Why 20 year olds should be very afraid

Ever wondered what your income or taxes or health care or pensions or debt levels might look like in 2050?

That's what Treasury are currently doing, but with spreadsheets and assumptions and lots of fancy maths, rather than musing on a Big Wednesday ticket on a Tuesday night.

At least every 4 years Treasury is required by the Public Finance Act to project the government's fiscal position out over the long term, which means around 40 to 50 years. Playing with these sorts of models and making some big assumptions is an awful lot of fun for economists. But it's not something that only economists should do or care about.

Politicians and voters should watch every time they make decisions about taxes, government spending and long term economic policy. If they don't, they condemn themselves to periodic bouts of crisis management and shock therapy.

The last time Treasury played with its models and pumped out the numbers in 2006 it presented a sobering view, even though 2006 seemed like a benign period. Back then both our economy and the government's budget seemed in a strong position. We were nearing the end of the strongest period of economic growth in modern economic history. The budget was forecast to be in surplus until 2030.

But even then Treasury painted a dire picture of a wall of spending on health care and pensions for baby-boomers that would generate massive deficits after 2030 and boost our government debt to GDP ratio to 100 per cent of GDP by 2050 from just over 20 per cent in 2010.

Even then, the outlook was for some very tough choices to be made at some stage in the next decade. Should we lift the pension age to reflect longer lifespans? Should we increase taxes on those few Generation Xers and Yers who are still working by then? Should we ration access to healthcare in some way?

Should we means-test the pension? Should we set up 'death panels' to decide how much a life is worth and where precious health dollars should be spent? These are tough questions that politicians usually put off until the last minute, preferring to wait for a crisis to allow them the political headroom to 'hurt' voters with the necessary medicine.

Fast-forward 3 years and Treasury is now putting the finishing touches on its latest long term outlook. Now the current situation is dire and the outlook for 2050 is bleak. It is expected to publish the new outlook in late October or early November. It decided to bring this one forward a few months to ensure those in the Tax Working Group and the 2025 Taskforce can put some robust assumptions into their reform ideas.

The debt to GDP ratio is likely to balloon out to well over 200 per cent of GDP by 2050, and that's using assumptions for productivity, credit ratings and interest rates based on recent experience. A debt level that high would of course force our credit rating lower and our interest rates up. A 300 per cent debt to GDP ratio is possible.

This is obviously unsustainable with the current policies.

Those 20-30 year olds graduating into the workforce now can look forward to working much longer than their parents and paying much higher taxes than their parents. That's unless their parents choose now to increase the pensionable age, reduce the value of the pension from its current 66 per cent of median wages, start rationing healthcare and save a lot more for their retirement.

Right now 20 years are too busy having fun to worry about the future. But they will eventually be spending most of their future engaged in an inter-generational tussle for wealth.

We'll see whether the baby-boomers in charge now have the foresight and wisdom to reduce their own standards of living now to ensure their children don't spend their retirement years mired in debt.

John Key has made a poor start by promising not to extend the retirement age, cut the pension or impose a capital gains tax. Who is he governing for? The blue rinse set at National Party functions or New Zealand's future generations?

 

Bernard Hickey

 

 

Photo: Mark Mitchell