Labour on New Zealand Superannuation

Sometimes I wonder where Andrew Little gets his advice/ideas.

Yesterday, the Dominion-Post ran an article by Vernon Small reporting an interview with the Labour leader and his finance spokesperson Grant Robertson.   In it

Little reaffirmed his opposition to raising the retirement age – a policy he scrapped as leader – but he wants to resume payments to the “Cullen” fund that pre-funds some of the cost of the universal pension.

“Do we need to resume contributions to the Cullen Fund? Too darn right we do, (because) $14.5 billion of contributions not made in the last eight years would have been worth $20b to the fund.”

Other changes to superannuation were not being contemplated, although Little did not rule out other options such as changes to the current indexing, which is linked wage rates.

“Those are things you can have a look at. They are not big money-savers necessarily – over time they might be – but (I am) not certainly averse to looking at those sort of things.”

But New Zealand could be proud of its low level of elder poverty. “So why would you want to change that?”

I agree that the low level of poverty among the elderly is something New Zealand can be proud of.  So why would Labour want to put it in jeopardy?   Because that is exactly what changing the indexing basis would mean over time.   By contrast, raising the age of eligibility gradually –  the policy Labour previously campaigned on but has now abandoned – would be one of the best ways of securing the admirable record of keeping from poverty those unable to work because of advanced age.

At present, NZS payments are indexed to changes in average nominal wages.  That means that, over time, those on NZS share in the overall gains that wage earners achieve.  When productivity growth is low, neither wages nor NZS tend to rise very much in real terms, and when productivity growth is strong the elderly get to share in the gains.  It is easy enough to run an economist’s argument for an alternative approach:  index to the CPI instead (as some favour) and NZS is kept at a constant real level, regardless of what happens in the real economy.  If the current real level of NZS is enough to keep poverty at bay, that same level should keep poverty at bay in future –  at least if “poverty” is defined the same way.

Changing the indexing basis makes a huge difference over time.    In their recent Long-Term Fiscal Statement, looking ahead of 40 years, Treasury (perhaps optimistically) assumed annual labour productivity growth of 1.5 per cent per annum.  Only a couple of days ago, they tweeted the chart from the report highlighting just how much would be saved by indexing to the CPI instead of to wages.  But the flip side of moving to CPI indexing is that NZS payments received by individuals in the future would be much lower than they would be under the current rules.  In fact, on the Treasury productivity assumptions, NZS weekly payments 40 years hence would be only around 55 per cent of what they would be on the current, well-established, formula.   Adopting such a rule would almost certainly see a big increase in the number of elderly people measured as living in poverty –  and since community expectations, and regulatory minimum standards in a whole range of areas, tend to rise with economic growth it is almost certain that there would be an increase in real hardship.  Imagine if real NZS weekly payments had been held constant for the last 50 years.

There is nothing inherently right about the current real (absolute or relative) level of NZS.  It is the outcome of a series of political (com)promises.  Sure some money could be saved by moving to CPI indexing for a while, but CPI indexing would almost certainly be untenable and unsustainable in the long run, reopening intense debates every few years as to just what level of income superannuitants should receive.  Avoiding the bitter fights around NZS that characterised New Zealand politics from the mid 80s to the late 90s seems highly desirable.

What I found really puzzling about Little’s reported remarks is that changes in the indexing arrangements would affect everyone who receives NZS –  and would potentially adversely affect them for the rest of their lives.  By contrast, changing the eligibility age doesn’t affect those (a large number of voters) now receiving NZS at all.   And changing the eligibility age slowly, as New Zealand can still afford to do, is a very slight dislocation for most people.   Increase the age of eligibility by, say, two months a year until the age gets to, say, 68, and then index any future increases to future increases in life expectancy.  On that rule, someone who was 60 when the policy change took affect might have to work until almost 66, instead of until 65, to receive NZS.  From their perspective, of course it is a loss and unwelcome, but it isn’t a huge dislocation.  And it is a much slower pace of adjustment than we adopted in the 1990s and early 2000s, when the age of eligibility was raised from 60 to 65 at a rate of six months a year –  and governments managed to get re-elected nonetheless.  I don’t imagine there are many 50 year olds now who expect to collect NZS at 65.

Yes, there are some people who are physically unable to work by the time they are 65.  There always have been, and no doubt always will be.  We have working age people now who are physically unable to work.    And any compassionate society needs to make provision for those people.  But that needn’t mean a universal entitlement at age 65 indefinitely.

The other overdue change to the NZS system is to alter the rules of eligibility.  A residency requirement of only 10 years to claim a full NZS payment seems generous to the point of irresponsibility, prioritising those with a weaker natural claim on our support, over those with a greater claim.  That is especially  so as I pointed out again recently the rules mean that for many people (especially New Zealanders in Australia) they don’t need to have lived in New Zealand –  or paid New Zealand taxes – at all.    The Retirement Commissioner proposes a 25 year residency requirement.  One other possibility might be phased residency tests: perhaps after 10 years, a person might be eligible for 20 per cent of the standard NZS payment, and after 30 years might be eligible for 100 per cent.   But that residency test should involve actual physical residence in New Zealand.

I’ve long been meaning to write a sceptical post about the New Zealand Superannuation Fund.  It was a worthy wheeze in the days when Michael Cullen set it up –  discouraging his colleagues from spending all of the large surpluses –  but it has no natural place.  There is no good moral or economic ground for keeping a universal pension at 65, even as life expectancy continues to increase,  the ageing of the population is a permanent (welcome) feature not a temporary blip, and we don’t have large surpluses any more –  and haven’t had surpluses at all for the last decade.  Labour is quoted citing the investment gains that could have been had if only contributions had been continued for the last eight years –  but (a) the scale of those gains was inherently unknowable in advance, (b) if, as many believe, global asset markets are overvalued the gains may not even be permanent (the NZSF portfolio is structured in such a way that mean that returns will be highly volatile) and (c) the flip side to putting more into the NZSF would have been even larger increases in government gross debt than we have already incurred in the last few years.  Paying public servants to take big leveraged investment risks doesn’t seem a natural role for government (although I know some of my readers/commenters disagree).

