Superannuation choices

Economics is sometimes known as “the dismal science” – thanks to the 19th century writer and historian Thomas Carlyle.  I’m not sure that either word in that phrase is generally fair or accurate, but sometimes economists don’t help themselves.

A good example is around “the ageing population”, something that economists have been worrying about for at least as long as I can remember.  In fact, of course, the ageing population is one of the very greatest achievements of mankind in the last couple of hundred years.   In the UK –  at the leading edge of the Industrial Revolution –  average life expectancy at birth in 1840 was just over 40.  Now it is over 80.  In the first half of the 20th century, many of the gains were  in reductions in infant and childhood mortality.  In recent decades, the gains have been concentrated among adults.  The typical adult is living longer, and that is  –  typically –  something to celebrate.   Here is the New Zealand data on the increase in remaining life expectancy at age 65 over recent decades.

life-expect-65

An ageing population isn’t something to try to “remedy”, whether by encouraging more births, (or more wars?) or targeting more migrants.   If there is an ageing population “problem”, it is largely an artefact of the rules we’ve set up for paying state pensions.  There are no doubt some issues around health  –  amid that debate as to whether people living longer means more health spending, or just means that the health spending (usually concentrated around the last few years of life) happens at an older age.  But my focus today is on the state pension system –  New Zealand Superannuation.

When The Treasury recently released their Long-Term Fiscal Statement, I saw criticism of them in some quarters for not making more of the “need” to change the New Zealand Superannuation settings, often with a subtext that reform was urgently needed. I’m critical of Treasury on a variety of scores, but that isn’t one of them.

Treasury included this chart in the report.

ltfs

As I noted then, one could reasonably run this under a headline “no urgent need for any big fiscal changes for 20 years”.  On these projections, in 2035 the spending share of GDP would be around where it was five years ago.  Actual fiscal policy changes happen all the time, and the base on which revenue is raised changes too.  It wouldn’t take much for spending as a share of GDP in 2035 to be not much different from where it has been on average over the last decade.  One can’t reasonably generate “fiscal crisis” headlines –  or urgent official advice to ministers – out of that sort of scenario.

In saying that, I’m not expressing even the slightest sympathy with the Prime Minister’s dismissal of the Treasury projections as, to put it mildly, not worth the paper they are written on.  If he genuinely believed that there is an easy solution: amend the Public Finance Act and save us the not-inconsiderable amount of resources that goes into producing these statements every few years.   As he has done since he was first elected, the Prime Minister simply wants to make the issues around NZS someone else’s problem –  he knows the parameters should change, and will change, but just not while he is PM.  As someone who is 54, I’ve always assumed that the NZS eligibility age would have increased somewhat by the time I reached 65.  That now seems increasingly doubtful.

But these really aren’t primarily economic issues, and despite Treasury’s enthrallment with their Living Standards framework, they don’t have a mandate for using taxpayer resources to push strongly for the sort of society they –  a few hundred bureaucrats –  happen to favour.  It isn’t even their role to try to work out what choices the public would prefer – that is the stuff of politics.    I read the evidence as suggesting that lower average tax rates would tend to lift New Zealand’s productivity and GDP per capita, but the effects seem to be small and uncertain, and New Zealand’s government spending as a share of GDP isn’t extraordinarily large by modern advanced country standards.

To my mind, issues around New Zealand Superannuation are substantially moral in nature, and the debate would be better if centred on those dimensions, rather than on fiscal policy.  Our level of government debt isn’t that low, but by international standards it isn’t high either, and if anything looks likely to drop as a share of GDP over the next few years.  So the issue shouldn’t be “can we afford to pay a universal welfare benefit to an ever-increasing share of the population?” –  ever-increasing, on the assumption that adult life expectancy continues to increase.  We probably could.  But rather “should we?”, or “is it right to do so?”.   Economists quickly get uncomfortable with “is it right” type questions, sidelining them as “political choices”, but almost all the important political choices are about conceptions of what sort of society or government we want –  competing visions of what is “right”.   Of course, there are practical dimensions, and areas where experts can offer technical perspectives  –  eg the implications of particular choices for other things we care about (eg labour force participation, incentives to save etc) –  but the key choices shouldn’t really be seen as technocratic in nature.

