The current superannuation system (and the wider welfare state) is dependent on the taxes of the working population, a portion of which it receives. This system is functional, provided the ratio of working people to retired people does not change dramatically.
However, New Zealand's birth rate has been declining since its peak in 1961. Stats NZ projects that people aged 65 and over will make up 26% of the population in 2060, compared to 16% in 2020 – an increase of two thirds. As the elderly population grows, it requires more tax to pay for superannuation from a shrinking working population, putting strain on the system.
The transfer of wealth between generations also happens in a second manner – through the healthcare system. People of retirement age are much more likely to need healthcare and to need it for longer. Currently, those over 65 use 42% of New Zealand’s public health services despite being only 16% of the population. Because of this, Treasury expects our ageing population to be the driving factor behind a 50% increase in the cost of government healthcare provision by 2060.
Neither of these would be as concerning an issue if productivity were increasing commensurately, expanding the nation’s overall wealth (and if NZ Super was indexed to inflation rather than wages). However, this is not the case, and it appears unlikely to happen in the near future. Statistics New Zealand measured national productivity as having grown at a dismal average of 0.6% per year over the last decade (compared with a healthier 1.9% annually the decade prior). We must play the cards we have been dealt.
New Zealand is left with two problems. The first is financial – members of the younger generations will end up footing a much larger welfare bill than their parents and grandparents. The second is political – as the retired population grows, they are likely to become more and more resistant to reforming the system they benefit from.
This situation challenges our sense of fairness. A key thread in the social fabric of Kiwi society is a tacit promise that one generation won’t willfully make the next worse off. It’s a sort of contract of equity between generations.
Social contracts like this do not exist in a void. They are shaped by context and enforced by policy decisions. The 1977 policy of the Muldoon government to introduce our current universal superannuation scheme was one such decision. So was the referendum in 1997 on the future of superannuation, which rejected a compulsory retirement saving scheme.
While the policy has remained largely unchanged since its introduction under Muldoon, its context has shifted. The ageing population will eventually impose an intolerable financial burden. We need a new approach that restores equity to the contract between generations before we reach the edge of the cliff.
New Zealand needs a new social contract. The generations being handed the short end of the stick under the current system have had no say in its design. They were not even born when Muldoon’s scheme was implemented, and the majority were not of voting age at the 1997 referendum. Yet they will pick up the bill. It is time for a new national discussion to reform our system for the next half-century.
Any new system must retain the better parts of the current system, namely the prioritisation of the dignity of our elderly, while ensuring that a new system will remain fair across generations. Unfortunately, there is no clear and easy way to achieve this.
Nevertheless, we need to begin this search for another method as a nation. Whether that be steadily increasing the age of eligibility, indexing NZ Super payments to inflation, preventing those who do not require it from accessing it, indexing eligibility for payments to life expectancy, making KiwiSaver mandatory, or some other method or combination. Our search for an answer must start now, before the demographic that fuels this issue entrenches it as a permanent feature of our society.
Max Salmon is a Research Intern at the New Zealand Initiative. He joins as a generalist, with interests in education, infrastructure, and energy. This article was first published HERE
The transfer of wealth between generations also happens in a second manner – through the healthcare system. People of retirement age are much more likely to need healthcare and to need it for longer. Currently, those over 65 use 42% of New Zealand’s public health services despite being only 16% of the population. Because of this, Treasury expects our ageing population to be the driving factor behind a 50% increase in the cost of government healthcare provision by 2060.
Neither of these would be as concerning an issue if productivity were increasing commensurately, expanding the nation’s overall wealth (and if NZ Super was indexed to inflation rather than wages). However, this is not the case, and it appears unlikely to happen in the near future. Statistics New Zealand measured national productivity as having grown at a dismal average of 0.6% per year over the last decade (compared with a healthier 1.9% annually the decade prior). We must play the cards we have been dealt.
New Zealand is left with two problems. The first is financial – members of the younger generations will end up footing a much larger welfare bill than their parents and grandparents. The second is political – as the retired population grows, they are likely to become more and more resistant to reforming the system they benefit from.
This situation challenges our sense of fairness. A key thread in the social fabric of Kiwi society is a tacit promise that one generation won’t willfully make the next worse off. It’s a sort of contract of equity between generations.
Social contracts like this do not exist in a void. They are shaped by context and enforced by policy decisions. The 1977 policy of the Muldoon government to introduce our current universal superannuation scheme was one such decision. So was the referendum in 1997 on the future of superannuation, which rejected a compulsory retirement saving scheme.
