By Jason Walls
The Treasury is recommending the age of superannuation entitlement be increased to help New Zealand prepare for the economic challenges of an ageing population.
This is despite Prime Minister Jacinda Ardern saying she would resign before increasing the retirement age.
Speaking to Interest.co.nz, Treasury Secretary Gabriel Makhlouf says he would “recommend that we change the age of superannuation in the long-term,” to prepare people for the changing demographics.
New Zealand’s changing age structure in the next 15 years will see a significant shift in the ratio between those aged 15-64 and those aged 65 and over.
Economists say this will put much more strain on the public purse strings – ANZ’s chief economist Sharon Zollner calls this a “looming fiscal time-bomb.”
Spending on health is expected to rise from just over 6% of GDP in 2015 to almost 10% by 2060, according to Treasury’s most recent report on New Zealand’s long-term fiscal position.
Superannuation spending, which is 5% of GDP at the moment, is projected to jump to almost 8% by 2060.
“This isn’t a question of economic theory. It’s a question of maths,” Zollner says.
All up, the Treasury’s report expects Government debt as a proportion of GDP will balloon to more than 200% by 2060, in large part due to the ageing population.
That’s up from 21.4% now – as a dollar amount, it is estimated the Government will owe roughly $3 trillion in just over 40 years’ time.
But Makhlouf says it is very unlikely a scenario where debt levels reach 200% of GDP will ever play out.
“Those are projections and they're assuming that Government policies essentially don't change.
“They assume that the growth in spending just continues over the horizon.”
Michael Littlewood, former co-director of Auckland University’s Retirement Policy and Research Centre, agrees.
“The Treasury’s report was done for one reason, and that was to alarm people into saying we have to address the superannuation issue.”
Both Littlewood and Makhlouf say the onus is on this, and successive Governments, to make changes to ensure debt does not get to that level.
Age of super ‘probably should increase’
Makhlouf says the Government’s approach to debt and spending, through its budget responsibility rules, have already started to help.
But there are other factors to consider, such as the age of superannuation, currently 65 years old.
“The age of superannuation probably should increase,” he says.
“Since it was set, longevity has changed, and people are increasingly working past 65. We think it’s one of the changes that Government could make.”
But this won’t happen under this Labour-led Government.
In an election debate, Ardern said she would resign before raising the retirement age.
Former Prime Minister Bill English said he would increase the age of eligibility to 67 by 2040 – a policy Ardern’s Government scrapped.
Makhlouf says the change does not need to happen rapidly. Ultimately, he says it’s about choices and what the Government decides to do in a bid to make sure it does what it can to ensure the future fiscal burden is limited.
“We don't need to make quick decisions today to manage where we may be in 40 years’ time.”
Can’t keep ‘kicking the can down the road’
But Bagrie Economics chief economist Cameron Bagrie disagrees.
“The longer we wait to make some hard decisions, the tougher those decisions are going to be.”
He says the time is now to be having a debate around how to manage New Zealand’s future cost burdens.
“We can't just keep on saying she'll be right because it's not going to be right.”
Raising the retirement age, he argues, won’t make enough difference to prevent the Government being burdened with billions, perhaps trillions, of dollars’ worth of debt in the future.
He suggests looking into whether superannuation needs to be means tested.
Bagrie is critical of the Government for not doing enough to solve New Zealand’s long-term fiscal issues.
On the one hand, he says, there is a strong intergenerational aspect to the work Ardern and her Ministers are doing.
Think measures to address climate change, through ending offshore oil exploration, as well as the way the Government is trying to get more young people into houses through KiwiBuild.
But when it comes to arguably the biggest problem facing New Zealand’s long-term economy, he says the Government is just “kicking the can down the road.”
A spokesman for Finance Minister Grant Robertson says the Government has restarted contributions to the NZ Superfund to help prepare the country for the challenges of an ageing population.
National did not contribute to the fund during its time in power.
The Government's commitment to the Budget responsibility rules – getting net Core Crown debt to 20% of GDP by 2022 and to keep Core Crown Spending at roughly 30% – will also work to mitigate this future economic risk, the spokesman says.