the current life expectancies for  a child born today - M & F

Suspect it is much greater which further highlights the need to raise the retirment age over time.

As Gareth Morgan used to tellu s years ago when introduced at age 60 - Life expectancy was 62 !

David - a laudable attempt to try and raise the alarm about pensions - no doubt the model requires fine tuning but well done for at least venturing down that track.

The superannuation age should be raised as a matter of urgency. Even then it will only partially soften the blow - 10 years from now the entire pension system will have undergone drastic surgery of a sort that few now would be remotely willing to contemplate.

 "we have now converted to negative trending demographics"....and nothing but NOTHING can change this pattern..oh no wait a minute, yes it can...heaps of oldies could cark it in an epidemic....a future govt could invite in shiploads of young immigrants as in the 50s( highly likely)...or both of these events could take place.

Gosh in the space of a few years the baby boomer bulge could change to a baby bulge...the billions heading into pensions would not be needed....taxes could be trimmed...all those mansions once filled with the retired could be snapped up by OllyN Junior et al. 

You're on to it Wolly.

Yup ...gotta say Wolly youv'e seen past it as a static position....in all likelyhood immigration demographics will come into play by 2025...hopefully by then the life expectancy will be 85 and we can work to thelate sixes early sevens no probs,n  with all that experience....beautiful crust.

So who would vote for a party that proposes raising the pension age from 65 to 67 phased in gradually over a period of say 15 years?

Quite a few people actually.

1. Those already receiving a pension: tick. Already over the line and happy to have more of those who come after them still paying taxes to finance their pensions.

2. Those up to say 5 years away from receiving the pension: tick. Most will think working a little bit longer to have the financing of their pension secured would be worth it.

3. Those under 40: tick. They will have understood by now that the system is not sustainable and probably don't expect to get a pension anyway by the time they reach 65. Will be happy to have 65-67 year olds contributing instead of instead of feeding off the system

Only group adversely affected would be tail-end BBers (40-60 year olds) of which a fair proportion already accept that the present entitlement is not sustainable (well I do anyway).

So where's the problem for our politicians?

For anyone who has been a welfare beneficiary all their life, (such as a disability welfare recipient), and has thus never worked a day in their life, and has never paid any income tax in their life, raising the age of retirement from 65 to (say) 70 will make no difference whatsoever. The important question is "how many are there" because they will merely migrate from one category to another.

In AU the number of unemployed is 660,000 an unemployment rate of 5%. The number of people on disability pension is 800,000, ie more than the total number of unemployed. That is permanent diability, and include many who are morbidly obese and cannot get a job. I would anticipate the NZ numbers being much the same. Thats a constant 1.460,000 people out of a population of 22,000,000 who will never pay a full measure of tax by the time they reach retirement.

Neco, I think people shopuild be prepared to take more responsibility for their own retirement, but you are probably wrong when you say quite a good number of people would vote for a Party that proposed raising the super age.  Bit like CGT, people might agree in theory but if it is not an immediate concern to them (except for those likely to be affected who WILL be motivated to vote  against) so it's not something that determine's one's vote.

 Thank you, David Chaston, for a fine article on this topic.

I reckon we should blow it up into ultra large print posters and wave them round Parliment to try and get our policiticans to waken up on this issue.  Poor old Diana C - at the Retirement Commission - has been doing her best for quite a few years to no avail.  The fact that Don-Key & co don't want to even consider raising the retirement age is ridiculous - just about every developed country has in the past few years - and the "burying the head" in the sand approach is just going to make the situation worse to finally deal with. 

People of my generation (X) and the Y-ers are left forking out the tax to keep generation plushy (Baby Boomers) comfortable.  They have had a good life - free University educaiton, generous work & public pensions, apprenticeships & training schemes etc.  It's no wonder the Gen Y youth in Britain are rioting.

I and a number of my friends (all Gen X) completely accept that by the time we reach retirement age it is very unlikely there will even be such a thing as a state pension.  Again the Govt is doing nothing to incentivise people to save for their retirement.  Australians were very forward thinking and smart introducing compulsary super back in the 90's.  AND they investment income and employer contributions on super is only taxed at 15% (NOT at your marginal rate).

