This is the third in a set of posts on savings and pensions issues from Peter Harris. The other two posts in the series are Good policy process – the case of New Zealand Superannuation and Why compulsory savings should not be on the agenda.The recent Retirement Commission/ Institute of Policy Studies workshop on retirement income and intergenerational equity reached three roughly uncontested conclusions, at least in respect to the New Zealand Superannuation scheme.
It is very effective at minimising poverty among the elderly. (Just how effective is contestable, but “the best in the world” is basically true). It is relatively cheap by international standards. It is not particularly effective in maintaining in retirement the incomes people earned when working. So we know it is effective and efficient. It also protects the retired from inflation and longevity risk. (It is “the gold standard” as one international participant put it).
We should celebrate, not lament, the fact that it does not replicate in retirement all of the market inequities of working life. That should never be a role for the government. Countries that try to do that typically impose some form of compulsion on savings, and compensate with tax concessions on said savings. The net effect is no discernable reduction in pensioner poverty, a significant increase in the fiscal costs of retirement income policy, and a fair bit of transfer of savings into tax advantaged or legally obligatory vehicles, rather than an increase in savings levels. The policy becomes less efficient, and, if it ends up displacing some or all of universal tax funded pensions, less effective and more inequitable. (Advocates of compulsory KiwiSaver please note).
If there is an efficient and effective programme in place, it would seem to me that there has to be a high standard of evidence needed to erode it. The “evidence” tended to revolve around demographic projections suggesting that in 2060, there would be four people 65+ for every ten of working age, compared with only two now. That is a rhetorically powerful, but analytically bankrupt, comparison.
If this “ratio” is definitive as an indicator of fiscal sustainability, we have a problem that is of an order of magnitude greater than whether NZS is affordable. There will be fewer people of working age for every hospital patient, school pupil, university student, police officer, prison inmate, kilometre of road needed to be built, and so on. Admittedly, with most of those, the numbers that taxpayers need to support is not increasing at the same time, except for health, where dependency might well be increasing at an even greater rate.
The fact is that it is GDP that drives the tax base, and the tax base that determines the affordability of any and everything.
Changes in the demographic structure have to impact on GDP growth to be at all relevant to the debate, and then to a material extent. All we had at the workshop was a much less scary suggestion that changes in the demographic structure would reduce trend GDP growth from 3 to 2 percent per annum. But how robust is this projection?
My (admittedly sketchy) understanding of the Treasury model that reaches such conclusions is that it derives GDP growth trend changes through a projection of hours worked and an assumed rate of productivity growth. If that is wrong, I make no apology. My point is that if the public is being asked to buy into major shifts in (effective and efficient!) fundamental life cycle income supports, it should be based on more than “trust Treasury”.
A fifty year projection of trends is not just heroic, its nuts. Think back fifty years. Ignoring the EU, globalisation, China etc etc, consider just two technological changes that impacted trends since then: the pill and the computer. They fundamentally shifted birth and labour force participation rates and productivity. Policy based on projections of 1960s demographic, participation and productivity trends would have produced a (with hindsight) laughable prescription.
Even now, labour force participation rates for the 65+ age group show a steeply rising trend. We need a better understanding and more effective monitoring of factors that are driving the tax base, and changes in the demographic structure might well be one such. But it is manifestly not the only one, and almost certainly not the most important one.
My suggestion? Establish a very high evidential threshold for trashing key public welfare programmes. The more effective those programmes are judged to be, the higher the threshold needs to be set. Monitor and adjust in line with evidence, not theoretical or speculative projections. Consider all options, not just a cut in the programme. With NZS, we are talking about a 3-point-something of GDP increase in the cost of sustaining it. Cracking down on rampant and systemic tax avoidance, pre-funding, and ultimately a small increase in some tax rates seem to be much less socially disruptive options.
Right now, the case for fundamental changes to New Zealand Superannuation, like the war in Iraq, has not been made.
—
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.
“Compulsory Kiwisaver” is bubbling up on the agenda, the latest being a call for it at the recent stock exchange AGM. It is easy to see why the NZX wants it. Not only does it add liquidity to the capital market, but somebody else (the government) does all the hard work – and carries all the cost – in raising the capital, collecting it, distributing it to investment agencies and regulating providers. The quintessential “free lunch”!
