There is a disturbing tendency to evaluate government policies and programmes in terms of how much government spending they involve, often in relation to a potentially volatile comparator like GDP. The Brash Taskforce was the worst offender on this front, but similar sentiments pervade recent reports from the Treasury, the IMF, the World Bank and the Business Roundtable. Policy prescriptions derived from this “standard” reflect poor policy process and are based on almost zero real analysis.
A standard victim of this shallow analysis is the state funded New Zealand Superannuation scheme.
“Paying a generous pension to everyone turning 65…. does not seem to fit very well with a serious focus on lifting material living standards…..Other Western countries have state pensions of one form or another. Those schemes are typically quite a bit less generous…than New Zealand’s…..the relatively favoured position of the elderly in New Zealand is fairly firmly established.” etc etc
(all of those quotes are from the Brash Taskforce, page 90).
Having asserted the “generosity” of the scheme, the prescription is obvious: scale it back to “reasonable” or some other acceptable standard.
But is the analysis sound? The key here is the concept of the “state”, in this case in relation to “state pensions”. Economics is simply about how a given set of resources are used, when there are options for using them in different ways. “The state” as an economic agent can tax and spend and clearly impact the form of resource use. But it can do much more: passing laws that dictate what individuals and firms have to do with a set portion of their incomes; putting obligations on other layers of statutory authority like local government and so on. It is the combination of these exercises of statutory authority that defines the role of the state.
Even then, that must be located in its proper context. For example, the level of state pensions needs to be related to average life expectancies: for different groups, and over time. A state pension is more or less generous depending on if it is taxed or not. It also matters what that pension has to cover: how many other services are provided free or at heavily subsidised rates to those above a certain age. While most pensions are indexed, it makes a great deal of difference to the value of those schemes whether they are indexed to price, or average wage movements.
A comprehensive survey of all of these dimensions of “state pensions” in OECD countries has been carried out by a Munich based research team on behalf of the OECD.
Admittedly this is a bit dated (2007), but the essence of the analytical approach remains valid. The report makes the very key observation that it is not sufficient to simply judge pensions policy in fiscal terms: social sustainability is also a crucial consideration: especially in relation to pensioner poverty.
Taking selective measures from that report almost defeats its very point: we really should look at measures comprehensively. However, constraints on length require me to do just that: this is more of a taste of what proper analysis should traverse.
The report shows that workers on average earnings in OECD countries can expect their post-tax pension to be about 70% of their earnings after tax. The countries with the lowest net replacement rates tend to be those which have just basic pension schemes. New Zealand’s is the fifth lowest in the OECD at 42%. That is a bit above Ireland’s (39%) and about the same as for the UK. The United States have slightly higher net replacement rates of around 52%.
A comparison with Australia is interesting. Because NZS is the only mandatory part of our state pension scheme, it delivers 100% of retirement income. In Australia, the mandatory employer contribution means that only 46% of their retirement incomes come from the comparable element. A consequence, however, is that even if our scheme is far less generous, it is also more equitable.
In Australia, a person on half of the average wage will get 84% of that (net) in retirement, not much above 81% for the New Zealand equivalent. A person on the average wage would get 56% in Australia, 42% here. On twice the average wage the Aussie gets a 41% replacement rate through the mandatory state pension system: compared to23% here.
Michael Cullen used to say that basic income security in retirement was the least that the citizens should expect from their governments in a developed economy: but it was also the most they should expect. The state should not aim to replicate in retirement incomes earned during working life (for both equity and efficiency reasons).
“Pension wealth – the present value of the future stream of pension payments – is the most comprehensive indicator of pension promises. It takes into account the level at which pensions are paid, the age at which people become eligible to receive a pension, people’s life expectancy and how pensions are adjusted after retirement to reflect growth in wages or prices.”
Pension wealth in New Zealand is 6.1 years for men and 7.1 years for women, compared to 8.1 and 9.4 years for the respective OECD averages. In Australia they are 7.3 and 8.4.
“Generous?” On what measure?!
By any standard, New Zealand Superannuation is affordable and sustainable. A programme that costs at peak no more than 10% of GDP is both. The legitimate question is whether that is the priority that the citizens want. Debate that by all means, and debate how it is to be funded, but please, as a matter of analytical rigour, do not prejudice the path of that debate by making the assertion that our scheme is “generous”.
Peter Harris is an economist who specialises in public policy, the labour market, and primary industry issues. He has been Economist for the Council of Trade Unions (CTU) and economic adviser to Dr Michael Cullen. Peter was also chair of the Savings Product Working Group, whose report was the founding document for what evolved into the KiwiSaver scheme. Further biographical details can be found here.