Last week I attended a Retirement Income Policy and Intergenerational Equity conference
, which was set up by Victoria University’s Institute of Policy Studies and the Retirement Commissioner to contribute to the Commissioner’s three-yearly review of retirement income policies.
As I’ve previously stated, I think that it’s important for the progressive movement to actively engage with the debate around the costs of an ageing population and whether current arrangements are sustainable, so I felt it would be worth using this week’s column to report some of the key themes from this conference.
There were two prestigious overseas academics there as keynote speakers, Kent Weaver from the US and Peter Whiteford from Australia (and formerly of the OECD). It was striking how both of them spoke highly of New Zealand’s model of superannuation, which is unusual for being universal rather than means-tested and paid at a flat-rate rather than linked to earnings, as tends to be the case with the contributory (insurance-style) schemes that are the norm overseas.
Whiteford, who also impressed me at the Welfare Working Group Forum last month, was particularly good at illustrating the positive features of our system, which is both progressive (as shown in the slide reproduced below) and cost-effective.
In some ways, though, the ‘central’ presentation that the rest of the conference revolved around was that of Gabriel Makhlouf, Deputy Chief Executive of the Treasury, who set out in the greatest detail the problem of affordability. (The speech-notes from his presentation are available on the Treasury website.)
Makhlouf explained the Treasury’s long-term projections about population and costs, which were used in the Long-Term Fiscal Statement document that caused a stir when it was released late last year (see for instance Keith Ng’s take). Based on these projections, government spending on New Zealand Superannuation would go up from about 4.4% of GDP to around 8% by 2050 (or to put it another way, from 13% to 22% of core Crown spending).
This, along with other pressures, is set to significantly weaken the government’s finances. The good news here (according to Makhlouf) is that the story now isn’t nearly as dire as it was in the 2009 Fiscal Statement — it’s only as bad as it was in the previous Fiscal Statement in 2006. But that’s still pretty bad, as the following slide indicates:
Treasury’s analysis wasn’t unquestioningly accepted by other presenters. Ganesh Nana from BERL stressed that their model was (as Makhlouf had been careful to state) just a projection based on certain assumptions, and did not claim to be a forecast of what necessarily would happen.
One illustration that Nana gave of this was labour force participation of the 65+ age group. This has been rising rapidly over many years but Treasury assumes that it will decline again in the future. Nana showed (see slide below) how a continuation of current trends would have quite different implications (with flow-ons for economic growth and government revenue).
On the other hand, a Treasury person in the audience argued that their falling participation assumption was driven by ageing within the 65+ population (e.g. in the future a greater proportion of those in the 65+ group will be aged 85 and over).
Much of the rest of the conference was devoted to discussing various options (or combinations of options) to address the fiscal problem posed by the Treasury.
The option that seemed to crop up most frequently was raising the age of entitlement. This approach was set out in the greatest detail by Geoff Rashbrooke of the IPS (formerly a Ministry of Social Development official involved in the design of Kiwisaver, and also a member of the Windy City Strugglers blues band).
He argued that the real cost of superannuation to the working population could be maintained at current levels if entitlement was progressively lifted to age 75:
Rashbrooke also showed other cost profiles based on more modest entitlement age increases (67, 70).
Makhlouf had provided the rationale for an increase: “In 1938, for example, when NZ introduced a universal pension, a 65-year-old could expect to live to 78 on average. By 1977, when today’s NZ Superannuation was essentially created (but with a take-up age of 60), a 65-year-old would live on average until 80. That life expectancy has now reached 85 and will rise to 89 for a 65-year-old in 2060.”
But there was also quite a bit of discussion at the conference about the fact that the 65+ age-group was a diverse population, and was perhaps becoming moreso. Many people reaching the age of eligibility are much healthier and able to keep working than their predecessors a generation or so ago, but others are not. And there may be a socioeconomic basis to this, with those in manual labouring jobs more likely to fall into the latter group.
A second solution was outlined by Susan St John of Auckland University’s Retirement Policy and Research Centre (and also well-known for her involvement with the Child Poverty Action Group). This was to restore some form of targeting to Superannuation payments, perhaps like the Surcharge abolished in 1998 (but better designed).
The third option mentioned by Makhlouf was reducing the rate of Superannuation over time (either by indexing it to inflation rather than wages or by dropping the wage ratio it was indexed to), but this received little serious discussion at the conference.
There was one other possibility that Makhlouf mentioned:
raising tax a little at first, but more assertively through time so that the tax-to-GDP ratio is eventually lifted by a little over 2 percentage points, would likely be enough to put a halt to projections for net debt to indefinitely track higher.
Such a move would amount to an across-the-board personal tax rise of 3.5 percentage points. Or, alternatively, the same amount of revenue could be raised with GST alone by lifting the GST rate by 4.2 percentage points. But a very strong reason for not going down that route is that significantly higher taxes would further lower the economy’s speed limit.
It is worth stressing that this last claim is entirely ideological. Yet the possibility of addressing the affordability of superannuation partially or entirely through tax increases seems to have been written entirely out of the debate.
Nevertheless, this option remains available — the question is whether we as a community are willing to choose it. (Peter Harris made a similar point in a guest-post about this topic.) This seems to me to be a crucial insight about the whole debate, and one that was recognised on Nine to Noon’s politics slot yesterday where both Andrew Campbell (“from the left”) and Matthew Hooten (“from the right”) seemed to agree it was a question of which choice we wanted to make (rather than being a case of TINA – ‘there is no alternative’).
Another key insight is that the fiscal challenges of an ageing population are not limited to superannuation. The rising costs of health and age-related care were also raised intermittently during the conference. Peter Whiteford noted that, in both Australia and the US, healthcare is a much bigger issue than superannuation. It also strikes me as one where less preparatory work has been done, at least in New Zealand: there is no Cullen Fund for health, and it does not appear that any equivalent to the options for managing superannuation costs discussed at this conference has been developed.
Your comments on any of the issues raised by an ageing population or on the proposed solutions are very welcome. In addition, I’ve published two guest-posts so far by economist Peter Harris, in defence of aspects of the current model, and I’d be interested in publishing further guest-posts, on either side of the argument. If you’ve got something to say (or know somebody else who does), then send an email and let us know.