Brian Fallow: Super at age 65? Don't bet on it

We need to get used to the idea that the age of eligibility for superannuation will go up.

Countries a lot richer have adopted such a policy. In the United States the age of eligibility for Social Security has been increased from 65 to 66. It is due to rise to 67 by 2022.

The Rudd Government in last month's Budget announced a gradual rise to 67 over the next 15 years in the minimum age for Australia's pension.

Our Government killed off the partial pre-funding of super last week, though it has yet to give it a decent burial and has so far only trundled it into the morgue.

It talks of an 11-year contribution holiday. Well, 11 years is not a vacation. It's unemployment.

Today's Government cannot bind a future one, and as the Finance Minister, Bill English, acknowledged to a post-Budget business breakfast last Friday, come the day when surpluses return there will be plenty of competition over how to use them, from increased spending and tax cuts to debt reduction, as well as the superannuation fund.

Yet the Government continues to insist there is no need to re-examine the entitlement parameters of New Zealand Superannuation.

Prime Minister John Key has promised to resign if superannuation were to be cut.

On Tuesday he told the House "my cast-iron commitment has always been that the Government will maintain payments [for a couple] at a minimum of 66 per cent of the after-tax average wage and that people will continue to be eligible for superannuation when they reach the age of 65."

The next Tui ad is probably already at the printers.

The case for looking again at the age of entitlement is not so much financial and fiscal, however, as political and ethical. It is about inter-generational burden-sharing and fairness.

But first let's look at the arithmetic.

It does not make a great deal of difference fiscally whether the Government borrows money and maintains the required contributions to the NZ Superannuation Fund, or gives itself a contribution holiday.

Either way an obligation is imposed on future taxpayers which they would not otherwise have, and a year ago would not have expected.

If contributions are suspended, as forecast, for 11 years the level of Government debt will be $20 billion lower by 2020 that it otherwise would have been. It will have saved about $6 billion or $7 billion in interest payments, depending on what bond yield you assume. Not a trifling sum.

It comes at a cost, however.

There is the opportunity cost of what that $20 billion, wisely invested, might have earned over and above the Government's cost of capital. This can only be guessed at, and the events of the past year remind us that there are downside risks.

But using the Treasury's estimated return of 8.65 per cent before tax, the difference by 2020 would be $2 billion or $3 billion.

Then there is the fact that as the law stands, when, or if, contributions are resumed they would need to be $1.2 billion a year or more higher than if there had been no holiday.

Even so it would be three years later than before - 2030 - until the fund starts bearing any of the cost of super payments.

The contribution it makes to the cost of super payments post-2030 would be lower as well. That is because by 2020 the fund will be only half what it would have been, and even with catch-up contributions over the following decade it would be about 30 per cent lower by 2030 than it would have been if things had been left as they were.

The burden on the taxpayers of the day will be correspondingly higher.

At this point the Government and its defenders say, "Ah, but the fund was only ever going to defray a small part of the cost of super. The Treasury now reckons that by 2050 the fund will cover 8 per cent of the cost of super payments, instead of 11 per cent if there had been no contribution holiday. The difference is immaterial."

The fund, they argue, was predicated on there being perpetual, structural fiscal surpluses sufficient to cover the contribution required to smooth the increase in the cost of super as a percentage of GDP.

But the surpluses are no longer there and there is no point in borrowing to replace them.

Okay. But the fund was not just a tax-smoothing exercise.

It was also a mechanism by which baby-boomers would contribute during peak earning and taxpaying years to the future cost of their super.

It is that feature of the scheme which has been hollowed out, at the expense of the less numerous generation which succeeds them.

To insist that this will make no difference to the latter's ability and willingness to pay even more towards baby-boomers' pensions defies credibility.

After all they will also face higher health costs as the population ages. They are more likely to be on the loser end of the rampant house price inflation of recent years, with correspondingly heavy mortgages.

The phrase "last straw" comes to mind.

If baby-boomers are not going to contribute financially to the cost of their pensions, they can instead reduce the burden by accepting a later age of eligibility.

While successive cohorts of parliamentarians have played political football with retirement income policy, the only constant has been increasing longevity.

Since the mid-1970s life expectancy has increased by nine years for males and six years, eight months for females. At 65 a man can expect to live for another 18 years, a woman for 20 and a half.

It has taken a severe recession to relieve chronic shortages of labour, especially skilled labour. One person in seven over 65 has a job and in the March quarter 60 to 64-year-olds were the only age group among whom employment rose.

It is not hard to understand why. The destruction of wealth on housing and financial markets globally over the past year has been immense and New Zealand is not immune. Household savings rates remain negative.

For all these reasons an increase in the age of eligibility for superannuation makes sense.

By contrast, messing about with the link to the average wage or the universality of entitlement is unappealing.

Per person the pension is only a third of the average wage, which itself is nothing to write home about. And home-ownership rates among the retired are falling.

Likewise the option of means testing was in effect pre-empted by Sir Roger Douglas in the 1980s when he introduced the taxed-taxed-exempt model for the taxation of private retirement savings, under which savings are made out of after-tax income, the return on those savings is taxed and only the final payout is exempt.

Means testing would turn that into a taxed-taxed-taxed model, egregiously punitive by any standard.

These issues need to be debated. It is not good enough for the Government to pretend otherwise, just because the Prime Minister does not want tobreak two major promises in the same year.