A factor in continued migration to Australia has to be the benefits of their super scheme.  I did a 20 year forecast for my husband & myself of our super contributions (net of 15% super tax) based on our 2009 Sydney salaries vs comparative Kiwisaver employer contributions (taxed at 33%) based on our current 2011 Auckland salaries and the difference was astonishing.  In NZ, after 20 years, the employer contributions (net of tax) - assuming no inflation or wage increases - accumulated to NZD 113,000.  In AUstralia, after 20 years and allowing for the employer super contribution increasing to 12% by 2018 - the employer contributions accumuldated NZD $639,000. 

DonKey & Bling-lish are consistently avoiding this key issue - which is going to become a huge problem in 10 years time - by which time they will have sodded off to holiday house in Haiwai & South Island farm respectively and left someone else to sort it out.

A key factor in my husband & mine decision to move back to Australia permanently early next year is the fact that Australia is better placed to deal with this issue long term and has sensible policy in place for its citizens to help them save throughout their working life for their retirement.  It's alright saying NZ has a better lifestyle balance - but does it ?  What happens when you retire ?  I think a lot of Kiwis will find they are veyr poor when they retire due to same old story - country living beyond its means for the past 30 odd years.

I'm a baby boomer, and I don't retire for another 15 years. So I guess for the next 15 years that means I'll be paying just as much tax as you to support baby boomers on the pension. But do you hear me whining about it?

By the time I reach 65 and start to collect National Super, the baby boomers will be dying off in droves. In fact about 1/3 of them will be dead already. Gee, I wonder how much National Super a dead person collects?

Fair enough point David B, as long as you don't mind paying higher taxes as we all will need to to pay for the yearly increases in health care, pension etc for the over 65s....something has to give.

I think if you're 50 years old now you will get the pension still at 65, but once Mr Key goes after three terms someone will raise it up to 67.

Lots of reference about how Aussie is better off than NZ in all aspects of life, haven't they announced their pension age is 67 now?

"the Govt is doing nothing to incentivise people to save for their retirement"

That's a bit harsh - the Government is currently spending a billion dollars a year to incentivise people to save for their retirement through KiwiSaver, and even after the Budget changes they will still be spending half a billion dollars per year on it.

Note also that the flat-rate, universal nature of NZS means that people who save for their retirement are not penalised for it, unlike under a means-tested pension system.

Oh but MdM have you factored in the debasement!....the govt buys votes with the billion borrowed to pump Kiwisaver and bloat the managed funds parasites...and tells Bollard to allow inflation to run 4 to 6% every year...how soon does that wash away the perceived kiwisaver pork handout. And has it dawned on you that the flow of borrowed money into Kiwisaver and then into the local share market and bond sectors is nothing more than a carbon copy of Bernanke's rort to prop up the DOW with QE. Our QE comes with interest payment demands attached...just ask Parky to explain!

MdM: That $1 billion per annum is cheaper than the $1.4 billion component of the health budget that goes in treating drug-dependency, which is, guess what, not an aged-care cost. And, also, the $1.4 billion is the after-care costs, and does not measure the $billions spent beforehand getting into a state that requires that care.

That's all true, at least I have no reason to think it isn't, but I am not sure how it affects my point that it is wrong to say that the Govenrment is not doing anything at all to encourage New Zealanders to save for their retirement

Crap....offer one big injection and be done with it.....cheap at $120....

regards

Raise the retirement age. If they raised it to 67 people may retire earlier and live of their savings / private pensions before jumping onto the super. If not well work till 67. Those who work still at 67 onwards can't claim the pension as well. Tough times, tough action. The country needs to get real.

my dad's friend is 70 and worth tens of millions of dollars. He is firmly of the view that pensions should be means tested. He thinks it is ludicrous that he gets a pension when he has so many assets and income streams.    

Back to Aus said:

A key factor in my husband & mine decision to move back to Australia permanently early next year is the fact that Australia is better placed to deal with this issue long term and has sensible policy in place for its citizens to help them save throughout their working life for their retirement

Very well put. I'm off to Aus next week. Unlike Nz, Aus didn't go to extreme neo-liberal reform, their policy is forward thinking and balanced. I agree they have positioned their country for their future a lot better than NZ  

There was a great article in the Dompost in the weekend on NZ's deregulation through the late 80s /early 90s and how it is costing us big time now

All the best for Aussie Matt. Keep us posted. :-)

Matt - that article was by John McCrone and called, 'Reaping the Past'. It is not online. The intro read, "NZ's rush to untangle red tape and embrace the idea that business and the market can be trusted to do the right thing may have cost us billions of dollars and even lives."

