Super: It's time to talk

Superannuation consultant Michael Littlewood and university economist Dr Susan St John. Photo / Richard Robinson

At the age of 26, Callum Eloff already has a devoted partner, a gorgeous young son and a large student loan. Like most people his age he's still renting, and despite the current property slump, doesn't expect to be buying a house any time soon.

Yet he's fairly confident he'll be financially fit in his old age.

"I want to do lots of travelling, so hopefully by then I'll have a few investments. I'm already in KiwiSaver, so I definitely won't just be relying on New Zealand Super," he muses.

Such is the optimism of youth. Not that you could exactly describe Eloff as an optimist. Like many 20-somethings, the IT worker is not particularly impressed with the economic legacy older New Zealanders have bequeathed him.

His generation, he notes, are not only having to spend a much greater portion of their income on a house they can call their own, they are also having to contribute to the cost of their own education, and are being encouraged to save for their own retirement.

Okay, so they're not having to hand over 66 per cent of their incomes in tax either, but Eloff is nevertheless planning to move overseas at some point, convinced the much higher salaries his mates are still enjoying in London will be the answer to his money problems, in the short term at least.

At this stage he doesn't expect to stay away forever, and for that reason today's baby boomers should be grateful. Because, boy, are we going to need his taxes.

As a journalist, I feel duty-bound to disclose my personal interest in Eloff's earning potential.

I have recently turned 43, which by some definitions makes me the very last of New Zealand's baby boomers. It has been estimated that by the time I am eligible to collect NZ Super, possibly in 2031, there will be one superannuitant for every three other people in this country - up from one for every seven other people at present.

In other words - as we have all been warned for many years now - the number of superannuitants will roughly double in this country over the next few decades. Meanwhile, the proportion of people working and paying taxes will dramatically shrink.

Despite the advent of KiwiSaver and what has become known as the Cullen Fund, superannuation then, as it is now, is likely to be largely a pay-as-you-go scheme - in other words, it is our children, not ourselves, who will be paying for our pensions.

Despite the insistence from politicians and some academics that there is no need to panic about this potential demographic doomsday, I have to admit I am just a tiny bit nervous. And if I were Ellof, I'd be slightly worried too.

The NZ Superannuation Fund, set up by former Labour Finance Minister Michael Cullen in 2001 to help smooth the future cost of superannuation, was expected to begin contributing to super payments from 2027. That is now likely to be around 2031, after

the decision by National to suspend contributions. It also means the fund is now expected to contribute just 18 per cent of the increase in super expenditure by 2050, instead of the 24 per cent that was originally envisaged.

If you say it quickly, that doesn't sound much, but in nominal terms that gap adds up to something like $38 billion in 2031, and $58 billion in 2050, according to Treasury's latest projections. And that assumes the fund itself is not scrapped in the meantime.

Labour MPs claim National has dug itself into a deep hole on the issue. "And that was silly, because they didn't need to dig that hole," one MP told me.

But Labour can hardly talk. Cullen thought he was being clever and visionary by setting up KiwiSaver and the NZ Super Fund. But National never bought into the vision, and has wasted no time severely pruning both schemes.

Even a cursory glance at the sorry history of superannuation in this country shows it has frequently been treated as a political tug-of-war - with pensioners caught in the middle and those about to retire jeering and cheering from the sidelines. For a while it looked as if some sort of truce might finally have been reached. But once again, it seems, the process has been politicised.

MPs, of course, need not fear their own retirement - their scheme is extraordinarily generous, subsidising contributions by up to 24 per cent of their salaries.

But to be fair, politicians usually act in what they believe to be their own electoral best interests. If voters thump them every time they make an unpopular but necessary decision, surely we have only ourselves to blame if they're terrified to have a serious chat with us about our so-called golden years.

Investment specialist Jonathan Eriksen was asked by Treasury to do the first independent review of the NZ Super Fund in 2004. As an actuary, and someone who advises other governments and multinationals on retirement savings policy, he also has a good understanding of the demographic issues.

He insists there is no reason to panic.

The Cullen Fund was designed to be able to withstand a contribution holiday "for quite a considerable period", he says. The legislation simply requires that more is tipped in later to make up for that, and provides a formula.

"That's exactly what's happened. Where the confusion has arisen is that Bill English has expressed it as a policy point that they're not going to re-commence contributions until there's a Budget surplus. Treasury estimate that won't occur for at least 11 years, but Treasury don't know what they're talking about."

What he means is that, in his view, Treasury is being overly, and understandably, cautious. Eriksen's own guess is that we will be producing fiscal surpluses again in five to 10 years.

"The whole point is you've got over $10 billion already, which is a good start towards paying a few pensions for the over-65s."

In any case, why should today's taxpayers be forced to fund their own pension payments as well as their parents' payments? he asks.

