NZ Super a matter of trade-offs

Professor Norman Gemmell says the discussion around whether to keep the NZ Superannuation age at 65 ahead of the election overlooks three important points.

private superannuation graph

Earlier this year, Prime Minister Bill English announced his government’s intention to raise the age of eligibility for New Zealand Superannuation (NZS) from 65 to 67 from 2037. Jacinda Ardern has pledged no increase under a Labour government she leads, so differences between the two parties on Super could hardly be starker.

John Key's similar pledge back in 2008 – to resign as PM rather than change NZS – was widely interpreted as a strategy to get elected by attracting a particular sizeable cohort of voters.

So has Ardern simply taken a smart political leaf out of the Key playbook? Or is there a good economic case for keeping, or changing, the status quo?

The big economic issues in this debate are whether keeping or changing the rules would be more inter-generationally fair and fiscally affordable.

Views on fairness are inherently subjective – centuries of philosophers have debated even a definition of fairness. So how we think economic resources such as pension income should be shared among different cohorts or generations of retirees and workers is likely to differ legitimately among voters.

Politicians and policy advisers should therefore begin by recognising there is no unique, objective answer to the question of what is the ‘fairest’ way to allocate and fund NZS across generations.

But that doesn’t mean there is no useful, objective information that can help voters make up their minds on what NZS option they prefer.

NZS is a pay-as-you-go system where tax paid by the current generation of workers largely funds pensions for the concurrent cohort of retirees. Fairness would seem to dictate each successive group of workers and pensioners should be entitled to similar pensions and make similar contributions to taxes. But deciding what is equitable between generations is especially complicated when, as in this case, the numbers in each generation differ.

Should fairness be based on fairness to each individual or fairness to the cohort as a whole? If the ratio of pensioners to workers is rising over time – the situation in most OECD countries – then treating the individuals identically over time means raising more taxes from later generations to fund a rising overall pension bill.

Alternatively, each new generation of taxpayers receives a lower level of NZS. Neither sounds very palatable but there is no uniquely ‘best’ way out of the dilemma.

In the run-up to this election, we have heard a lot from the party leaders about ‘my generation’ and the popular media debate on NZS has often focused on the alleged special favouring of the baby-boomer generation.

The baby boomers, it is claimed, can retire earlier than their children will be able to afford because of NZS and private savings, and have larger pension pots to live off in retirement than the next generation can expect.

Three important aspects to consider

But this ignores three important aspects to the issue.

Firstly, evidence from the Treasury as far back as 2006 pointed out that the rise in NZS expenditures due to ‘baby-boomer effects’ is a relatively small source of the anticipated effects of ageing on NZS costs. Most of the projected NZS cost increases over the next few decades (latest Treasury estimates suggest it will rise from under five percent of GDP now to eight percent by 2060) are due to health improvements over the last 60+ years that have reduced infant mortality and increased longevity. So it is a long-standing and ongoing phenomenon that is not tied to baby boomers.

Secondly, it is not enough to ask what is fiscally equitable across generations. For centuries, each succeeding generation has typically been better off economically than the previous one as per capita incomes rise over the long run. This has much to do with one generation’s saving, investing and innovating behaviour enabling the next generation to begin life with much higher living standards than their parents and to expect higher living standards over their lifetimes. This suggests a case for fiscally favouring current over future generations through higher pensions to help equalise life cycle living standards with their children.

Thirdly, whatever equity benchmark we choose, raising the age of Super now, or not, is fundamentally about what trade-offs we prefer. Either we accept some combination of higher taxes and less non-NZS public spending now so more tax revenues can be diverted to the status quo Super payments, or we raise Super eligibility, which reduces the future NZS bill, allowing future taxes to be lower or spending higher.

There is, of course, no single 'correct' answer to this question. But with a longer-living, rapidly-growing population of pensioners over the coming decades (indeed it has already started), maintaining an unchanged NZS age at 65 is likely to mean future generations receiving state pensions for almost as many years as they will have worked, especially if they spend more time in tertiary education before entering the workforce.

Is this really the balance we want in New Zealand?