No escape from growing super burden

Economists have changed the variables, writes BRIAN FALLOW, but the answer is the same.

Politicians grappling with what an ageing population means for the sustainability of New Zealand Superannuation sometimes take refuge in the idea that society is adaptable and changes will occur in the structure of the working population that will see us right.

The sort of changes they have in mind are an increase in the proportion of women who work, people retiring later, more immigration than we have been used to, or even a higher birthrate.

But research by Wellington economists Paul Callister and Dennis Rose suggests that such changes in the labour market can only mitigate the problem, not provide an escape from the dilemma of either lower superannuation entitlements or higher taxes.

Their modelling looks at the effects of changing, through plausible ranges, such variables as the birthrate, the immigration rate and the participation rate (the proportion of adults who are in the workforce).

"Basically, the message is none of it solves the problem," Mr Callister said.

For example, at the moment the ratio of workers to retired people is about 4.4 to one.

By 2051 the ratio will have fallen to 1.8 to one, assuming the central scenario used by the Super2000 taskforce of medium fertility and mortality, a workforce participation rate similar to the present and net immigration of 5000 a year.

A higher birthrate would help, but not much, lifting the ratio to two workers to one retiree.

A high participation rate or net immigration of 20,000 people a year only nudge the ratio up to 1.9 or 2.1 to one, respectively.

Even the combination of high fertility, high workforce participation and high immigration only improves the ratio to 2.3 workers per retiree, a far cry from today's 4.4.

Looking at other measures of the superannuation burden tells a similar story.

Mr Callister and Mr Rose measure superannuation payments against the yardstick of aggregate market income, that is, all the money people earn in wages and salaries, or from running their own business, or from investments.

On that basis, and with the central demographic assumptions, the cost is projected to more than double from 8.5 per cent now to 18.5 per cent by the middle of the century.

Again, adjusting the participation rate, birthrate and immigration rate within plausible ranges still leaves the 2051 figure in the 15.5 to 21.2 per cent range, way above where it is now.

The impact on the Government's budget is dramatic.

At present, personal income tax coming in exceeds transfers going out (superannuation and income-tested benefits) by the equivalent of 6.6 per cent of market income.

On the central scenario, 30 years from now all the income tax take will be needed to finance those transfer payments, and by 2051 there will be a net outflow equivalent to 3.1 per cent of market income.

Ramping up net immigration would reduce the net outflow to 1.3 per cent.

"Add in high fertility and the balance shifts to negative 0.3 per cent. Add in high labour force participation as well, and the balance improves to zero," say Mr Callister and Mr Rose in a paper to a conference on labour, employment and work in Wellington.

The paper is drawn from yet-to-be-published work they have done for the Ministry of Social Policy.

"If older people are to maintain reasonable relativity in income standards, this will require some combination of later retirement, greater reliance on investment income - the real value of which will depend on current output - or an increased flow of transfers through public pensions. These pressures suggest increases in participation rates."

Under the central scenario, there are likely to be as many people aged 55 to 59 in the labour force as there are people aged 20 to 24, whereas now there are only half as many.

"If labour shortages emerge, particularly among younger workers, it is likely that consideration will be given to encouraging higher levels of inward migration."

But Mr Callister says a lot of the countries that have been the source of immigrants in the past would face the same sort of demographic pressures and could well attract migrants from New Zealand.

"If we are going to have that inward migration they [the migrants] will basically have to be non-Europeans."

With the pressures from globalisation and technological change, "the need for upskilling and increased labour force participation reinforces the frequently acknowledged need to strengthen policies which assist disadvantaged groups, including Maori and Pacific Island peoples, to improve their skills and enhance their opportunities in the market."

But in the end, says Mr Callister, the options of raising the age of eligibility for NZ Superannuation, cutting the pension relative to the average wage, or targeting the entitlement, would have to be examined.