Time to reflect on a greying NZ

Superannuitants' day in the sun comes at a rising cost. Photo / Greg Bowker

How best to cope with the long-term budgetary impact of an ageing population is something Treasury Secretary Gabriel Makhlouf is careful not to be drawn on.

Instead, he wants the public to reflect on the options and trade-offs available.

Last month the Treasury released its statement on the long-term fiscal position, backed by a stack of research papers, which projects the widening deficits and ultimately insupportable debt burden which would result over the next 50 years if tax is held at 29 per cent of gross domestic product (GDP) and government spending grows at historic rates.

By 2060, net government debt would be twice the size of the economy's output, compared with 26 per cent now.

The cost of servicing that debt, measured against the size of the economy, would be more than the Government now spends on health care and New Zealand Superannuation combined.

And those two big-ticket items would gobble up nearly two-thirds of the tax take.

So the statement sketches some of the policy choices available to get grappling hooks into that relentlessly rising debt line and haul it down to a sustainable level - which for the sake of argument it defines as 20 per cent of gross domestic product, the current target level for 2020.

In the case of NZ Super, the parameters which could be adjusted are well known: raise the age of eligibility, reduce the value of the pension (by indexing it to consumer price inflation, say, rather than wage inflation, or an average of the two), or some form of means testing.

"In many respects the debate on the age is more or less over," Makhlouf says.

Labour force participation rates for people over 65 continue to increase. "People are just choosing, because they are healthier, to keep on working. Increasingly, young people are recognising, I think, that at some point there will be a change and the question is how much notice people are given."

The statement makes it clear, though, that just raising the age of eligibility 65 to 67 does not solve the problem. More would be needed.

Means testing is complicated to apply in practice, it says, and is likely to introduce disincentives to work and save which the current universal entitlement avoids.

And the Shipley Government's plans to alter indexation were pre-empted by electoral defeat.

Health care costs are a more challenging problem, Makhlouf says.

If they continue to grow at historic rates they will increase from 6.8 per cent of GDP now to 10.8 per cent by 2060.

"One factor is the impact of ageing and the other is just technology."

As incomes have increased we have chosen to spend more on health care. At the same time, economic growth leads to higher wages across the economy, including the health sector, so that it can become more expensive over time just to maintain existing levels of services.

"This certainly is territory that has not been debated and needs to be," he says.

"The country could just choose to spend the money and find it from elsewhere. Or we could explore co-payments or whatever."

But there are limits on the extent to which taxes can be increased in an era of global mobility for individuals and businesses.

"You can't just rely on greater tax to solve these challenges."