If pension age stays GST might go to 15 per cent

Retirement policy experts have warned GST may have to be increased from 12.5 per cent to at least 15 per cent, unless the Government considers raising the age of entitlement of NZ Super.

Debate over the sustainability of New Zealand's pension payments has reignited after National's decision to suspend contributions to the NZ Super Fund, possibly for at least a decade.

Prime Minister John Key has promised to resign if the age of eligibility is increased, and Labour has made a similar commitment.

But experts insist the issue needs to be discussed - ideally by an independent forum, such as a taskforce or a royal commission - if only to rule out that possibility.

It has also been suggested the Retirement Commissioner chair a wider review, to take political heat out of the issue.

Raising GST from 12.5 per cent to 15 per cent could reap the Government about $2.2 billion extra each year, based on Budget forecasts of how much it expects to raise from GST over the current financial year.

Coincidentally, the figure is about the same amount as has been added to the NZ Super Fund each year, since it began investing in 2003.

Other options include cutting Government spending, raising other taxes, or introducing means-testing.

In 2007, Retirement Commissioner Diana Crossan called for the Government to consider such options as soon as possible, to allow those due to retire in the next 20 or so years time to plan.

She has requested a Treasury report on the necessity, feasibility and implications of such options, which is due to be completed this month.

However, most policy experts, including Ms Crossan, believe the most palatable option would be raising the age of entitlement. Australia has signalled it will lift the age to 67, as have several other countries.

Both the OECD and the International Monetary Fund have urged New Zealand to consider the move, to reduce the long-term cost of NZ Super, which is expected to double as a proportion of GDP over the next few decades.

In 2007, Treasury warned that "if trends do not change... NZS [New Zealand Super] may have to become less generous in future".

Treasury Secretary John Whitehead has floated the possibility of an increase in GST, as part of a wider review of the tax system.

He has also suggested other changes, such as introducing a capital gains tax, and lowering personal and corporate tax rates.

Economist Susan St John, who co-directs Auckland University's retirement policy and research centre, said it was crucial the issues be considered in tandem. New Zealand had a sorry history of political meddling in superannuation "because we've had this ad hoc, ill-considered policymaking in the retirement savings area without looking at how everything is integrated".

Retirement savings consultant Jonathan Eriksen said he was unconvinced there was going to be a cost blowout in NZ Super. However, an increase in GST was almost a certainty if the Government decided to scrap the NZ Super Fund.

"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."

SUPER DILEMMA

What is the problem?

Shortfall in superannuation fund after Government suspended full payments, a decision that will be reviewed on a yearly basis.

What does this mean?

A shortfall in the pension pot for those retiring in the 2020s and 2030s.

Is there a solution?

One option would be to increase GST by 2.5 per cent to 15 per cent to boost tax revenue by about $2.2 billion - roughly the same sum the super fund got during good years.

What are the alternatives?

Raise the retirement age, raise other taxes or means test pension eligibility.