Guest Post: On the long-term costs of New Zealand Superannuation: more affordable now?

A guest post on Kiwiblog by Michael Littlewood:

As New Zealand’s population ages and, in particular, as the proportion of over-65s increases, the cost of New Zealand Superannuation (NZS) is rising. We know that and it doesn’t help us understand the issues to create headlines that catastrophise the expected costs.

The pensions payable in the future, public and private, will be claims on tomorrow’s economy, so the best way to express the expected cost of NZS is as a proportion of tomorrow’s economy. At present, this is probably best measured by the Gross Domestic Product (GDP). This is not a perfect measure, given the number of factors that bear on its calculation, particularly for long periods into the future. But it’s the best we have.

A catastrophiser will cite the billions of dollars of costs today and the even greater billions of dollars of costs tomorrow but that is misleading and matters much less than the ability of tomorrow’s economy to meet those claims.

Pensioners pay income tax on NZS so the government pays with one hand and collects with the other. Again, what matters to future voters is the net cost of pensions.

With that introduction, let’s look at what the Treasury thinks about the expected net cost of NZS. Since 2000, the Treasury has published estimates that put together all the known information about the drivers of the cost of NZS: number (and expected number) of pensioners, mortality expectations, expected growth of the national average wage and prices (those drive the annual calculation of the level of NZS) and all the assumptions that drive estimates of future growth.

The Treasury’s ‘New Zealand Superannuation Fund Contribution Rate Model’ (NZSF Model) works out contributions to the NZSF and expected future drawdowns. Those calculations are done twice a year and are archived here[1].

Given the headlines created recently by apparently dire, future projections, I was curious to see what the Treasury now thinks is the best estimate of the net cost of NZS in future decades.

The table uses the Budget Economic and Fiscal Update (BEFU) versions over the last 25 years.



Yes, over the last 25 years the current year’s cost of NZS has risen by 19% (0.7% a year) but over the same 25 years (2000-2025), the expected net cost of NZS in 2050 has actually fallen from 9.0% of GDP to 5.4% (down 40%).

NZS is expected to cost less, in real terms, in 2050, 2060 and 2070 than we expected 25 years ago? That sounds like a ‘good news’ story to me. The pattern of possible costs across the table is consistent; consistently downwards.

We know this is all based on a bunch of assumptions that have varied over the 25 years but, in each case, the estimate is the Treasury’s best contemporary guess about those future costs.

Focussing on just the 2025 numbers, the Treasury expects the net cost in 2070 to be about 2 percentage points of 2070’s GDP higher than today’s 4.4% (+45%).

So how come the real future cost seems to be falling over the last 25 years? NZS is the numerator in this equation; the denominator is GDP and that has grown more than the Treasury expected in the early 2000s and in subsequent years, due to a combination of increasing labour force participation rates and higher immigration numbers. That combination drives the reduction. For example, the 2000 model predicted the net cost of NZS in 2025 would be 5.3% of predicted GDP. In fact, it turned out to be just 4.4%, a reduction of 17% in real terms.

That’s why real, future economic growth is so important in this discussion. An actuarial colleague and I put a substantial submission together for the 2019 Retirement Commissioner’s Review. We called it Informing the 2019 Review – 133 questions that New Zealand needs answered[2]. Of nine key “reforms that really matter”, we ranked greater economic growth than we, or even the Treasury, expect as the #1 priority:

“Greater economic growth (than expected) should be central to discussions on every aspect of public policy, including retirement incomes. At the foot of every significant retirement or pension policy proposal should be the question: ‘How does this help New Zealand grow more than under current settings?’ Not all policy changes have to be about economic growth, but if we do not get that growth, we will not see material improvements in the standard of living of the population, including retirees.”

How do we judge whether NZS is/will be ‘affordable’ in 2070?

We could compare the cost of our pensions with those in other countries. International comparisons of public pension systems are difficult – the OECD tries to do that in its Pensions at a Glance 2024[3]. The net cost of government spending on public pensions across all OECD countries was an average 7.0% of GDP in 2020 (and will be higher now). And that doesn’t include the cost of favoured tax-treatment for private savings in all other countries. New Zealand’s $0.55 bn on KiwiSaver subsidies for 2026[4] is exceptionally modest in that regard.

So, New Zealand’s net 6.4% for NZS in 2070 (up from today’s 4.4%) looks modest in that context. But that doesn’t necessarily make it affordable.

We need to talk about NZS. The 2019 Submission already cited had something to say about that as well:

“New Zealand needs a research-led review of every aspect of NZS… New Zealand has never done such a review before. NZS is the best Tier 1 scheme in the world but it can undoubtedly be improved.”[5]

[1] Accessible at https://www.treasury.govt.nz/publications/archive-new-zealand-superannuation-fund-nzsf-contribution-rate-models
[2] Online at www.alt-review.com
[3] Accessible here: https://www.oecd.org/en/publications/pensions-at-a-glance-2023_678055dd-en.html
[4] Because of the 2025 Budget’s changes, the YE 2025 estimate of $1.06bn is expected to reduce to $0.55bn (0.12% of GDP) in the year to 30 June 2026 (Fiscal Strategy Model BEFU 2025).
[5] See Section 6 – ‘Framing a debate on every aspect of the NZS benefit design’: https://alt-review.com/section-6