Future-proofing pensions

If we regarded tax as an insurance premium without complaining that a lack of catastrophe means we can’t make a claim, the debate on pensions in the future would be simpler.

Most people would accept that universal superannuation at 65 is not necessarily good policy and pensions would be means tested.

However, that is politically unpalatable for at least two reasons: 

  • people who’d done nothing to help themselves would get taxpayer assistance while those who’d made sacrifices and worked hard to  save for their retirements would not.
  • too many of us regard tax not like an insurance premium but more like an investment and superannuation is therefore one of the dividends.

Various attempts have been made to sort out an enduring and sustainable policy on superannuation. Don Brash is among those who think we haven’t got there yet.

In a speech entitled challenges for New Zealand’s future pension system he says:

. . . it’s estimated that the fiscal cost of New Zealand Super will increase from its present level of 4.4% of GDP to over 8%.  Of course, that’s still lower than the current fiscal cost of the age pension in Greece (at 11.5%) and some other European countries, as noted, but that’s not a lot of consolation given the fiscal challenges those countries currently face! 

Part of the reason for this prospect is the sharp fall-off in the birth rate, but the main driver of the increased cost is the arrival at age 65 of the baby boomer generation, and in particular the increased life expectancy which we all enjoy.  Over the past half century, life expectancy at birth has increased by nearly two years every decade.  While that increase is projected to slow, a person turning 65 in 2050 can expect to live an additional 24 years, more than four years longer than a 65 year-old in 2008[5], and of course considerably longer than when the age pension was first introduced for those reaching 65 in 1898.

When the increased fiscal cost of healthcare and long-term care for the elderly is added to the increased fiscal cost of New Zealand Superannuation if the present parameters remain, it’s clear that, if we’re to avoid a substantial increase in the tax burden on that portion of the population which is still employed, something needs to change.

His solution is to gradually raise the age at of eligibility for superannuation, giving people a choice between retiring sooner with a lower pension or delaying retirement and receiving a bit more.

 We raised the age of eligibility from 60 to 65 in the nineties and there was widespread acceptance of the need for that change.  Nobody seriously suggests lowering that age again.  There is a widespread understanding that we are living much longer than we were in the past, and that that is a continuing trend.  Most 65 year-olds no longer feel “elderly”, or ready for the scrap-heap. 

Last year, Australia announced that the age of eligibility for their age pension will be progressively raised to 67.  Germany and the US are also raising the age of eligibility to 67, and the UK is going for 68.  Denmark is targeting 67, and then indexing the age of eligibility to future improvements in life expectancy.

In my own view, raising the age of eligibility could be made more politically acceptable if we were to allow a degree of flexibility regarding when the pension is actually taken.  If the age of eligibility were 67, for example, under a policy allowing flexibility regarding the age at which it could be drawn somebody might choose to take the pension at, say, 65.  At that younger age, the amount received would be actuarially adjusted downwards, and would remain at that lower level (with regular upward adjustments with wages of course) until death.  Conversely, if somebody chose to defer drawing the pension until, say 69 or 70, the amount received would be actuarially adjusted upwards. 

Such a system would allow people a greater degree of choice about when to retire.  It would not directly reduce the fiscal cost of New Zealand Super of course – by definition, the amounts paid would be actuarially equivalent to drawing the pension at the age of eligibility.  But by encouraging people to stay in the workforce for longer, it would have fiscal benefits in terms of higher tax revenue and, probably, lower health costs, given that there is evidence that people who remain employed are often healthier, physically and mentally, than those who have left the workforce.

One of our staff is 80 and still works fulltime, another is 76 but not quite as diligent – he takes Wednesday afternoons off to play bridge. Neither has plans to retire soon yet both have been receiving a pension since they turned 65.

Not everyone has the ability, or will, to work into their 70s and beyond, but I can see the appeal of giving those who might the choice to do so.

It won’t happen while J9ohn Key is Prime Minister.

During the last election campaign he was asked about future changes to superannuation.  

His first answer was there would be no changes in the first term, that led to a question about future terms. It was one of those have-you-stopped-beating-your-wife questions for which he couldn’t give a right answer. Had he  stuck to “not in the first term” or refused to answer, political opponents, and the media, would have turned no commitment to make no changes in a future term into accusations that there would be change.

That is unfortunate.

No matter how hard people have worked and how much tax they’ve paid, simply turning 65 isn’t a good reason to start giving them something back when there are so many more urgent calls on taxpayers’ funds.

Don’s suggestion of a gradual increase in the age of eligibility, with a choice of lower payments for earlier retirements and higher payments for later ones, has merit but that’s not a good enough reason to go back on a pre-election commitment.

3 Responses to Future-proofing pensions

  1. Sinner says:

    Don’s suggestion of a gradual increase in the age of eligibility, with a choice of lower payments for earlier retirements and higher payments for later ones, has merit but that’s not a good enough reason to go back on a pre-election commitment.

    The reason to “go back on a pre-election committment” is simply that we can’t afford any benefits, let alone the codger-dole”. I remember going to election meetings in the late 1980s (when McGillicudy was still contesting urban seats) and at least they were being absolutely clear they didn’t expect any government pension or support. Anyone under the age of 60 who expects government to provide super or anything for them is criminally stupid and politically ignorant. Anyone over the age of 60 who expects or expects to keep getting a pension is basically a thief.

    The correct – and only sustainable – policy decision is to terminate all benefits immediately. If the dole, DBP, WFF, sickness etc is stopped at the same time as the codger-dole (“super”) and schools & hospitals then they will have no grounds on which to complain.


  2. homepaddock says:

    “The correct – and only sustainable – policy decision is to terminate all benefits immediately.”

    Not sure if you tongue is in your cheek, Sinner.

    In case you’re serious, what about the people who, for reasons beyond their control, can’t look after themselves?

    You may not mind beggers in the street and other signs of social malaise that are typical in the third world, but I don’t think most New Zealanders would find it acceptable here.


  3. Andrei says:

    The people on the “codger dole” sinner my friend paid taxes during their working life to fund their predecessors on the “codger dole”.

    Money taken from their pay packets when they were in their prime. And money which if had not been taken may well have been set aside for retirement.

    When old age pensions were introduced the age of entitlement was set in such a manner that 50% of the population died before reaching it and from memory the average time someone was on it was about 3 years.

    Assumptions that no longer hold.

    The whole issue of supporting the elderly is one of human selfishness.

    In days of yore the family of the old and infirm did it and hence having a large number of children was of benefit.

    And those who had not reproduced for the often died in desperate poverty.

    Now many if not most families leave it up to the State and many do not not have children or not enough anyway to ensure a comfortable dotage.

    The whole pensions thing comes down to a values problem and alas because the baby boomer generation has not produced enough children however we tackle it poverty in old age is inevitable for many.


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