This is another in my series of letters to Generations X and Y about their financial outlooks. In the first one here I advised departure. In this one below I say read Treasury's Long Term fiscal outlook to see the scale of the tax increases/and or debts likely to crush you from 2020 onwards. Happy reading!
Dear Generations X and Y,
I've warned before about the decisions being made by the baby-boomers in power now that will impoverish you in years to come if you do nothing. One solution is to leave. Another is to stay and fight.
Don't believe me? Here's the nation's official forecasting forecasting exactly what will happen if you they (baby-boomers) do nothing and you do nothing. The do nothing option includes leaving the retirement age at 65, leaving the universal super at 66 per cent of the average wage, doing nothing to rein in the growth of government spending and doing nothing to change the tax structure to improve our productivity growth of 1.5 per cent per year.
Here's the 10 key points to take away from Treasury's 75 page report , the speech from Treasury Secretary John Whitehead and the data pack.
1. By 2050 the number of people over 65 will almost triple to 1.35 million, meaning there will be 42 pensioners for every 100 people of working age, up from 19 now. Spending on superannuation would double as a percentage of GDP. Given our current 'pay as you go' super scheme, Generations X and Y will have to pay most of their incomes in tax to pay for the health and pensions of the baby-boomers.
2. Government debt to GDP will grow from 10 per cent now to 223 per cent by 2050. That would trigger credit rating downgrades, much higher interest rates, cuts in public services and essentially New Zealand's bankruptcy. That would be borne particularly by those in debt, who are most likely to be home owners and former students have had to borrow heavily to get into the housing market.
3. The interest costs on this public debt alone would be equal to 13 per cent of GDP or more than is currently spent on health. That's before any interest costs on private debt. This will mean New Zealand would essentially be controlled by foreign creditors or their agents. The best example of this is Ireland, where the IMF has directed it to sack public servants, raise taxes and cut health spending. Unemployment is now well over 10 per cent there.
4. The average wage earner will be earning over the top tax rate of NZ$70,000 by 2023. Anyone stupid enough by then to still to be paying PAYE tax and not have children will shoulder most of the tax burden. Half of families pay no tax now because of Working for Families or other benefits. The top 10 per cent of income earners now pay 40 per cent of income tax. Without a change in the structure of our tax system, more people will invest in property and other assets that make loses to avoid paying PAYE.
5. Currently property investors own NZ$200 billion worth of property and declare losses worth NZ$500 million a year, costing at least NZ$150 million in lost tax revenue. Losses declared by Loss Attributing Qualifying Companies (LAQCs) often used by property investors, tripled to NZ$2.3 billion between 2003 and 2008. Essentially, anyone clever enough to avoid paying PAYE by 2050 will be doing it, leaving childless people without property to pay most of the income tax.
6.Treasury is suggesting ways to control health spending that include user pays and a Pharmac-style authority to buy medical equipment.
7. Treasury is suggesting ways to control justice spending that include letting prisoners out earlier and keeping more people on home detention and doing community service.
8. Treasury is suggesting various forms of bulk funding and user pays for education to control spending growth.
9. Almost 300,000 people are now on the unemployment benefit, the DPB, the Sickness Benefit or the Invalid's Benefit. That compares with a total of 344,000 on these benefits 10 years ago. There are now 522,000 receiving the Superannuation Benefit. Over 384,000 families now receive Working for Families. That means about 1.2 million New Zealanders now receive benefits. At the end of September there were 1.29 million New Zealanders in full time jobs, many of whom will also be receiving benefits. At a rough estimate, just over half a million New Zealanders on PAYE are paying most of the costs of 1.2 million New Zealanders on benefits.
10. The current situation is unsustainable without a later retirement age, lower pensions, healthcare rationing, userpays education, higher taxes, higher interest rates and an emigration surge.
So what are you doing about it? Why is John Key so popular when he chooses (so far) to do nothing to address these issues? When are generations X and Y going to revolt publicly? Or will they just choose the obvious way out: a one way ticket to Australia?
Bernard Hickey
Pictured: Treasury secretary John Whitehead. Photo / Mark Mitchell.
A new letter to Generations X and Y
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