Brian Fallow: Super age alternatives need debate

Photo / The Aucklander

Let's ignore for a moment the craven irresponsibility of our political leaders in refusing to even talk about changing the entitlement parameters of New Zealand Superannuation.

Let's assume for the sake of argument that people are more open to the idea of a later age of eligibility than they give us credit for.

What sort of increase might we be talking about, and by when?

This issue has been usefully illuminated by Geoff Rashbrooke, the former Government Actuary who is now a senior associate at Victoria University's Institute of Policy Studies.

In a presentation to the IPS conference on requirement income and inter-generational equity last week he outlined the trade-off between the eligibility age and the tax burden on working people as the population ages.

Fairness between the generations is a slippery concept but one way of thinking about it would be to hold the amount available for pensions at a fixed proportion of labour income.

Let's start with what it costs today. If the cost of superannuation were met by a payroll tax it would be about $3000 per worker or 6 per cent of the average wage.

(True, NZ Superannuation is supported by the whole tax base and not by a dedicated tax on labour incomes, but given the global contestability of foreigners' savings it is unsafe to assume that imposing an ever-rising tax burden on their contribution to our economy is feasible. New Zealand retirement incomes are ultimately a cost New Zealanders face.)

If the scheme's entitlements remain unchanged, and assuming Statistics New Zealand's central scenario for demographic change, that 6 per cent will rise to 8 per cent (the equivalent of $4000 today) by the early 2020s, to 10 per cent by 2030 and to 12 per cent by mid-century.

And that is just the cost of the pension. It does not reflect the impact on health and aged-care costs.

What if we followed the Australians and pushed the age of eligibility up to 66 by 2018 and 67 by 2022?

That hauls the curve down a bit. But Rashbrooke's model still shows the cost reaching 8 per cent of the average wage by 2026 and 10 per cent 11 years after that.

If you wanted to hold the tax burden per worker where it is now, at the equivalent of $3000 today, the age of eligibility would have to keep rising, to 70 by 2024 and 75 by mid-century.

It's a fair bet the country would not eagerly embrace such a prospect.

So what about a compromise, a more gradual rise in the age accompanied by a progressive rise in the tax burden per worker to the equivalent of $4000 (or 8 per cent of the average wage) today over the next 25 years?

That would see the age of eligibility reach 66 by 2015, 67 by 2020 and 70 by 2040, remaining at 70 thereafter.

Naturally, an exercise like this comes with important caveats.

"It assumes increases in the number of workers, but there needs to be jobs for them and they need to be private sector jobs" Rashbrooke said. "An increase in the age of eligibility may not be associated with jobs for all who want them."

It would also, he acknowledges, have a disproportionate effect on lower socio-economic groups.

This is where Don Brash's flexibility proposal comes in.

"Raising the age of eligibility could be made politically more acceptable; if we were to allow a degree of flexibility regarding when the pension is actually taken. If the age of eligibility were 67, for example ... someone might choose to take the pension at, say, 65," Brash said in a speech last week.

In that case the amount would be would be adjusted downward on an actuarial basis, so that they would receive the same total amount if they lived for the normal expected span for someone their age, but spread over two more years. They could borrow some of their future superannuation entitlement, you might say.

Conversely if someone chose to defer receiving their super until say, 69 or 70, the weekly payment would be actuarially adjusted upward.

This would not, of course, affect the fiscal affordability of the scheme one way or another. But it might encourage greater labour force participation among older New Zealanders (with benefits to economic output and the tax base) without being as hard on those with physically demanding jobs as just raising the age of eligibility would be.

A possible drawback would be some loss of transparency. New Zealand Superannuation is a very simple scheme. Everyone gets the same amount from the same age and the rules about how that sum is automatically increased are straightforward.

Under Brash's model it would no longer be one-size-fits-all and people would have to trust those doing the actuarial calculations. But it would be an open process and it is in any case the norm for "Bismarckian" pension schemes elsewhere, where pensions are linked to people's contribution over their working lives.

The age of eligibility is not the only parameter of the scheme which might be adjusted.

However, the Shipley Government's tampering with indexation, shifting from the average wage to consumer price inflation, may well have contributed to the electoral defeat which promptly followed.

The other option is targeting the pension.

Auckland University's Susan St John told the IPS conference there needed to be more intra-generational sharing of the costs of superannuation, that is, requiring high-income, working, younger over-65-year-olds to contribute more to the cost of low-income, older, less healthy superannuitants.

This would also improve inter-generational equity, she said.

There has been a degree of targeting of super in the past. The surcharge which applied to other income between 1985 and 1998 caught, by its last year, 16 per cent of superannuitants and entirely cancelled out the national super of the top 5 per cent, St John said. It clawed back about 10 per cent of the cost of the scheme.

While the universal system we have had since then has been in place the top tax rate has fallen from 39 to 33 per cent (or 28 per cent for portfolio investment entities), so the overall system has become less progressive.

The question is whether we want super to be a universal benefit or to provide a basic income floor. If the latter, maybe there should be a separate tax scale for all other income for superannuitants that would abate away the value of the pension by some agreed income level, she said.

But Brash is surely right about how unpopular the surcharge was, especially given New Zealand's internationally unusual lack of any upfront tax incentive for retirement savings.

It was so deeply resented, he said, by those who felt they were being penalised for prudently making provision for their own retirement - often after paying relatively high income taxes during their working lives - that there were determined efforts to avoid paying it.

That brings us back to the age of eligibility as the most promising adjustment to make.

It will require agreement by both major parties. That will be hard enough to reach without the rash promise by the Prime Minister, to resign rather than change the entitlement side of super, getting in the way.