Good luck in Auz Matt.

Cheers, Les.

Raising the pension age and/or introducing a means test are, at best, simplisitc answers with their own sets of problems.  

Is it fair for example to raise the pension age for labourers? for Maori (who have a lower life expectancy)? 

How does a means test encourage saving?  Yet wide spread private debt reduction and saving are arguably necessary to end this global financial crisis.

There are quite a few social and infrastructure things we could use our tax money for.  And paying everyone pensions from 65 is affordable if that is the way we want to spend some of the tax money.  Although that would mean not having tax money to have for something else.  Or we could spend it on something else and not on pensions.  

We need to think of a range of options and decide what is the best package overall, not just  knee jerk react to one spending option like this article does.  With incomplete analysis (e.g. what about the rest of the tax revenue that is not income tax).

(And yes I am just 6.25 years away from a pension so you dismiss all I have said as self interested dribble if you like.)

Giving a larger pension to Maori may seem justified, based on a shorter lifespan

But then you should also pay more to men, who live less long than women.

Obviously politically impossible.

So better not to go down that track.  Treat it as an insurance scheme - some benefit from their premiums more than others, but treat it as the luck of the draw.  Anything else is getting tricky. 

Cheers

Actually, as both our Mothers are on single Super, as Widows, the Govt Super is saving our respective families from needing to financially support them directly.
As they have both planned wisely - with their husbands (life-long), have a freehold house, car each & small savings - this is enough for them to live reasonably on Super with the odd topup, gifts etc from the family.

Universal Super is uncomplicated, not overly generous and works well -  NZers don't begrudge the 65+ who have worked, payed taxes, raised families etc ... from receiving a small stipend.  They are definitely not in the same category of long-term Dole-ers, "Sickness benes", solo teen mums etc....    These sorts of social engineering articles want to disrupt stable families and wise planning & living  - everything is about $$$ - and we (socialists) get to choose who get the $$$.

Maybe if people had 1 partner for life, lived frugally and got on with a productive life they wouldn't need to worry about "retirement". No investment is ultimately safe anyway - & you can't take it with you  ....

OK, this is a problem largely caused by a demographic quirk, one that has been known about for decades.  It is not caused by greed, or selfishness as the tone of the article and many comments imply.  Australia does not have the same problem because it has addressed the issue.  So-called baby boomers are the first generation to, by necessity, attempt to pay towards their own pension as well that of their parents. Expectation of a state pension is hardly surprising or immoral or greedy when it has, like state funded health and education, been an accepted feature of New Zealand life for generations.  But times have changed.

Those approaching retirement are just as capable of comprehending the impossibility of sustaining pensions as we know them as any one else - and it is somewhat disturbing to be talked about as, or at least implied to be, the cause of the problem, and incapable of contributing to the solution.  Not all, and perhaps not even the majority of my generation have made intentional or accidental fortunes from the property boom - in fact I have been called old fashioned, and naive by younger people when I say that I have always considered my house a home - not an investement at all.  I accept that because of NZ's gradual slide in comparative wealth (5th in the OECD on 1970 to 27th today), the longer life that I (we) statistically will enjoy, and because the demographic problem has not been adequately addressed here, that the pension that I may receive will commence sometime beyond 65 (not at 60 as for our parents and grandparents).  But I cannot accept the air of smug distain, of unconcealed devisiveness (Bernard et al), that could, quite unnecessarily generate a wave of xenophobic bitterness against the elderly.  How sad - is that the sort of society you want?  There is an odd sense of being ring-fenced...  Impending difficult times call for inclusive pragmatism so people at have a stake in the issues that affect them.  The link to the Spanish protests, and the London riots demonstrate the result of disenfranchising sections of society. 

I agree that pensions should not be paid while people are earning a healthy wage, I also agree that a transition to a later commencement date based on average life expectancy is necessary (nothing new here, it has happened before), and perhaps it should be asset tested.  Although it would be interesting to make it available on application - so those that have accumulated enough at least have the choice of accepting it or not.