But what about the missing billions by 2031? "Well, you just raise taxes," he replies.

Uh-huh. It has to be said that this is a similar answer that others, such as accountant Jeff Todd and economist Susan St John, also give when asked why there is no need to panic. Eriksen is determined to see the glass half full, however.

Once you take into account KiwiSaver, the Cullen Fund and the current NZ Super scheme, New Zealand has one of the best retirement savings systems in the world, he says. The only country that is any better off is possibly Singapore, he suggests. So we should all calm down.

Australia's system is too complicated and has the behavioural aspects wrong, he says. The British pension is too low, America's social security system is "just about bust" and France, Germany and other countries simply aren't collecting enough tax for their pensions to be sustainable. Italy, Japan and Spain, all of which have large numbers of retired people, are already "out the back door".

"In the very big picture, compared with other countries, we're looking good. The key in New Zealand is we've got a young population comparatively, although it's ageing like everyone else's, but we've also just started to have a lot more babies, and so we're actually going to have more workers coming through to replace [the older ones]. That's only happened in the last year or two."

While Eriksen doesn't believe there are compelling fiscal reasons to reconsider the age of entitlement for NZ Super, it might actually be a good idea for an entirely different reason, he says.

Life expectancy is improving partly because working improves most people's health, he says. Therefore, he would personally like to see debate on whether we should raise the age to 70.

Like others, Erisken would like to see any such change take place over a 20-year period. In Australia, the age is to be lifted to 67 over a five-year period, which is far too fast, he says.

"If you started thinking about it in five years' time, you'd still be fine, as long as you did something in the next three to five years after that. But if you started looking at it in 10 years' time, and stuffed around as we have for the last 30 years, we're gone."

Otago University public health professor Tony Blakely agrees there is no reason for panic. But he would still like to see "considered debate".

Blakely admits he's no expert on superannuation, but has been getting himself up to speed on the issue. It helps, he believes, that he's not one of the usual suspects.

According to Blakely, no one is prepared to predict what life expectancy is likely to be in the future, as there are simply too many variables. But the overall trend is clear, he says: over the past 60 years, average life expectancy has continued to rise at a rate of about two to three years each decade.

Although many famous demographers have expected that global trend to eventually slow, or even plateau, it hasn't happened yet.

Blakely is convinced more Kiwis will be collecting a pension for longer if the current entitlement age of 65 is not raised.

That age, after all, was first set in 1898, when the average life expectancy for a Kiwi male was just 54 (it is now 78). "That said, there is nothing sacrosanct about the age of 65. That's a key point."

There are, of course, complicating factors such as what sort of health our future 90-year-olds can look forward to. And the fact that particular groups, such as Maori men, still tend to live much shorter lives than others. Because the type of work you do is also a factor, says Blakely, it might mean that we also need to boost the invalid's benefit and make it available for those who are in no condition to continue to work, but are not yet eligible for a pension.

"A perfect way to do it would be to know exactly what everyone's remaining life expectancy is going to be based on some blood test, but that's never going to happen, so we have to use demographic criteria, and I think it would be very difficult to set a different retirement age for different people."

Blakely agrees that, overall, the evidence appears to show that working longer actually improves your health, rather than destroys it, although there is debate over which is the chicken and which is the egg.

"It's quite complex, but certainly overall life expectancy is likely to increase, in my view. And it's up to the media and people like us to keep driving that debate."

It's probably fair to assume that the bureaucrats have also been doing a bit of back-seat driving. A Treasury paper from 2000, which is one of the few on recent retirement policy to have been made public, certainly made the same point Blakely makes.

"While the desire for stability in retirement income policy precludes ad hoc changes in entitlements, measured change is inevitable as the New Zealand economy and society evolve," it suggested.

Wigram MP Jim Anderton has claimed that in the early 1990s, Treasury wanted to raise the age of entitlement to 72.

So far, politicians have given every indication they would rather that debate crashed into a very large tree. But the problem is, the longer you let that debate idle, the more likely it is to overheat.

Labour politicians admit they were surprised the public was not more upset when they first mooted raising the age of entitlement back in 1990, over a 20-year period. When National actually did so, but only gave those close to retirement a couple of years to adjust, those affected were understandably furious.

And it is not just NZ Super that would be affected if the age of entitlement went up again. Many people seem to think they will be able to withdraw their savings from KiwiSaver once they reach the age of 65. In fact, the trigger is the age of entitlement for NZ Super - meaning that quite a few people would have to wait even longer to get their KiwiSaver money if the super age were raised.

Retirement policy expert Michael Littlewood has made no secret of his view that Labour is equally to blame for the current uncertainty, because it failed to debate the sustainability of NZ Super when it launched KiwiSaver and the Cullen Fund. Its reaction to National's decision to suspend payments to the NZ Super Fund has been "just plain mischievous", he believes.

