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Geoff Simmons says politicians need to face up to reality and discuss the future of our public pension systems

Geoff Simmons says politicians need to face up to reality and discuss the future of our public pension systems

By Geoff Simmons*

Over last weekend the Retirement Commissioner foreshadowed the launch of a new study. The findings are that despite its success, NZ Super is not sustainable in the long term unless we make some changes to it.

This sparked the usual round of denial from politicians, including the Government who claimed that we can afford NZ Super in its current form as long as we continue to “control” (i.e. cut) spending in other areas.

Given the pressures appearing elsewhere in the public sector, this approach simply does not seem plausible without NZ Super eventually taking over all Government spending. We need to look at the options the Retirement Commissioner is putting forward.

The Government’s Plan

According to the Retirement Commissioner, the number of people over the age of 65 (and therefore receiving NZ Super) will double over next 20 years, and the cost of paying for NZ Super will triple over 20 years. There are currently 4.4 people working for every retired people, but this will shift to 2.4 people working for every retired person.

The Government’s response (from Commerce Minister Paul Goldsmith) is to claim that NZ Super is sustainable as long as the spending is “controlled” elsewhere. When you build in the Government desire for tax cuts, that means keeping spending growth under the rate of economic growth, and often under the rate of inflation and population growth. In other words that means other areas of spending will be cut in real terms per person. The Treasury graph below shows how this strategy has looked in the area of welfare spending; NZ Super spending has grown while other benefits have been “controlled”.

super

Running the Numbers

Lets take a closer look at the Government’s proposal. In the eight years of this Government, NZ Super spending has been rising by 6% per annum, while Government spending has been increasing by closer to 3%. In 2008 NZ Super made up 10.8% of Government spending, now the figure is 16.5%. If those trends continue, by 2060 NZ Super would make up half of all Government spending.

Meanwhile in healthcare, another area of spending dominated by the elderly, spending has been increasing by 4%, and yet there are still cost pressures there. Taking health and Super together, if current trends continue then health and super spending could swallow the whole Government budget by 2074.

Of course, such scenarios are ridiculous and will never happen. But they illustrate the problems with the Government’s approach; in the long run it is mathematically impossible to keep a lid on all spending to allow for NZ Superannuation without increasing taxes.

Treasury’s long-term fiscal forecasts suggest that public sector spending will return to long-term trends. In other words, despite what Government says they can only keep a reign on spending for so long, otherwise they will get voted out. This is not surprising; we are already seeing the pressure to spend building across other areas of government.

The Treasury’s more reasonable long-term fiscal forecasts show that health and NZ Super will be half of Government revenue by 2030, and 2/3 by 2060. By that date, based on current policies our annual government deficit would be a whopping 18% of GDP, and total debt almost 200% of GDP. Clearly the current approach to both healthcare and NZ Super are not sustainable and we need to look at alternatives.

What are the options for reforming NZ Super?

First up we could change the eligibility criteria. One option is to increase the amount of time new migrants have to spend in the country to be eligible. Currently in New Zealand people are eligible after 10 years, but the OECD average is 26 years.

As the Retirement Commissioner points out we are living for longer, are healthier for longer and are working for longer. Another option is to raise the age of eligibility to 67 years. The Commissioner is suggesting a slow transition, raising the eligibility age by 3 months per year over 10 years. We could also recognise that some people over 65 can still work, so they could do so while receiving a reduced NZ Super payment.

The final option is to change the amount received by superannuitants. Currently NZ Super is indexed to wages, while all other benefits are indexed to inflation. Superannuation could be changed to the same basis. Of course this could be offset by making sure people retire with more private savings, for example through Kiwisaver.

Of course, that is just one half of the story; we could also increase government revenue to pay for NZ Super costs. However, that would require dropping the idea of tax cuts, raising taxes and putting all that money into the Cullen Fund. Even that may not be enough to pay the eventual bill.


Geoff Simmons is an economist working at the Morgan Foundation. This article is here with permission and first appeared here.

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8 Comments

I'm expecting very poor quality decisions out of all future Governments. I don't see that I have any choice but to look after myself for retirement.

At this time I know people reaching 65. I tell them to apply for super months before their birthday. Something I've noticed is that a lot of them have not saved enough to retire on and they are quite aware that they'll need to keep working as long as possible. Most will be able to work to maintain their lifestyle but there will be some that will take a major hit to their ability to spend. I don't see this getting better over time and I've still got more than 25 years left (unless I decide to retire early).

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I wonder if super and a lot of other things besides would be a lot more affordable if all the tax loop holes were stopped, the tax avoiding super wealthy and multinationals were more appropriately taxed. It seems to me that the super wealthy are laughing their heads off, having set matters up so that the superannuatents and the rest of society have to battle for a fair share. May be instead of fighting each other we should go after the real culprits.