Regarding, "... disenfranchising sections of society." I rather think of it as disconnecting sections or people from society, as it makes it easier to understand the lack of empathy for those they have been disconnected from. With that in mind then, it's easier also to understand how corporations show less and less empathy for their origins as they make the most of the global villiage:

http://www.rollingstone.com/politics/blogs/taibblog/holiday-in-scambodia-20110720

I think maybe the same applies to the more globally mobile individuals who enjoy that village and who would tend to be relatively younger and wealthier and therefore can seem to show less and less empathy with the elderly and the poor in their origins. See my comment at 25 Aug 11, 9:07am.

How should we expect our government to deal with these kinds of dynamics?

How are they dealing with them? (First answer imo is, dismally.)

Cheers, Les.

Matt in Auck - good luck for your move to Aussie.  I'm sure you won't regret it : financially it's a no brainer !

Youll be living the dream in Auz before you know it.  I couldnt even consider moving back to NZ even though its where the family still is.  Auz has it sorted - NZ is buggered.  But I still hope we win the world cup !

Judgeing by your above statement I assume you refer to the Wallabies!

Throw this article and the one on the power and profits of the big banks into the blender to get........."How the big banks are sucking the country dry"..........that's the real problem.

If the power companies are sold off as it looks likely they will be, then NZ will see what price hikes look like. Was the supercity still looking at selling off Metro Water? If that happens then who wants to guess which directions water prices go..

Yes the country is being royally shafted, and it is hard to see how it won't get worse in coming years....

Most of those shares will end up in the family trusts and the payback for the National Party is ongoing support from the rump. I don't see foreign ownership as a threat. The potential for future govts to wash their hands of any blame regarding price rises, will be front and centre.

That said, most households waste heaps of power...hundreds of dollars worth per family per year...in the same way most drivers waste hundreds of gallons of fuel by driving like bloody morons...and others waste thousands on drugs....or on shite they don't need....or are too bloody lazy and useless to grow spuds.

.... just so long as you don't suggest taxing the nice capital gains that us baby boomers have accumulated as a result of a being able to claim the costs of those assets against our other taxes!  mmmmm......  the return from selling my rentals and farm will be for me.  All me!

Cheers to all

Philly, if taxing the nice capital gains, was what the big banks wanted to happen, then that is what National would be doing...it is what Cullen would have done....shift your vision to include the banks and things become crystal clear...20/20....

This economy is all about ensuring the survival and profits of the banks. The rest is incidental fluff.

@Wolly:  Not developing a bit of a monomania, are we?  I'm sure there are a few wee other things that matter in the economy besides banks.

Cheers

Nope...no monomania here...just super sharp vision Philly.

The crisis everywhere can be traced down to credit being easy to get.

The heart of the problems (in all the piigs..here...across the Tasman...in the US....China...japan....the UK....!...did I leave any out...oh yes eastern europe...) comes down to the manner in which the govts have lept into bed with the bankers including the so called regulators of the bankers, to flood easy to get cheap credit into markets...it's evident today in Bollard's easy peasy ocr games....

There is a critical need to rid nations of the drug pushers and their pimps. Until we see that happening, this countries economy will remain firmly and forever under the thumb of the bank bosses and they are only looking at keeping the scam going, plus their fat salaries and bonuses.

You may well be right, & my perception of the banks' position is similar to yours, & to many commentators.

However, you have moved totally off the topic, which is how the burgeoning retirement needs of the upcoming flood of retirees can be managed and funded.

Cheers.

Articles like this one always makes me LOL, because I know that there will be heaps of replies from outraged boomers, whinging like little girls about the very idea of anyone derailing the gravy train they've enjoyed for so long.

And there they are, right on cue!

LOL.

David - useful article, I agree with your final recommendation and don't doubt your analysis. However I'd like to make the same point I made elsewhere about a similar issue a few weeks back when data about the high % of non net taxpayers was being discussed. That is, the need to value the whole contribution to society made by that %, that do work. Same goes for those who will end up having paid less than they receive in terms of pension. It's probably not easy to do this and does not alter the impact of your analysis, conclusions and recommendations. However, I think it's worth considering if we are not to end up further demonising certain proportions of society simply because they seem not to have added sufficient value to society as a whole. No one can choose who they are born to, where or when.  Since the high % of non net taxpayer discussions a few weeks back, Morgan and Guthrie's 'Big Kahuna' has had more air and it's this point about unrecognised, unpaid (under valued) contribution that is a key foundation in that thinking too.

