Careful analysis is throwing up several uncomfortable but hard-to-avoid facts about the state pension, New Zealand Super (NZS).
For one, Government budgets will groan and even risk collapse under the weight of paying for it and related costs in the long term.
Second, means-testing the pension so it is aimed solely at those who need it is no panacea.
Third, blaming the previous National Government for stopping contributions to the NZ Super Fund (NZSF) during a fiscal crisis only partially explains its financial insufficiency now.
Lastly, a contributory scheme dreamt up 50 years ago offered hopes of a financial Shangri La, but its politically motivated execution pushed Shangri La permanently out of sight. There's also debate over whether the retirement age should be raised from 65.
On the first question – affordability - the current government plans to carry on with business as usual, insisting there is no problem.
“We believe with the right economic management we can fund superannuation for the longer term," the Prime Minister Chris Hipkins told journalists recently.
However, Treasury analysis contradicts this position, and predicts a future of costs, deficits and rising total debt.
Its latest forecasts indicate the NZSF will meet on average 16% of the cost of superannuation between 2040 and 2090, without including tax, and 20% including tax.
That leaves 80% to be found from other sources.
A detailed study by Treasury in 2021, He Tirohanga Mokopuna, put it another way.
It wove together healthcare as well as pension costs for the elderly and produced some devastating scenarios.
One of them assumed total Crown revenue would remain constant til 2061 at 29% of GDP, but total Crown expenses would rise to 45% of GDP.
The impact of this would push net debt up sixfold to 196% of GDP, not far below the debt level of Greece during the Euro sovereign debt crisis.
Treasury is careful to say that factors such as immigration levels and productivity gains could affect these forecasts, but even a significant downward revision of these numbers would still leave New Zealand state finances in a very tight spot.
When this matter erupted in controversy at the start of this month, Government ministers attacked the previous National Government for making the problem much worse.
It blamed the decision to suspend state contributions to the NZSF in 2009, saying that was a big setback to proper funding of NZS.
The suspension happened at a time when New Zealand was reeling from the Global Financial Crisis, and the government deficit was large.
Speaking about the problem at the time, the then Finance Minister Bill English said he refused to borrow money to buy shares, and contributions would resume when the Government was back in surplus.
The current National leadership say their predecessors were right to do that.
Some commentators accepted this view. They argued borrowing still more money to invest in the NZSF would make the deficit worse, and was based on the unreliable assumption that world stock markets would rise.
But other people contested the National Government’s view, saying a modest savings programme could be maintained even while debt was still on the books. After all, many ordinary citizens pay into their workplace super scheme even when they still owe money on their mortgage. On the other hand, citizens tend to pay down their mortgage, while the Government's debt was growing at the time.
However these arguments pan out, there are signs that continued government input would have had a limited impact on this problem. This is clear from figures released by the Government, which match the NZSF’s own publications.
'Absolutely disgraceful'
As of 30 June 2022, the NZSF stood at $55.7 billion. The foregone contributions by the government, together with an average return on that missed investment, would have pushed it to $84.3 billion.
That means continued Government contributions, plus investment returns over that time, would have added $28.6 billion to the fund.
Put another way, the fund would have been half as big again as it was, in 2022 figures. That would have been a useful addition to paying for NZS, but it could not have come close to meeting its 80% shortfall.
Jonathan Eriksen, a veteran actuary and investment expert, estimates that continued payments by National would have about doubled the share of the cost burden met by the NZSF.
"It is absolutely disgraceful that the National Government stopped the contributions to NZS," says Eriksen.
"(Continuing the payments) would have doubled the percentage from 20% to 40%, which means we would not have been under the same pressure that we are now."
Treasury was requested for more information on this, but said it had not analysed this section of the debate. Others have argued the NZ Super Fund shouldn't be taxed.
What about means testing?
There is another side to the coin here. Instead of building up a bigger pot of money to fund NZS, the money that is available could be paid to fewer people.
At present, billionaires get the same payment as people who struggle to pay the electricity bill. Why not means test the pension, so it goes only to those who really need it?
Not paying the wealthy would clearly reduce the outflow of funds. It could have more social equity, since the taxes from the poor and middle classes would not go into the pockets of the rich, like Robin Hood in reverse.
But means testing is easier said than done. The state-funded pension, which provides a floor beneath Australia's contributory scheme, is means tested and asset tested, and has been widely criticised as costly, intrusive and inequitable.
Here in New Zealand, means testing is almost routinely condemned for the same reason. The argument goes like this: it is administratively far easier to pay everyone the same sum of money than to painstakingly go through their finances one by one and make adjustments in each case.
According to this view, the money spent on bureaucracy to enforce means testing would cancel out any financial gain.
But there is evidence to suggest that this argument has flaws, and arranging people's benefits to suit their finances might not be impossible after all.
