Brian Fallow: Making pensioners poorer isn't a Super idea

Linking NZ Super to prices -- rather than wages -- is a recipe for making elderly Kiwis poorer. Photo / Getty Images

OPINION:

Memo to the Treasury: engineering poverty among elderly people is not an acceptable way of addressing the long-term risk of unsustainable government debt.

The suggestion in the draft Long-Term Fiscal Statement, released this week, that New Zealand Superannuation could be indexed to consumer price inflation rather than the average wage is an idea they should drive from their minds with blows and curses.

Its inclusion in this document is only, and barely, defensible as an illustration of what they mean by the "significant" changes needed if an ageing population, combined with stunted productivity, is not to deliver inexorably widening deficits and an ultimately insupportable level of public debt over the next 40 years.

Course corrections will be needed to either, or both, of our notions of what an acceptable tax burden is or to what services and transfer payments New Zealanders expect from the state in return. Of course.

Driven by a declining birth rate and rising life expectancy, the share of the population over 65 is projected to climb from 16 per cent in 2020 to 26 per cent in 40 years' time. We are invited to freak out over the prospect that that would push the cost of NZS from 5 per cent of GDP to 7.6 per cent by 2061 (or 6.3 per cent net of tax).

But, to calibrate the scale, the same document also tells us that the average cost of public pensions across the OECD is already over 8 per cent of GDP.

The relatively light fiscal burden of the state pension reflects the fact that "the focus of NZS is on social protection rather than income replacement".

"Maintaining standards of living into retirement is left to individuals, who can supplement NZS by continuing to work, relying on family support or increasing voluntary savings," the statement airily proclaims. They make it sound so easy.

This glosses over a couple of things. One is that the level of superannuation has long assumed that by the time people retire, they will at last own the roof over their heads.
That is increasingly not the case, and rates of home ownership are likely to continue to decline as a legacy of the horror show that is the current housing market.

And even if superannuitants do own their homes outright, local body rates and insurance both tend to rise significantly faster than the CPI.

The other problem is that we have had since the 1980s – when Sir Roger Douglas introduced it – an exceptionally harsh tax treatment of private retirement savings: taxed-taxed-exempt. When he was Finance Minister, Sir Michael Cullen described that as the worst example of intergenerational theft he had seen. It remains the law of the land.

We have a tax system that for a generation now has told New Zealanders: if you want to provide for your old age, don't save money, borrow money. If you save they will tax you every step of the way. Better to borrow as much as you can and use it to bid up the price of housing.

Arguably one consequence of the eye-watering cost of houses these days is a drop in the fertility rate to 1.65 babies per woman, from the 1.9 assumed in the previous 2016 Long-Term Fiscal Statement.

New Zealand Superannuation payments currently range from $364 to $506 a week before tax - hardly princely sums. Photo / 123RF

New Zealand Superannuation payments currently range from $364 to $506 a week before tax – hardly princely sums. The high end of the range is for single superannuitants living alone.

The Treasury's long-term fiscal model calculates that if the level of payments were to increase in line with the CPI, assumed to be 2 per cent a year, rather than the average wage, that would cut about a third of the projected increase in the fiscal cost of NZS by 2061.

But it would mean that the rate for a married couple, net of tax, would fall from 66 per cent of the average wage now to below 50 per cent in the 2050s.

Put another way, it would replicate the cumulative immiseration of beneficiary households created by decades of indexing welfare benefits to the CPI.

There is a reason why the Government has moved, belatedly, to index the main benefits to wages and that the main statutory measures of child poverty are relative to median incomes .

Unless the rising tide lifts all boats, the people in those it doesn't are entitled to a sinking, left-behind feeling.

"Unless people respond to the change [to CPI indexation] by voluntarily building up more savings for their own retirement, this approach would be likely to undermine the effectiveness of the present system at preventing poverty in old age and enabling older New Zealanders to share in increases in national income which their labour and investment have helped to create," the draft statement admits.

The other measure it considers for reducing the cost of NZS – raising the age of eligibility from 65 to 67 – would have a more modest fiscal impact. Once in place by, say, 2030, it would shave around 0.7 per cent of GDP off the future cost, but the cost would still continue to rise, driven by the demographics, at a rate parallel to the status quo, just that bit lower.

The statement acknowledges that increasing the age of eligibility would be hard on Māori and Pacific peoples, who have lower life expectancies than the rest of the population.

The New Zealand Superannuation Fund, intended to reduce the burden on future taxpayers, is projected to cover only 6.6 per cent of the total net-of-tax cost of NZS by 2060. Even though the fund's managers have outperformed their benchmark reference portfolio most years, the fund has been hobbled by the fact that for half of its life so far the previous National Government stopped contributing to it.

The draft statement barely mentions the third obvious way of limiting future increases in the cost of NZS: means-testing.

It does, however, briefly cite one possible means of targeting superannuation proposed by Auckland University's Susan St John and Claire Dale. It would apply a "basic income" approach to NZS so that it is paid as a non-taxable grant regardless of other gross income from work or investment. But that other gross income pensioners earned would be subject to an alternative tax regime with higher than usual rates.

That sounds like a more sensible idea than the statement's suggestion of a permanent real freeze on NZS payments.