For me, there is simply something wrong about offering a universal income to an ever-increasing share of the population.   Governments don’t exist to support us all, but on the other hand they probably do exist, in part, as a vehicle through which society can support those genuinely unable to support themselves.

I’m often struck by the contrast between the situation now and that in 1898 when the first (asset and income-tested) age pension was introduced in New Zealand.  The age of eligibility then was 65.  Life expectancy at birth then, even in a rich colony like New Zealand, was less than 65, and for the minority who made it that far, average  remaining life expectancy was perhaps another 10 years.   But the people who were turning 65 in 1898 will have typically entered the workforce very young –  even for those with a reasonable base of schooling, full-time work would have started by 12 or 14.  That meant fifty years in the workforce –  whether paid directly, or managing a household –  before the question of eligibility for a state pension even arose.  And there weren’t working-age benefits available either.

These days, by contrast, a typical young adult won’t enter the fulltime workforce until perhaps around age 20.  A few leave school and go straight into fulltime work at 16.  Many of the mass who now do university study will be 21 or older before they start fulltime work.    And around 10 per cent of the working age population is on a welfare benefit at any one time.  And when people do finally get to 65 –  as most do – their average life expectancy is now another 20 years.

So we’ve gone from a situation where most adults would support themselves (or within families etc) for their entire adult lives, and a small proportion might have perhaps a decade of state support in old age, to a situation where on average a typical adult will be receiving a state pension or benefit for perhaps a third of their adult life.  That is too much of a change, a shift towards state dependence, for me (as citizen/voter) to regard with equanimity.

This isn’t an argument for abolition of all welfare, or even for harshly treating those permanently unable to support themselves.  For the latter group –  a small minority – I worry that our system has already become unreasonably harsh and burdensome.    It is really simply a view that our conversations and debates should be around what sort of society we want, and what the appropriate role of the state vs self (and family) reliance is.    Shifting towards making NZS available at, say, 67, and then legislating to index that age of eligibility to future increases in adult life expectancy, just isn’t a terribly radical reconception of the role of the state in the face of such large (and welcome) increases in life expectancy, and in the ability of most people in, say, the 65-70 age group to maintain paid employment.

There also needs to be more public debate about the residence requirements for NZS.  When the age pension was first introduced in 1898, there was a requirement of 25 years continuous residence in New Zealand to be eligible.  A recipient had to have spent at least half their adult life in New Zealand –  whether as taxpayer or other contributor to the society/community.  Consider, by contrast, the rules today, under which one can be eligible for (a much higher rate of) NZS having lived in New Zealand for only 10 years, including five years after the age of 50.   That is extraordinary enough, but then there is the oft-overlooked provisions under which, in MSD’s words

We can also count periods of residence spent in countries that New Zealand has social security agreements with.

  • New Zealand has social security agreements with the United Kingdom, the Netherlands, Ireland, Jersey, Guernsey, Australia, Greece, Canada and Denmark
  • These agreements allow you to use residence in these countries to qualify for periods of residence (or contributions) and presence and the ordinary residence criteria.

 

Australia is, of course, the big issue there.  Not only have huge numbers of New Zealanders gone to Australia and spent the bulk of their adult lives there, but these provisions also apparently cover Australians who have never lived in New Zealand.

Fortunately for us, perhaps, people tend not to migrate towards colder climates in their old age, but the rules still seem quite extraordinary.  What obligation should New Zealanders have towards people who left for Australia at, say, 20, never paid any material amount of taxes in New Zealand, and then late in life decide that a universal pension in New Zealand seems an attractive fallback.  Even the fiscal risks aren’t small.