Perhaps one way to think of this is to consider, if the unpaid, unrecognised value contributions and all working contributions (including past contributions) by non net taxpayers were removed from society as a whole, what would be the net value impact to the remaining net taxpaying society of that removal, positive or negative? If positive, crank up the furnaces; if negative maybe some folk are due a pay rise, and if so, where will that come from? Let's not forget how difficult it can be to value contribution to society - some net-taxpayers find it hard to value even themselves:

".... but the trust paid him a salary of NZ$120,000 even though it was receiving income of between NZ$500,000 and NZ$700,000."

Bernard - when you interview Don Brash, ask him how he is going to persuade John Key to increase the retirement age.

Cheers, Les.

How about you work out the compounding interest our taxes make, over the full working years.  Will make a huge difference to the amount you say we pay, the Govt makes plenty out of that.  If the money was managed properly, there would be enough and more to go round.

Hiacynth:

No, you can't do that, nor claim that. That is the problem I noted about 'pay-as-you-go' - there has been no "saving up" for these liabilities, therefore there is no 'compound interest' available. It doesn't exist.

Over the past 40+ years, voters have rejected policies to fully-fund the obligations to pay NZ Super in the future. To do so would have required consuming less 'now' so you could be more comfortable in the future. A whole generation or two rejected that concept.

The Cullen Fund was the first time any attempt has been made to start that, but the benefits will (and should) accrue to the people who retire in 30-40 years, not to the generation that chose 'pay-as-you-go'.

David

David, I think you will find that people of all ages and several generations have voted over the last 40 years! 

It is political motives that have resulted in a live for today and stuff tomorrow approach.  There was a very heathy fund started by Labour in the 70's - I think it was Muldoon who spent it.  I remember people thinking it (the fund) was a great idea at the time, and there was a general sense of resentment when it was dismantled. 

We could have been in as good or better position than Australia now (earlier start) but self serving politicians blew it for us all. 

All history now of course - we have a problem and we need to take a rational aproach to solving it - manufacturing blame with emotive, xenophobic finger pointing might help you get noticed but it distorts your otherwise rational analysis.

In comparing European experience and recent disorder note that in the UK all employees and employers pay national insurance as well as income tax. Baby boomers along with others have paid 9-10% of their lifetime income to provide a pension at 65 and for their health and unemployment cover. Unfortunately the NI tax collected was not ring fenced and has been expended not invested - the cupboard is bare and the contracted entitlement dates have been moved unilaterally.
Exporting jobs converts wages to profit and the cost falls on the society losing the jobs. While seeking scapegoats for economic problems its worth hearing Nouriel Roubini's WSJ interview http://online.wsj.com/video/nouriel-roubini-karl-marx-was-right/68EE8F89...

Why don't you take into account the compounding interest on all the monies we have paid in taxes, the Govt makes plenty on that.  If this money was properly managed, there would be plenty to go round and still money left over.

Hiacynth:  that is not how the system was devised or works.  National superannuation is paid from existing workers' taxes.  No money is put aside, with the minor exception of the Cullen Fund.  The government borrows, it doesn't put money aside & then get interest on it.  Govt net debt is (from memory) about 30% of GDP.

Labour introduced a national savings scheme for pensions in the 1970s, but Muldoon took it away.  Possibly the biggest piece of economic sabotage in NZ history.  Which is saying something.

Cheers.

How about:

"Finance companies"

"Unregulated 1980s share market"

"Think big"

Oh look, Muldoon gets on the list twice!

I did ok out of that election bribe....was paing top contubutions , got mine the employers plus interest back, ,, enough to damn near by a house back then...If that scheme wa still in place today NZ would be sitting rather pretty now

The bigest bribe t ever go down in NZ history I recon, and the voters took it hook line and sinker...and gess who created it?...Roger Douglas

Hasnt things changed over the yrs in politics lol

As Bernard has repeatedly pointed out, if the farmer keeps hoarding the seed potatoes, the peasants don't get no mash.

