Don Brash: Super scheme cannot continue in present form

This week's report of the Financial Services Council makes it clear that New Zealand Superannuation will not survive in its present form.

With life expectancy rising by two years every decade, taxpayers of the future will be faced with an enormous increase in their obligations unless there is some change. Currently, for every person over 65, there are more than five people in the workforce; within 30 years, that figure will be just 2.5 people.

The Retirement Commissioner recommended that we raise the age of eligibility for New Zealand Super to 67 by 2033, starting in 2020. Recent polls suggest that a majority of the public support that, and some believe that the increase should start before 2020. The Labour Party Finance spokesman is on record as believing that the age of eligibility should rise to at least 67, and the Act Party's view is similar.

Clearly, there must be a change. Would it be feasible to reduce the generosity of New Zealand Super instead of increasing the age of eligibility? At the moment, New Zealand Super is one of the most generous taxpayer-funded retirement schemes in the world and, according to the OECD, poverty among those over 65 is lower in New Zealand than in almost any other developed country.

But New Zealand Super guarantees only a pretty basic living standard, and even that depends on the superannuitant owning a debt-free home on retirement. The scope to reduce the level of New Zealand Super payments is almost certainly quite small if significant hardship among the elderly is to be avoided.

Maybe New Zealand Super could be means-tested? Two problems: first, both Labour and National tried to means-test New Zealand Super in the 80s and 90s, by means of the surcharge, and both finally abandoned the effort because of the furiously hostile political reaction. Because it was widely perceived as unfair - "I've paid taxes all my life, so I'm entitled to New Zealand Super" - there was also widespread avoidance of the surcharge.

And second, any form of means test does, for at least some people, constitute a strong disincentive to save: "Why save if all it means is that I lose my right to New Zealand Super?" Which leaves the option of increasing the age of eligibility, as countries all over the developed world are doing.

Many people will also advocate some form of compulsory saving. Those calls, often made by those with a vested interest in having more funds under management, should be strongly resisted. To begin with, having more private sector savings only helps solve the future fiscal problem if New Zealand Super is means-tested and, as past experience shows, New Zealanders are very reluctant to contemplate that.

Even more serious, to oblige New Zealanders to pay into a managed fund instead of, say, paying off a home mortgage is totally counter to their interest. I've never come across a managed fund which consistently earns returns, after tax and fees, which come close to the rate of interest on the average home mortgage.

In my view, there are two things which are key to enabling older New Zealanders to maintain a reasonable standard of living in retirement.

First, we should maintain New Zealand Super as a universal benefit at its present level relative to the average wage (for a married couple, at 66 per cent of the average wage), but recognise that the age of eligibility must go up. In 2010, the Australians announced the age of eligibility there would start increasing in 2016, and reach 67 by 2023.

If we announced a change this year, we could start increasing the age of eligibility in, say, 2018, and reach 67 by 2025. Thereafter, the age of eligibility should be indexed to life expectancy.

Secondly, it is imperative that we make housing more affordable in New Zealand. One of the reasons why most retired New Zealanders currently enjoy a reasonable standard of living is that most of them own debt-free homes. But owning a debt-free home has become well beyond the reach of most younger New Zealanders.

How do we make homes more affordable, so that the next generation of New Zealanders has a chance to arrive at retirement owning a debt-free home? The Productivity Commission was in no doubt that the most important factor in making homes more affordable would be to free up the supply of residential land - making sections vastly cheaper and enabling builders to gain economies of scale by building several houses at a time.

With fewer than five million people spread across an area greater than the United Kingdom, it is extraordinary that New Zealanders are expected to pay upwards of $200,000 for 500 square metres of dirt - equivalent to $4 million per hectare - even in quite distant suburbs.

Doing that would have a double bonus. Not only would many more New Zealanders be able to afford to buy their own homes, but we would be much more inclined to save from our current income if we could no longer rely on a continuing escalation of house prices to make us rich - surely a major factor in our poor savings performance over the last 20 years.

The result? A fiscally sustainable New Zealand Super scheme, younger New Zealanders having a good chance of owning a debt-free home by retirement, and more private sector savings to supplement retirement income.

Dr Don Brash is a former Reserve Bank governor and leader of the National and Act parties.