And it would be a lot easier if done by the Inland Revenue Department (IRD) instead of the Ministry of Social Development (MSD), since the IRD adjusts people's payments all the time – it is their job.
New Zealand used the IRD in the 1980s to effectively means test the pension. It did this by imposing a surtax on money earned in addition to the pension while leaving the pension itself unscathed.
A cabinet minister from those days, David Butcher, says the system was spoiled by having too many tax loopholes and high tax rates that incentivised people to take advantage of them. But those facts do not invalidate the basic idea.
“People felt they were being swindled,” he says.
“But, in principle, the objection that means testing is too complicated, that you spend hours doing it, and have thousands of people wading through documents, does not apply if you have a proper, straight forward tax system.”
The New Zealand Superannuation Grant
This method of means testing the pension was killed off politically in the 1990s. But the principle of means testing via the IRD lingers on. There is an echo of it in a system proposed by an Auckland academic, Susan St John. Her idea manages to preserve pension universality and introduce means testing at the same time.
St John's scheme would give superannuation to all people. It would be renamed the New Zealand Superannuation Grant (NZSG), and it would be guaranteed, universal and untaxed.
However, any extra income that an NZSG recipient earned would be taxed at a higher rate than would apply to usual earnings.
“When you qualify for your non-taxable grant at age 65, you could choose to opt into that, and then you would automatically have your other income taxed on another schedule," St John says.
“You are essentially replicating the old tax surcharge but you are doing in a way that is much more straight forward and easy to understand.”
St John says people with a lot of money who want to stay on their existing tax arrangements could decide not to opt into the scheme in the NZSG in the first place.
She adds her scheme would definitely save money.
“The old tax surcharge (from the 1980s) used to save 10% of the net cost of superannuation. You would be able to replicate that without any difficulty and 80% of the population would not notice any difference.
"You would probably be able to save more than 10%.”
Despite this, means testing still gets little support. There is a lot of faith in universality among left leaning parties these days. And Eriksen gives another reason.
He says if people knew they were going to be means tested on their other income and potentially lose access to the pension as a result, then they would be disincentivised to save money or invest in the first place.
Eriksen says means testing would gravely weaken KiwiSaver.
The role of life expectancy
Meanwhile, there is yet another complication to this story. The real cost of NZS to the Government will depend on how long people live for. At present, average life expectancy is approximately 82. But that number might be pulled down by Covid-19.
The Otago University epidemiologist Michael Baker says this has happened elsewhere. He points to a study in the BMJ (formerly the British Medical Journal) that says life expectancy in 2020 fell by more than two years for men in both Russia and the United States because of Covid.
Other countries experienced lesser falls in life expectancy, though New Zealand, Taiwan and Norway, actually experienced an increase in life expectancy in 2020.
Baker says New Zealand went on to achieve a similar benefit compared with other countries in 2021, but this happy outcome did not last.
"For the first time in 2022, we saw an increase in mortality of about 10%, which was kept at this relatively low level because of widespread vaccination.
"The impact of Covid will be much less in 2023. We are on track to have about 1000 deaths from Covid in 2023, which would add about 3% to mortality.
"So yes, Covid-19 is increasing mortality rates, particularly in older age groups, and will lower life expectancy."
But that is as far as Baker goes. Just how much lower life expectancy falls remains to be determined, and there is another health impact on life expectancy which is also unsure - deaths from lung cancer and other smoking related diseases.
In the mid 90s, a quarter of the population smoked tobacco. Now, just 8% do. A dramatic decline like this is bound to increase life expectancy, and possibly more than cancel out the impact of Covid-19.
But according to the lobby group, Action on Smoking and Health, no one can quantify in detail how big this impact will be.
The link between smoking and the economy was referenced in a famously cold-blooded comment from Treasury a decade or so ago, that "smokers more than fiscally pay their way." They did this partly by paying excise duty, but also because they die early and save the Government pension money.
However, current smoking trends indicate this fiscal irony will not last.
The Muldoon effect
Finally, the whole pension story in New Zealand could have been very different, according to the late fund manager and business commentator, Brian Gaynor.
For much of his life, he raged against the repeal of a ground breaking superannuation scheme introduced by the Third Labour Government in 1975.
This programme had compulsory contributions from employee and employer, and would have given people individual entitlements, but it was killed off when the National Party under Robert Muldoon won the election that year.
Gaynor called this a "dreadful political decision, which transformed New Zealand from the potential Switzerland of the Southern Hemisphere into a low-ranking OECD economy."
An assessment by Infometrics some years ago said the Third Labour Government's scheme would have been worth $278 billion in April 2015, if it had been left alone. If the fund had made a similar rate of return between 2015 and 2023 as the NZSF, then that $278 billion would have more than doubled.
Meanwhile there was one final attempt to fix this problem. In 1997 Winston Peters forced a referendum on a compulsory, contributory scheme.
But the referendum was decisively defeated.
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