TECHNOLOGY is the fly in the ointment.  A large amount of capital was once diverted into the consumer economy via wages and salaries. Technology has allowed mobile capital to feed on the labour forces of political and social systems we wouldn't have a bar of ourselves. Technology has  devastated most jobs that used to fully occupy and give the less able a sense of belonging  and a reason to get out of bed in the morning.

So far those unaffected, IE the literate-and-blogging, us,  have allowed this to happen.  Just like the child who's working 14 hours a day in a sweatshop in China to make our undies, our own poor have been largely ignored by many.  But just watch what happens in the next 20 years when technology achieves productivity gains for its masters by displacing the formerly well-heeled from our own income stream. Will David then blog that we should be increasing retirement age to 97.5 years?

The exponential progress of technology in the hands of the holders of capital in a globalised 'free market' system is not sustainable.  The holders of capital have already welcomed socialism with open arms.  They are not even philosophically against it anymore. Why would they be?  It has already allowed them to gain from future productivity, now. Oh, by the way, that future income stream was the grease that was going to keep our superannuation scheme going.

Technology is progress......but its unlikely to continue to be expotential......because of fundimental thermodynamic limits....

It has taken the munane and boring out of many ppls lives and allowed them to do more interesting work.....it has allowed us to have a more complex and diverse society......what you seem to be talking about is being a luddite.....however lucky you becasue the era of cheap energy is almost over....in the future human labour wil once again be important.....of course what you miss is the poor and ignorant 100 years ago were quite numerious and led pathetic and short lives, technology actually improved things for them.......try reading some history...

retirement, there wont be any.....its all been used up for teh next 40 years....its been spent as debt which cant be paid for easily without cheap energy.

regards

I think you have taken it to far again Steven.  Im sure the point was labour intensive well paid jobs in manufacturing etc have been replaced by technology or outsourced to cheap labour overseas.  Im sure nobody wants to go back to ploughing fields with a team of horses but what was wrong with the technology in the 70's and 80's that resulted in lots of jobs that filled in peoples days and paid them quite well.  (I dont mean the railways by the way ) Im no luddite at all but where are we heading ?  Why is icebreaker clothing made in china and still $300 for a jersey ? Did the price go down when they moved manufacturing offshore our did the profits just increase at the top ?  How can a kg of crossbred wool be worth $4 and a metre of carpet over a hundred and none of this manufacturing occurs in NZ anymore - have we really made any progress ?

It is perfectly tenable to argue that the Government should have saved up some of the money that they have been collecting from taxpayers.   But it is not tenable to argue that policy decisions and fiscal accounting statements should be made as if they had, for the fact is that they did not

The money has been spent, on things that the present generation voted for, such that the money that will have to be spent on future pensioners will have to come from future taxpayers (who have not agreed to the arrangement).  And they will have to pay much more for that than present taxpayers are doing, because of demographics, unless something changes in pension settings.

Were you the party boss MdM,,,doesn't matter which mob....would you see to it that a big pot of money were built up...given the understanding that if you lost an election, it would be robbed out by them over there!

No, I do not think I would.  I am simply acknowledging that some people think the Government should do that, and that they are entitled to that view. 

However, I am also arguing that - whatever you think about the above point - we cannot now act as if the Government had done it, when in fact they did not.

Oh I agree but that won't stop pollies telling porkies.

Gold is hit, down a lot....any idea why?

http://finviz.com/futures_charts.ashx?t=GC

regards

 Yesireee steven it's cos there were more sellers than buyers at circa $1900

Thats a big drop on profit taking.....unless there is a reason i would have though it better to hold til $2000........hence i wondered..

regards

I think the margin calls were increased!

Bank of America is back up 11% maybe this is the "promise" of QE3 making ppl return...

regards

Spring has sprung ,

.. the Dow has risen

Why ain't the price of gold ..

.. .. fizzing ?

Maybe we can learn something from the Asians.  In Asia it's the children's responsibility to support their elderly parents.

And that's exactly what my wife and I have been doing here in Hong Kong for the past 9 months, having also provided regular financial assitance for the past 25 years. It's a common social convention.

As a pre-baby boomer I fight off the monumental guilt the world is trying to pile upon me by recalling that the "free" education some of my generation received also involved me paying up to 66c in the dollar marginal tax rate at a disturbingly low threshold.

