Some Treasury staff say the government should get on with developing a plan to meet the rising cost of superannuation, which is expected to increase 50% by 2060.
An analytical note published on Thursday warned New Zealand’s population was ageing due to longer life spans and falling fertility rates.
It said the cost of superannuation and public healthcare would “substantially increase” as the proportion of people over 65 steadily grew over the next 80 years.
In 2020, there were four working age New Zealanders to support each person over 65. That was already well down from the 1960s, when there were seven workers per retiree, but it is projected to get much worse.
By the end of the century, it's forecast there will be less than two working-age people to support each person over 65. That’s 1.75 people aged 15-to-64 per retiree in 2100.
Treasury has previously warned the cost of superannuation will potentially increase 50% as a share of GDP by 2061 and continue to grow thereafter.
The authors of the recent analytical note said the government would have to meet this cost by increasing tax revenue on the proportionally smaller working population, or by decreasing spending on other services.
“Government revenues are not magicked from thin air, but are obtained through taxes and charges for publicly-provided services,” they wrote.
Alternatively, the government could consider changing superannuation settings to reduce the cost of the policy — but this would need to be done sooner rather than later.
“Despite the clear signs pointing towards these shifts, it may be tempting to delay taking action when the full impact might not be felt for decades,” the authors said.
“However, addressing these demographic challenges should begin well in advance because any policy changes affect lifetime savings decisions and capital accumulation, which cannot be adjusted instantaneously.”
Do not dither
To translate: if the government wants to cut universal superannuation in 2060, it needs to warn people born in 1995 today so they know to save enough to survive.
And if it doesn’t want to do that, it needs to come up with a credible plan for covering the costs so that a future government isn’t forced into cutting eligibility with no notice.
The paper’s authors also debunked claims that economic growth or the NZ Super Fund would be able to dig the country out of this hole.
The NZ Super Fund would only cover a quarter of future increases, and superannuation costs would increase in-step with productivity growth because payments are indexed to wages.
“Under current policy settings, there is no easy way to ‘grow’ our way out of these fiscal pressures,” the authors said.
Analytical notes are written by staff members at Treasury but are not considered official advice or an agency-wide view. Rather, they are used to develop policies and advice.
This specific paper was commissioned as part of ongoing work on the four-yearly statement on the long-term fiscal position, due to be published next year.
So, more taxes?
This report supports Labour Leader Chris Hipkins’ recent argument that New Zealanders need to accept the need for higher taxes, or else scrap universal entitlements.
However, a tax increase alone may not be enough to cover the climbing cost of the policy. The government currently collects the equivalent to 32% of GDP in taxes.
Some combination of changes may be needed to cope with this challenge, and there are essentially four levers which could be used:
First, fertility rates could increase. The government cannot and should not control reproduction, but it could make policy choices that encourage people to have more children.
Second, would be to maintain a welcoming migration policy. New Zealand already has a strong multicultural identity and should be able to avoid the backlash seen in Europe.
Third, changes to superannuation settings could be made to make it more targeted and affordable. It could be means-tested, kick in at 67, and be paid at a lower rate, similar to other benefits.
Finally, more tax revenue will need to be raised to cover the cost of pensions and healthcare for the ageing population — even if other government expenditure gets trimmed.
*An earlier version of this story incorrectly reported the cost of superannuation would increase to 50% of GDP by 2061. It has been corrected to say the cost would increase by 50% as a share of GDP.
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