I’ve written about some of these issues before.  As I noted then

Personally, I’m happy that we should treat quite generously people who have spent most of their life in New Zealand and have reached an age that can genuinely be considered “elderly”, but I don’t feel the same sense of generosity towards those who have migrated here quite late in life, or to New Zealanders who have spent most of their working lives (and taxpaying years) abroad.

Of course, among the political questions societies need to face is the extent to which income support in (relatively) old age is universal or dependent on circumstances.  New Zealand has gravitated towards a structure where the state pension is paid to everyone, regardless of income or assets, and subject to a very undemanding residence requirement.

Is there a case for income and/or asset testing?    We tried such a model between the mid 1980s and the late 1990s, and it proved politically unsustainable.  Personally, I don’t think it is an issue worth trying to fight again.  It is easy to say “why pay NZS to people earning more than $100000 per annum”, but there aren’t many of them, and even those still earning high incomes at around age 65 will typically see labour income drop away quite quickly.  So there isn’t much money to be saved from instituting a means-test that cuts in at a high income.  There is quite a lot of money at stake if, say, an abatement regime could cut in at, say, the current NZS payment rate (any private income above that threshold would progressively reduce NZS payments).  But if we tried that sort of regime again, there would be huge resistance (on “fairness” grounds –  “I saved all my life, and that person who saved little gets the full NZS payment”), huge incentives to mask or transform the nature of income/assets, and a pretty serious disincentives effect on lower or midde income people to remain in the workforce past age 65.   Would it make much difference to private savings behaviour?  It is hard to tell: very low income people don’t have the capacity to save much anyway, and for seriously wealthy people it would make no difference.  For those in the middle, it might well deter private savings for some and raise it for others  –  the net effect just depends on whether the income or substitution effects are more dominant.  As it is, it is unlikely that the current NZS system materially adversely affects private saving – although the pension is universal, it doesn’t offer a comfortable standard of living for those from the income cohorts who had much capacity to save during their working lives.  For those people, our system discourages private savings less than, say, many of the other advanced country systems (offering an individual-income related unfunded state pension) do.

Frankly, I think any serious means or asset testing regime is largely futile, and probably unsustainable over time, unless or until society could recreate some sense of “shame” in being reliant on the state.  If NZS is seen as an entitlement, that no one should be embarrassed to take, people will do whatever it takes to maximise their claim to the entitlement.  Behavioural responses will be quite different than in a system in which people are ashamed to be dependent on the state, and will do everything possible to avoid themselves (or their parents/relatives) being dependent on the state for income support.

A few years ago, I came across an account of the New Zealand age pension system published just a few years after it was introduced.  William Pember Reeves had been a reforming minister in the Liberal government of the 1890s, and in 1902 published his two volume State Experiments in Australia and New Zealand. Included in that book is a fascinating and lengthy discussion as to how the new age pension system was working.  At the time around 4 per cent of New Zealand’s population was over 65 (compared to 14 per cent now).

I reread the relevant section this morning, and it was a reminder of a different age (different in some good ways and some not so good ones).  Applicants for the age pension had to appear in open court to present the evidence that they met the statutory tests.  Applicants were subject to good character tests, including being disqualified if they had had a recent period of imprisonment (by contrast, today on the MSD website it isn’t actually clear whether even current prisoners are disqualified).   And the income and assets tests were very demanding –  the marginal abatement rate was 100 per cent for private income above 34 pounds a year in private income.  Reeves was generally a supporter of the reforms he was writing about, but he also notes that even in those early days of the regime, there were opportunities to game the system, some legal, some not.