Everybody whines—and so they should—about the lack of political will to fix blatantly obvious problems which have been building up for decades, but we still keep falling for the same tired promises, failure of nerve, and cynical self-interest from National and Labour.

Every informed person knows that we need to kill Working for Families and no-strings-attached interest-free student loans. We all know that New Zealand Super is unsustainable, we should all know that pandering to the farming and tourism juggernauts so that they can produce more low-income jobs, is the way to the Third World, but we let them get away with it.

By flagging CGT, allowing ourselves to be convinced that a high value New Zealand dollar is a very bad thing, and other nonsensical policies, we've allowed our land to increase in value to the point where our own children can't afford to buy it.

What hope is there when more than 50% of us believe that John Key is the Messiah, that China will make us rich, and that ACT's more sensible economic policies are far right?

The Treasury Secretary predicts that another 400,000 Kiwis will cross the ditch by 2025. The New Zealand Institute extrapolated the trends: by 2025 we'll be passed in per capita GDP by Botswana and Kazakhstan.

What to do?

Time for a Kiwi Spring.

DPB is 2.31% of total govt expenditure.  Sicknesss benefit is 0.95% of total.

Superannuation payments are 11.67% of total government expenditure - by far the single biggest expense the government has (followed by primary education at 3.33% of total and the family tax credit at 2.64% of total).

Your rant about  DPB numbers increasing by "thousands" every year is incorrect.  A big per annum increase in 2008 was 1800.  This is less than 2000 therefore not "thousands" is obviously a mulitple of thousands.

OOh - there's also debt servicing of 4.45% to add in there - still nothing on superannuation.

Those that are not retired also pay tax and will pay tax for the rest of their working lives, just like you (and at higher rates if trends continue).  However they realize that even though they will pay tax for their whole working lives (probably at higher rates) they are likely to never get a pension, ever.  So as well as paying tax "all their lives" they will also have to fund their own retirements.

Who's actually being picked on? - those that pay tax "all their lives" and get a pension 'till they die or those that pay tax "all their lives" and will never get a pension?

With regards to your numbers they are totally flawed I'm afraid:

You have added the tax paid for 1 person, but compared it to the pension for  a couple (2 people).  Not many people have been supported by their spouse for their entire life. Big mistake number 1.

You haven't included GST paid  on expenditure before and after retirement.

You haven't included the tax on the pension.

You haven't allowed for other tax deductions that were available until recent years including low interest housing loans, child benefits, life insurance, medical insurance.  Wasn't there a mortgage interest rebate once? Can't remember what else there was- I'm too young.

Then there were death duties paid by the people who died during the time death duties applied.

Also people who owned businesses paid tax on their business income, and employed people who also paid tax.

The biggest mistake is that you are disregarding all the people in their cohort (born in the same year) that paid tax, then died before they retired.  Looking at an average person is not very meaningful.  It's like saying that it is unfair that someone who died at 50  got the full sum assured because they died too early and didn't pay enough premiums.

You need to do a proper actuarial analysis. People who do this kind of job study for 8  or so years, on top of a maths degree and use complex computer sytems to run this kind of anaylsis.  The danger of doing this simplistic kind of analysis is you jump to wrong conclusions and take all the innumerate masses with you. 

So first you need many data points, not just one.  Group data by age bands, sex, smoker status, marital/habitation status, income brackets, kids or not, race, etc.  Project for each group the tax paid per year (including all deductions etc)  taking into the account the probability they survive.  i.e. For 1000 born not all will be alive by retirement age but the tax paid by the ones that died has to be included for that cohort.  You need to adjust these figures for CPI as you have done to get today's figures. Then  from retirement you need the net amount of pension after all taxes are paid including GST and other taxes for each cohort, discounted by an expected inflation rate, and adjusted for the probability of survival. You could look at one age group to see if they pay their share, or you could look at one race, or one sex and ask the same. Or smokers/non smokers taking into account tax paid on ciggies, vs early death by cancer etc.  Or maybe BMI taking into account death by diabetes.  It all gets very complicated so leave it to the experts!

They dun gone retired LAJ....!

Yet another case of this site trying to create intergenerational hatred.  It may gain you advertising revenue but is it helpful for society to come out with nonsense like this?