He is also concerned there is draft legislation currently before Parliament concerning the portability of NZ Super that should really be considered as part of a wider debate.

The problem, he acknowledges, is that the pits of Parliament is not the appropriate place to argue such issues. "They're scared witless. They're like rabbits in the headlights," he suggests.

Littlewood was part of the Todd Taskforce, an independent inquiry into superannuation chaired by accountant Jeff Todd in the early 1990s. The experience was heartening, he says - most people saw reason on the issue once it was explained to them in rational and unemotional terms.

"Once everybody calmed down we had quite a good discussion, and when the report came out at the end of 1992 it had a good reaction and it led, incredibly, to the [Multi-party] Accord which was far beyond any of our imaginations. What that tells me is that we again need to put this in the hands of someone who is not involved in the day-to-day dirty business of politics."

Littlewood credits Todd with the hard work behind the scenes that led to the Accord, and that same process is needed now, he believes.

While Treasury Secretary John Whitehead seems to be fulfilling at least part of that role at present, softening up the public for a possible increase in GST and maybe a capital gains tax, something much more comprehensive is needed, says Littlewood.

"All of the political parties need to take part in it - a royal commission if you like - but then that body needs to keep working on the issues, and follow them through."

Another obvious solution would be to boost the Office of the Retirement Commissioner to give it more teeth, he suggests.

Economist Susan St John, who together with Littlewood runs Auckland University's retirement policy and research centre, agrees that "considerable leadership" is required.

St John would like to see a wider-ranging review of the tax system and NZ Super than National seems to have in mind.

In particular, we need to consider whether we are having our cake and eating it too, by giving wealthy people too many opportunities, through Portfolio Investment Entities and other tools, to disguise their incomes in order to pay less tax on their superannuation payments, she believes.

"One of the things that I think is missing from the debate is that we as a country have opted to pay a universal pension to everyone under a quite generous 10-year residence requirement. You don't have to have a contributory record, so women are extremely well treated - it's a wonderful system. But I think there is an issue that won't go away, and that is that countries that have universal payments are countries that have progressive taxation... We, however, have progressively undermined that 'progressivity' because we've had this ad hoc, ill-considered policymaking in the retirement savings area without looking at how everything is integrated."

Retirement Commissioner Diana Crossan is keen to take on the responsibility of chairing such a debate.

As a result of the Accord, it was agreed there would be six-yearly reviews of retirement income policy. Their frequency has since been increased to one every three years.

In her last report, in 2007, Crossan questioned whether the country could afford the generous incentives built in to KiwiSaver, and bemoaned the fact that it would create two classes of retirees: comfortable KiwiSavers, and struggling non-KiwiSavers, some of whom (like parents who stay at home to raise their children) can hardly be blamed for their inability to make the most of the scheme.

The report also called for a debate over the future affordability of NZ Super, and noted there was considerable uncertainty about life expectancy which could yet push the bill even higher.

Possible options, it suggested, included raising taxes, increasing the residency qualification period, and reducing the rate. The most palatable option, she suggested, was to raise the age of entitlement by up to two years, as is already the case in the US, Ireland and Norway, and will soon be the case in Britain, Germany, and Denmark.

Crossan recommended Treasury report by the end of 2008 on the necessity, feasibility and implications of such options. "That work should start now, so that decisions can be made in time for a long-notice period to be given to those affected by any adjustment," she urged.

Since then, National has scrapped some of the incentives that made KiwiSaver a no-brainer for most people, to make it more affordable. But both Labour and National have pretended to be deaf on the issue of NZ Super.

They have both ruled out raising the age, and Prime Minister John Key has even staked his own job on it, despite being given the perfect excuse when Australia announced in its own Budget this year that it also plans to raise the age to 67.

Crossan can't help wondering what the politicians know that she doesn't.

She insists National's decision to suspend contributions to the Cullen Fund is, in fact, a red herring. Given the global recession, it's possible a different government would have made a similar decision, she says. In any case, the Cullen Fund was only ever going to be a "very, very small" part of the bigger picture about how much, and when, we pay for NZ Super, she argues.

She also concedes that there may, in fact, be no need to do anything much. At present, about 4 per cent of our GDP is spent on NZ Super. At the peak of the population bulge, around 2050, it is expected to gobble up about 9 per cent of GDP (before tax). But some countries are already spending 12 per cent, and some might have to allocate up to 25 per cent in the future.

New Zealanders probably don't realise how lucky we are to have such a unique, simple, and equitable scheme, which is envied by almost every other country, says Crossan. We can also be thankful that in New Zealand, as elsewhere, other big-ticket items - such as education - will inevitably fall as the baby boomers and their children age. And the health budget may not need to be as big as we once feared.

