The 22nd of May provided two startlingly different approaches to fiscal management.
In New Zealand, the government delivered its so-called ‘growth’ budget – another deficit, no realistic path to surplus, and rising government debt. The major growth item, and the biggest contributor to Crown expenses, was NZ Super, the non-means tested pension paid from the age of 65.
On the same day, the Danish government, led by the center-left Social Democrats, passed legislation to gradually increase its pension age from 67 in 2025 to 70 by 2040.
Since 2006 Denmark, a country with a similar population to NZ, has linked the pension age to life expectancy. That goes a long way to explaining why Denmark has had budget surpluses for the last decade.
By contrast, New Zealand has maintained the pension age at 65 for the last quarter century. That’s despite life expectancy increasing during that time from 78 to 83. NZ Super is now forecast to cost $29bn in 2029, up from $21.6bn in 2024.
That goes a long way to explaining why the NZ budget is a mess of red ink.
And it’s only going to get worse if nothing is done. Around 16% of New Zealanders are now aged 65 or over. By 2050, this will rise to almost 25%. The figure will still be rising fifty years from now.
Without reform, NZ Super will constitute an ever-greater burden on the budget, to the detriment of other government activities.
This is not a new issue. The fiscal implications of rising life expectancy and an ageing population have been apparent for decades.
Back in 2010, a review by the NZ Retirement Commissioner Diana Crossan recognised that a pension age of 65 was unsustainable. She concluded that ‘something will have to change to keep NZ Super affordable for the long term’. Her recommendation was a transition from 65 to 67 phased in from 2020 to 2033.
Crossan warned that ‘we can’t keep ignoring this issue until it’s too late’. Sadly, it’s now 15 years later and the issue is still being ignored. If the Retirement Commissioner’s recommendation had been followed, NZ would already be five years into the transition period and enjoying significant budgetary gains.
NZ’s folly is highlighted by the action taken in other comparable countries.
Between 2017 and 2023 Australia raised its pension entitlement age from 65 to 67. The figure in the United Kingdom is currently 66 as part of a transition to 67 by 2028. Ireland is at 66 with a plan to reach 68 by 2039.
Entitlement to full Social Security in the US kicks in at 67. Sweden, Spain, Italy, Germany, and the Netherlands are all at or on the way to 67 by 2027.
Why is NZ not transitioning to a higher pension entitlement age? It’s certainly not because the country is in a stronger financial position than all those other places.
There are several possible explanations. One is the New Zealand Superannuation Fund, a sovereign wealth fund intended to partially fund future NZ Super payments. However, while the fund has proven a successful endeavour to date, it’s not a contributory pension scheme and it’s subject to investment risk.
Australia has increased its pension entitlement age to 67 despite having a similar fund. That fund, is called the Future Fund and currently has assets exceeding A$240 bln.
The Australian budget is also protected by the fact that the age pension is means tested and there is a compulsory superannuation system. The latter ensures that a significant part of the population will retire with sufficient assets to be disqualified from a pension under the means test. Australians currently have more than A$4 trillion of super assets.
Increasing the pension age to 67, applying a means test for that pension, and having a compulsory superannuation system all make fiscal sense for Australia. The NZ budget looks exposed by comparison.
Another explanation for NZ Super remaining at 65 is the impact of various ‘fairness’ arguments. Some people contend that the pension age must stay at that level because it’s unreasonable to expect manual workers to work beyond 65. However, such workers are a declining proportion of the workforce, and their position is better addressed by providing specific targeted support rather than by continuing to pay a full pension to all people 65 and over.
Others contend that the different life expectancies for different ethnicities in NZ should be reflected in different pension entitlement ages. Figures produced by the Ministry of Health certainly reveal some remarkable differences based on ethnicity (and gender).
Aotearoa New Zealand life expectancy at birth, by ethnic group and gender, 2017–2019
Source: Health and Independence Report 2023
Fearing the potential for division and discord in addressing the ethnicity argument, many would rather just ignore the pension age issue altogether.
Interestingly, the manual labour and ethnicity arguments have not stopped other countries raising their pension age.
Of course, the primary reason for inertia on NZ Super is unquestionably the cynicism of the country’s politicians. Reform would take political courage, an attribute in short supply.
Why advocate for long term fiscal discipline if it carries short term risk at the ballot box. Why waste political capital on measures that won’t pay dividends at the next election.
Denmark’s policy to raise the pension age will help protect that nation’s economic viability over the decades to come. That in turn will enhance its prospects of remaining a successful, high-income liberal democracy well into the future.
It’s a shame New Zealand hasn’t adopted the same approach.
*Ross Stitt is a freelance writer with a PhD in political science. He is a New Zealander based in Sydney. His articles are part of our 'Understanding Australia' series.
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.