Our current NZS system has a number of good features. It does prevent the extremes of elderly poverty sometimes seen in other countries or in other times.  And it does nothing to directly discouraging older people from remaining in the workforce.  It is also administratively straightforward. And it probably does relatively little to deter private savings.   But –  and whatever the state of the government’s finances – with an age of eligibility that is the same now as it was 100 years ago, in the face of dramatic and continuing gains in life expectancy, it seems simply wrong – and expensive –  to keep paying a universal pension to an over-increasing share of the population.  And I can see no compelling reason for why full NZS should be available to anyone who has not spent at least 30 adult years physically resident in New Zealand –  be they immigrants, or New Zealanders who have spent much of their lives abroad.

Of course, others will have different conceptions of the role of the state.  No doubt, for those who favour a Universal Basic Income, NZS appears as a precursor to their vision for how the whole of society should be organised.  A related group –  those who worry as to whether there will be enough jobs to go round in future –  no doubt share that sort of view.  To date, a shortage of jobs just hasn’t been an issue in New Zealand and for me –  and these are ultimately moral debates –  the UBI proposals are deeply corrosive of the way in which I think society should operate.

To close, for those interested in the numbers, Treasury estimates that NZS spending will rise from around 4.8 per cent of GDP now to around 7.9 per cent by 2060.   Neither immigration nor productivity assumptions really make much difference to those numbers.  In their scenarios, raising the age of eligibility for NZS to 67 cuts that share by around one percentage point.    They don’t quote the numbers in this statement, but indexing the eligibility age to future gains in life expectancy offers materially larger savings than that, over time (eg over four decades, life expectancy could increase by perhaps another 7 years).  I don’t have a good sense of the savings a more binding residence requirement might offer, but it seems quite plausible that with these three changes, the public finances would be under no great pressure at all in continuing to offer something like the current wage-indexed level of NZS to the genuinely elderly who have spent most of their lives in New Zealand, in a minimally distortionary way.  But they are reforms that should happen –  should already happen –  regardless of what the 20 or 40 year ahead fiscal projections look like.

 

6 thoughts on “Superannuation choices

  1. Indexing the eligibility age to future gains in life expectancy is very sensible, but what might well be saved on super will more than likely be out-spent on aged care health costs. The latter (universal healthcare) I suspect is more the issue that needs far greater attention. Gareth Morgan’s ‘Health Cheque’ is still a very good read even though somewhat dated now.

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    • Perhaps wrongly, I’ve always tended to assume that health was less of a problem because there were more margins on which practical entitlements could be changed (eg lenght of waiting lists which will influence demand for private health insurance, extent of subsidisation of drugs, GP visits etc etc). But I stayed away from commenting on health as I don’t feel very knowledgeable.

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  2. You would have to add our Prime Minister John Key to the old and aged and retired. This will give Winston Peters a final last gasp at being Prime Minister if he can last the 3 year term. He is looking very tired. NZFirst would be well ahead in the polls if Winston had a bit more energy. This may give him a boost to carry on and negotiate a deal with national. Without John Key National will lose public support and give NZ First the keys to the leadership. Bill English will be happy to continue as number 2. He does not quite cut it at the top job.

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  3. In this current period of a growing and profitable economy, the government should consider increasing Emplyer Company super contributions to KiwiSaver from 3% to 5%. In times of plenty it is good common sense to increase the savings level. A tax cut is just forcing the RBNZ to consider moving interest rates up as it adds fuel to already a stretched resource limited economy.

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  4. Singapore has a Employer contribution scheme that varies in boom times and bad times. When the economy was bouyant and the threat of inflation was high, Singapore increased company contributions to a high of 15.7% together with a employee contribution of 15.2% instead of increasing interest rates.

    After the GFC Company Contributions dropped to 8% and employee contributions also dropped to 8%.

    This variable superannuation rate was what got Labour particularly interested when they offered a VSR scheme when David Shearer/David Parker/David Cunliffe was running the Labour show.

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  5. KiwiSaver acts as a privatised taxation scheme that funds the production of rather useless financial sector jobs, add the Cullen Fund to that. NZS is viable forever, unless Treasury and RBNZ kids have lost their keyboards. Savings don’t drive investment, spending does, which then flows to savings…

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