While the policy has remained largely unchanged since its introduction under Muldoon, its context has shifted. The ageing population will eventually impose an intolerable financial burden. We need a new approach that restores equity to the contract between generations before we reach the edge of the cliff.
New Zealand needs a new social contract. The generations being handed the short end of the stick under the current system have had no say in its design. They were not even born when Muldoon’s scheme was implemented, and the majority were not of voting age at the 1997 referendum. Yet they will pick up the bill. It is time for a new national discussion to reform our system for the next half-century.
Any new system must retain the better parts of the current system, namely the prioritisation of the dignity of our elderly, while ensuring that a new system will remain fair across generations. Unfortunately, there is no clear and easy way to achieve this.
Nevertheless, we need to begin this search for another method as a nation. Whether that be steadily increasing the age of eligibility, indexing NZ Super payments to inflation, preventing those who do not require it from accessing it, indexing eligibility for payments to life expectancy, making KiwiSaver mandatory, or some other method or combination. Our search for an answer must start now, before the demographic that fuels this issue entrenches it as a permanent feature of our society.
Max Salmon is a Research Intern at the New Zealand Initiative. He joins as a generalist, with interests in education, infrastructure, and energy. This article was first published HERE
9 comments:
The only point I would make is that those very same people who receive superannuation invariably have to pay for their own care when they are no longer able to live independently-not a cheap exercise.
A worthy discussion Max. incrementally increasing the age of superannuation early is a no brainer and should be instigated this Parliament .
Public consultation only needs to be miniscule such is the obvious requirement if you have any thought for future generations .
The funding required to build resilience fund has to come from government savings and 4 or 5 ministeries have to be gone . My No 1 choice is the Climate Change ministry because the promises made by NZ to unnamed entities was ludicrous and misconduct in the extreme.
Lets start a fresh. Set a side the money I've already paid towards it until I'm 65. I started work in 1978.
Then let's start a new scheme, no problem.
Interesting that you only pointed to declining birth rates as the driver for the younger demographic being burdened more than past generations. But you overlooked the immigration rates that are swelling the overall population trends. Migrants are taxpayers too.
Roger Douglas has proposed an elegant and practical solution, which can be read on the NZCPR website.
Good discussion but missing some vital points.
1. It all assumes the population is stagnant and doesn’t grow. More immigration or births will increase the working age population.
2. The super problem could be eliminated entirely if we followed a scheme similar to Australia. Super contributions are not taxed and you can salary sacrifice to increase your super contribution. If you can retire with$ 3.0million in your retirement fund you can afford private healthcare and not require govt super.
However, the myopic policies of NZ and its tax, tax envy means the status quo remains.
The whole taxing and super debate never gets discussed properly because it’s all ends up about taxing more. How about a debate where people can retire with enough so they don’t need govt assistance.
Thank you! Yes a conversation that deperately needs to be had.
When Super was introduced, '65' meant something very different than it does now. These days, many 65 year olds don't feel old at all, and are extremely healthy and active. My parents, in their 70s, live a very active lifestyle and due of course to no longer needing to work are arguably healthier than me - working long hours and under stress from every side including financial.
I don't begrudge them a relaxing retirement! but the reality is they do not need Super payments. They own a freehold (new) house and recently sold an investment proporty they owned. They have two cars, and regularly go on holidays. They want for nothing. They simply do not need to be given extra taxpayer $$$.
It would be nice if we could give money to all retirees whether they 'need' it or not. But we cannot continue to do this as it is unsustainable.
Please, please, please - the Goverment must come up with a solution and the people - yes even the current superannuitants - must be willing to vote to support it. The future of our country depends on it.
So, the heading says 'the young stand to suffer..' and there's mention of 'fair' and 'fairness'. Taking 'suffer' first; the young will indeed greatly suffer (and not just financially) later in life if they follow the leftist agenda of smaller families (or no kids at all) which is a major factor in the average-aging of the population. We had heaps of kids and put them through private education as the state education was so useless, paying thousands of dollars a year just in GST on school fees. Does Max perhaps think that is 'fair'? And BTW where has all of that money gone? Narrow views on this without addressing the major social issue of the decline of the nuclear family are simply missing the point.
Kiwi saver should be replaced by a compulsory super scheme.
Just like we had back when. Those who remember, Muldoon shut it down and refunded money to those who had contributed to it.
Countries who have super schemes invest capital in various countries around the world.
Ring fencing contributions is a must, don't let governments near them apart from an overseeing role.
If a scheme is not compulsory.
Post a Comment