Superannuation dilemma

25 January 2012

The government has agreed to investigate United Future’s flexi-superannuation proposal - the idea that people are able to choose whether to take up superannuation at age 60 at a reduced rate or at a higher rate at some later age. It is good that changes to superannuation are on the table. But it is critical that discussion is not limited to just this flexibility.

The rate at which government spending had been growing during the 2000s is not sustainable and as a society we need to agree on a number of far-reaching policy changes to control this growth. This means having a close look at New Zealand Superannuation, as one of the big areas of government spending.

The number of people aged 65 and over will grow from 610,000 today to over 1.1 million in 2031. The cost of New Zealand Superannuation will balloon from 9 billion dollars a year to 20 billion dollars a year in today’s terms. That is $7,800 per person in the labour force, nearly twice the current bill. A bigger superannuation bill is not a problem in and of itself. It may even be affordable. But it does mean we need to find savings elsewhere to balance the budget. The obvious area for savings, because it is the single biggest ticket item, would be healthcare. On past trends, health expenditure is projected to grow by 12 billion dollars or more (in today’s money) by 2031.

If there are no changes to superannuation, the Treasury has estimated that growth in healthcare spending would need to be limited to 7 billion dollars by 2031 if government spending is to remain about 45% of GDP. The health budget would need to grow at half the pace it has in the past. This obviously has implications for access to healthcare services. We must ask ourselves if this is a trade-off we are willing to make. Relying on finding savings from healthcare is a risky strategy. International experience shows that making lasting changes to the growth in spending on healthcare is extremely difficult. The changes would need to be radical.

A far easier and more certain way would be to control the cost of superannuation. One approach would be to target eligibility, based on some form of means testing. While New Zealand is lauded for the simplicity of its universal system, it may need to be looked at. But if that is too radical or complex a change, there are two other, even simpler, options that ought to be considered. One of these options is to increase the age of eligibility to New Zealand Superannuation from 65 to, say, 67. Other countries have gone down this track, recognising ever-increasing healthy life expectancy.

People would need to be given time to adjust to such a policy change. If people were given 10 years to prepare, and a higher age of eligibility were introduced in 2022, it would reduce the number of eligible people by over 100,000 a year. This is equivalent to 2 billion dollars a year.  But, while helpful, it only shifts the budget pressure out by a few years; it does not change the rate of growth.

A more meaningful change would be to limit the growth in the amount people get paid. Currently the rate of New Zealand Superannuation cannot fall below 65% of the average wage. But this floor could be lowered to a more affordable level.

In the past, the rate was linked to the CPI. Linking superannuation to the CPI would ensure superannuitants’ current purchasing power was maintained. But relative purchasing power would not be. New Zealand Superannuation would provide a safety net, rather than a way to share in (or tax) the productivity gains of future generations, who will also be paying for the rising healthcare costs of superannuitants. Linking the rate to the CPI would reduce the superannuation bill by about 4 billion dollars per year, or 20%, from what it would otherwise be in 20 years’ time.  This is a much bigger impact than changing the age of eligibility. Longer term it would have an even more profound impact.  Doing both policies would save the government 6 billion dollars in 2031, or over $2,000 per person in the labour force. It is important we take the opportunity to discuss New Zealand Superannuation.

The discussion will not be easy, as there are some major questions of intergenerational fairness to be resolved. But New Zealand Superannuation cannot be treated as a holy cow. If we choose not to touch it, we are choosing to touch healthcare, education and other areas of government spending that are possibly more important for our long term wellbeing and prosperity. There is no free lunch.

Jean-Pierre de Raad is the Chief Executive of the New Zealand Institute of Economic Research.

An occasional column for the Dominion Post newspaper.

NZIER is an independent economic research and consultancy group.  Part of its responsibility as a non-profit Institute is to promote debate on New Zealand’s economic challenges.