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It's not super that is going to be the issue in the future, it will be a UBI.

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As money is conjured out of fresh air, today, pensions will be easy to fix.

As will the so-called UBI.

It is the tax created from these counterfeiting creations that will enable us all to live in luxury...forever.

That will be taken, as we spend up large.

We should not think of working in future, there is no need, no need of politicians and Bankers, no need of anything, bought and paid for with real money.

We give credit, which is never, ever due.

We could set up a drip feed from one drip Computer to another, each have a credit card even the kids and never ever have to pay it off, if we drip feed enough to cover those essential costs of living....and the taxes needed to sustain us.

We do not need billionaires, millionaires, we only need to cover the cost of basic Housing, food and a bike. Then we can all ride away into the sunset, no greed, no debts to pay, no interest to recover, no imports to export ratios, no smart phones, no stupid people, working to support the idle rich, and even idler bludgers, no nuffink.

We is all gonna be the same......idle rich.

We could all be one big happy family, looking out for each other, we would have 24 hours to do so, seven days a week.

But then what would Poll-lies do, what use would Bwankers be...doing, I hear you ask, why they would have joined us using using the funny money, for what God intended, when he flung the usurers out of the Temple.....but............... it has been down hill, ever since.

Gold did not work,
Coins did not work,
Paper did not work,
We have tried ones and zeros, yaun and dollars, Euros and I could go on forever, but we have not tried my Free Trade yet....and sod all the others, who think we need all the others, we just need the internet to be self repeating, do away with the Oligarchs, etc......we just need to get back to basics...

Free internet for all, free medicine, free TV...you name it, it is Free....and the Slaves can go free too, and all the other Lords and Ladies, lauding it, can go.....Kiss my a ring.

As can the Pope, if he has a mind to ....object.

Just think, no Putin, nuffin to fight about, no Trump, no Hillary, no Lauds and Ladies of ill repute, wanting your vote for nefarious means..

Work is a four letter word and should not be uttered, in my presence.

Because we will have a presents state, world wide.

Now Free is the one word to use. in works place...

But I think that might upset a few people, who think we need work to make the World go round, we just need an internet, filled with free enterprise, to give us all freedom.....in my Brave New World.

(Just who is gonna do the WORK.....Robots, which we could replace, Poll-lies, Bwankers, and everything else....as soon as I figure out...how the Hell...to do it, then we would have nuffin to fight over...Praise de Lawd, and I would not have to blog....anymore, in your flamin interest).

PPS....No rentiers, we would all have a house free, so no need of all this housing malarky to fill page after page, of my.....idle reality.

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As the retired population becomes a greater proportion of the overall population the greater the political tendency will be to please this group if you want to win votes and be in power. The number of taxpaying workers will become a decreasing proportion of society with a lesser proportion of votes.
There is obviously little incentive to change the status quo if you want an increasing number of votes, unless you can educate the aging population that the status quo is unstainable - and will place an excessive and unsustainable burden on future generations.
The middle aged to retirees are the ones who put the current laws in place forcing their entitlements on the future younger generations. Those younger generation are becoming increasingly less by proportion and having to support a larger number of beneficiaries. Those persons receiving superannuation are beneficiaries.

A solution is to decide what is a realistic proportion or ratio of the population that can be supported by the rest of the population, may be 8:1, but 4.4 : 1 is pushing it, 2.4 : 1 is ridiculous, those doing the supporting (the working taxpayers) will be getting nowhere.
The democratic process will not bring about the best outcome if people choose to vote in their own self interest and if political policy is to do what will get the most votes - this is the status quo we have at present. Wise political leadership and education about the situation is needed.
I hope our ruling politicians wise up a bit before the situation reaches an unstainable crisis point - as in some European countries recently. That crisis point may come sooner than expected, especially when our housing capital gain Ponzi scheme eventually runs out of steam.

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Optimist. You are unhappy about old people and their voting power. But that's you. (Even if you haven't got there yet)

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As usual a more simple idea is better. All that needs to be done is for the Reserve Bank to credit the Government coffers by the amount required each year and obviously as the elderly die off that money is withdrawn from circulation.

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Those who insist-like Key-that NZ can hold the age to 65,needs to explain why countries such as the UK,Germany,France,the Netherlands and Norway are wrong.
UK: the state pension entitlement age will rise to 66 from 2020 and to 67 between 2026-28.
Germany: it will rise to 67 by 2029.
France: it will rise to 67 by 2023.
Denmark: it will rise to 67 by 2022.
Netherlands: it will rise to 67 by 2024.
Norway: it already is at 67.

Perhaps John Key woul;d argue that we are much wealthier than these other countries and can therefore easily afford to keep the age of entitlement at 65. Yea right.

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