"Some people have said to me, who I respect, that actually we will be okay. But I'd like to see [the evidence of] that," she harrumphs.

Until then, her own instincts tell her that we may regret doing nothing at all. "My guess is we will have to do something. We will have to have a serious conversation about it."

Treasury has told Crossan the report she requested by the end of last year will be out by the end of this month. It has been delayed so the Ministry of Social Development can also contribute.

The Government's response to that report will be crucial, she believes.

Coincidentally, perhaps, she is due to report to Finance Minister Bill English and Social Development Minister Paula Bennett by "mid-2009" on the progress of her previous recommendations.

It is, she agrees, a very tricky issue for politicians.

"It's a hard one. It's very hard. How do you have this conversation without looking like you're going to change the rules of the game?"

However, Crossan is adamant we don't need another taskforce. Instead, she suggests, the next three-yearly review she is due to complete next year could be the definitive word on the subject, for now anyway. It would even be possible to include issues such as tax in its terms of reference, if that's what the Government wanted.

Her own office has sufficient resources to do that work, so there is no point bringing in another Jeff Todd, she insists.

"If they don't want to do it, they can just ignore it. But if they announce somebody else, that shows they want to take it seriously - so why not just take seriously what's already there?"

And if they do ignore it?

"Then I have to, in my role, say that we need that to be forthcoming, and say it loudly, I guess, because otherwise we'll continue to have these kinds of conversations we've had over the past 20 years ad nauseam."

There is another scenario other than raising the age of entitlement, of course, and that is raising taxes, cutting spending, or some sort of means testing.

Given all the muttering from employers and others in the business sector that KiwiSaver should be made compulsory, some wonder whether National would prefer to go down the means-testing route.

It has, after all, always been a little hard to argue that multimillionaires are just as entitled as anyone else to collect their fortnightly pension payment.

Compulsory saving and means testing go hand in hand because, it is argued, without compulsion no one would save for their retirement if they thought it was going to disadvantage them once they quit work.

Debate in Australia over the raising of the entitlement age has been partly dampened because the pension there, unlike here, is already income- and asset-tested. Also, it is employers who fund the entire cost of Australia's compulsory workplace savings scheme.

Susan St John, for one, wouldn't be surprised if National decided to float the possibility of means testing. "That would certainly be disastrous," she suggests.

Raising the issue could even tempt Winston Peters out of retirement - and that thought terrifies most current MPs.

"Politicians have all got stung on this issue so badly," one former MP told me. "Under MMP, someone would grab it, and Winston would be out of his box straight away. He's only got to get half a per cent on what he got on election night and he's back there, and it would be his number one issue."

There is one thing, of course, all of us can be absolutely certain about: none of us is getting any younger. And as a force at the ballot box, the baby boomers are only going to get bigger.

Winston, of course, knows this. But perhaps he will decide that retirement is not so bad, after all, and leave the rest of us to work it out for ourselves.

Forever changing

1898: Asset- and income-tested Old Age Pension introduced from age 65.

1915: Tax incentives introduced for private super schemes.

1939: Two-tier scheme introduced from age 60: an income- and asset-tested Age Benefit, or a universal superannuation payment.

1960: Asset test for Age Benefit dropped.

1975: Labour introduces compulsory super scheme for employees and employers.

1976: National replaces compulsory scheme with taxable National Superannuation from age 60, with no income or asset tests. Pension for a couple, before tax, to equal 80 per cent of gross ordinary-time wage.

1979: Formula changed; couples now to receive a net pension worth 80 per cent of average net ordinary-time wage.

1985: Labour introduces tax surcharge on other income.

1988: Tax incentives dropped for private super schemes.

1989: Rate for a couple dropped to 65 per cent of average after-tax wage.

1990: Rate for single superannuitants rises from 60 to 65 per cent of married rate.

1990-91: National signals age of entitlement to rise from 60 to 65 between 1992 and 2001; links rate with prices rather than wages; increases tax surcharge, lowers the income exemption.

1992: Todd Taskforce rejects compulsory super and tax incentives, and paves the way for political consensus on super policy.

1993: Multi-party Accord on NZ Superannuation, with agreed minimum rate for a couple to be 65 per cent of average wage and a new Retirement Commissioner.

1997: Referendum overwhelmingly rejects a compulsory super scheme.

1998: NZ First-National coalition abolishes tax surcharge.

1999: National sets up Super Taskforce.

2000: Labour-Alliance coalition scraps taskforce.

2001: Labour sets up NZ Superannuation Fund, to help fund future payments.

2007: Labour introduces voluntary private KiwiSaver scheme.

2008: Labour requires employers to contribute to KiwiSaver.

2009: National reduces compulsory employer contribution to KiwiSaver; drops employer tax incentives; suspends contributions to NZ Superannuation Fund.