Time to Talk About Super

VIEWS FROM OUTSIDE THE APIARY: IAN FLETCHER

Hanging over the head of all New Zealanders is the unavoidable fact that we have an ageing population forcing rising superannuation costs. So why are so many politicians ignoring it? Ian Fletcher sets the table for a much-needed “mature” discussion.

By Ian Fletcher

On 7 November we elect a Parliament, which will go on to elect a government. What we won’t do is elect a different age profile for the population. We’re more or less stuck with that. That fact sits beneath every promise (or hope) of lower taxes, better health care, more defence, infrastructure and public services. It also means that New Zealand Superannuation has grown from easily affordable 50 years ago to one of the the biggest items of public expenditure. We are dancing around the case for reform to limit its growth, and have more money for other things. Politicians fail us when they avoid facing up to this issue, and its happening again.

It’s time for politicians to realise the significance of the superannuation problem facing New Zealand says Ian Fletcher, and having a healthy, mature conversation on the matter would be “a real cultural asset”.

Superannuation is certainly a good social institution: simple, known in advance, individual, and protective against hardship in old age. Universality avoids stigma and complexity. We’ve had an old age pension in some form since 1894, and I see that commitment as a real sign of civilisation we can be proud of. But a once-good policy can become unaffordable when the population, labour market and life expectancy change around it. Here we are. The facts are changing and we must think again.

The arithmetic is not ideology. In the 1960s there were seven New Zealanders aged 15 to 64 (paying taxes) for every person over 65. There are now four; by 2065, Treasury projects two. Most tax is paid during working life. NZ Super is paid from general taxation from age 65, and its annual rate rises with average wages. It is not a pot of money with each recipient’s name on it. It is a promise that tomorrow’s taxpayers must meet from current revenue.

Treasury puts NZ Super spending at 5.1 per cent of GDP now, compared with 3.9 per cent in 2006, and projects around 8 per cent by 2065 under unchanged policy. The line will not be perfectly smooth: migration, wages, employment and longevity will move it around. But its direction is plain. Raising the age helps; it does not solve the whole problem.

The Super Fund is useful. Treasury expects its withdrawals to shave only about half a percentage point of GDP from NZ Super costs after 2055. It pre-funds part of the bill; it does not cancel it. Nor does immigration make the issue vanish. New arrivals grow older, while population growth adds demands for homes, transport, schools and health services.

This is about opportunity cost – the choices we give up when we choose to spend money in this way. Every permanent claim on national income leaves less room for something else: a tax cut, cancer medicine, teachers, policing, flood protection, defence, debt reduction, or the next response to an earthquake, pandemic or financial shock. These are real constraints on what future governments may do.

It’s important not to catastrophise: we can afford to keep National Super as it is. But, if we do, we will need a combination of higher taxes, higher borrowing and cuts elsewhere to pay for it. Again, this is just arithmetic. If that’s our choice after a proper debate, fine. My point is that we’re not having the debate as we should. Having the debate now would allow for planned changes, time to adjust, and a social and personal version of the no-surprises policy politicians are so keen on. The clouds are gathering: Ministers are already anxious about our credit rating. This is an early canary-in-the-mine sign of these pressures.

Pension plans and retirement savings are not just a New Zealand issue, they are forcing rising debt and higher taxes in many countries.

Any debate should start with the proposition that NZ Super should prevent hardship. Changes should be gradual, and widely supported. I think the real debate is over need versus entitlement. Both routes are open to us as a country, but if we are to avoid the more debt/higher taxes/cuts future, we need to manage the expenditure. Otherwise we leave younger taxpayers to finance it through higher taxes, worse services or more debt. They may not welcome that.

There are several paths, but no painless options. A gradual lift in eligibility age, announced well in advance and linked to longevity, shares the adjustment across generations. Treasury says a 20-year warning materially reduces harm because people can change work and saving plans. But any age change needs strong support for people unable to work and a credible pathway for physically demanding occupations.

Changing indexation is another option: raise NZ Super with inflation rather than average wages. This manages costs but means a relative decline in the pension over time. Means testing targets public money more tightly, but brings complexity and can punish saving or continuing to work; even Treasury says it would have to abate surprisingly modest private incomes to make large savings.

A sensible package need not be punitive. It could grandfather people close to retirement, give long notice to everyone else, lift KiwiSaver saving over time, retain a strong poverty-prevention floor, and reform the age or indexation rule on a published timetable. The mix is political. But the key point is that refusing to decide is also a decision. It prioritises today’s entitlement over tomorrow’s capacity to choose. It’s a tax on the future.

The wider point is that governments everywhere are under this pressure. Older populations need more support, and tax bases just don’t keep up. That’s why debt is rising, along with taxes, in so many countries: this debate is being repeated around the world. This is an opportunity for us to get ahead of the curve, and underpin continued stability for both our society and our economy into the future.

If we can face up to these relatively modest changes, we will keep taxes and debt lower than otherwise, and have more left over for other things. And, perhaps most importantly, we will have learned how to have a mature conversation about long term issues within our otherwise relentlessly short-term democracy. That would be a real cultural asset, and a lesson for many others. The alternative, denial and avoidance, will foreclose the choices the next generation will need.

Ian Fletcher is a former head of New Zealand’s security agency, the GCSB, chief executive of the UK Patents Office, free trade negotiator with the European Commission and biosecurity CE for the Queensland government. These days he is a commercial flower grower in the Wairarapa and consultant to the apiculture industry with NZ Beekeeping Inc.