I wonder what Labour’s private attitude is?  After all, Labour governments elsewhere in the world –  notably Australia –  have put in place policies to raise the eligibility age for the state pension.  Perhaps they really hope that in next year’s Budget Bill English and Steven Joyce will take the brave but responsible step of raising the eligibility age slowly.  If they did, it is hard to envisage responsible members of the Labour Party’s leadership opposing such a stance with any conviction.

19 thoughts on “Labour on New Zealand Superannuation

  1. Many excellent points. Andrew Little seems to be pandering to the median voter while willing to betray the interests of his working-class voters.

    I find your remark about the New Zealand superannuation fund to be interesting. They seem to think they can beat the market. If they really could, their salaries would be in the tens if not hundreds of millions not the hundreds of thousands.

    The New Zealand superannuation fund should consist of a receptionist and a compliance manager for the index funds in which it is invested. It should then deduct from its rate of return the marginal deadweight cost of the taxes used to fund it

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  2. If the age of eligibility for a state pension is determined by life expectancy minus say 10 years would that mean that women have to work longer than men, and that Maori could receive their pensions earlier? The devil’s in the detail.

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  3. Yes, details matter. My proposal would be a universal age (as at present, not distinguishing between male or female, European, Maori, Pacific, Asian, poor or rich), with that age increasing with improvements in the average life expectancy of the population as a whole. It is a policy that has been adopted already in Denmark.

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    • Do you have any details about how exactly the link to average life expectancy works in Denmark?

      Is the pensionable age based on life expectancy minus a percentage, or minus a number of years?

      And which average life expectancy is used? For example, say I’m now 45. When I was born the average life expectancy was lower than it is now, and by the time I reach the pension age calculated on the basis of today’s average life expectancy, it’s likely that average life expectancy is likely to be higher than it is now. When would I know what my pensionable age is to be?

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      • I’m not over the details, but on digging round in various OECD publications I found an interesting range of models. Denmark’s is actually only semi-automatic (they do the calculations every 5 years and need a specific vote of Parliament to raise the age then). Since they aim to keep average years in retirement to around 14.5 years, I presume it must be using something like life expectancy gains at 65.

        As it happens, Italy, France, Greece and Spain have gone further in making the linkage automatic – in some cases (eg France) sharing the life expectancy gains between pension years and working/contributing (to the social security scheme) years.

        In Italy they are moving to biennial review which – with life expectancy increasing around 1.8 yrs a decade – should mean no more than a 4-6 month revision in the pension eligibility date at each review. If we were to adopt such a model, a biennial review looks sensible, and then phase the resulting adjustment in evenly over the subsequent two years. Since trends in longevity growth are pretty persistent there should be very little surprise for anyone in their mid 60s – even tho for your 45 year old, the age at which they might get NZS could be quite uncertain (as in practice, if not in law, it is now).

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  4. I’ll have a go at defending NZ Super.

    Medium-sized not-for-profit funds in this part of the world tend to be well-run, in my experience, and NZ Super in particular seems to be well-run. The employees don’t need to be geniuses but they do need enough scale and scope to access diverse risk factors. Although very liquid markets are almost perfectly efficient there seems to be potential for manager outperformance in smaller markets, and surprisingly strong persistence of manager performance in private equity and VC. Some of the direct investments into local businesses are a little risky but hardly seem ruinous.

    I would support opening NZ Super to Kiwisaver accounts. It is highly diversified and has an expense ratio of only 0.3%.

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  5. Given that NZFirst and Labour are campaigning on no increase in the age of 65 eligibility, i am doubtful that National would be brave and go against the grain and raise the age to 67. Its like asking to be booted out of government. You would have to have rocks in your head to do that.

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  6. You may well be right (and nothing on this blog would have given you any reason to think I had confidence in this government). But, then again, NZF is campaigning on doing something serious about the residency requirement. And I doubt that campaigning to raise the NZS age was really what did in Labour’s chances in 2014. I suspect that there is enough public recognition that something has to change that a govt willing to raise the age (slowly), in conjunction with a Budget with a variety of other measures and effective leadership wouldn’t necessarily be punished electorally.

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  7. “I don’t imagine there are many 50 year olds now who expect to collect NZS at 65” – hmm, I think your imagination might have got the better of you!

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  8. fair comment, altho when first Lab in 1989 and then Nat in 1992 (speeding up the process) raised the age from 60 to 65 none of the main parties ever promised to reverse the move. and a prudent govt that did try to raise the age slowly would show a lot of context about what other countries have already done.

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  9. Re the NZ super fund, I thought it was intended to cope with an upcoming, but one off, bulge in the retired portion of the population? If so, it seems like a sensible idea to me.

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    • But the increase in the proportion over 65 isn’t a temporary bulge, but a permanent feature resulting from the continuing increases in life expectancy. There is a sharp lift in the over 65s as a result of the “baby boom”, but the numbers never drop back again – – and the baby boomers started turning 65 in 2011, so in a sense we’ve already seen much of the sharp increase, without using NZSF funds at all.

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  10. In principle I don’t have a problem with extending the minimum residency requirements for receiving superannuation in NZ from 10 years to something longer, like 25 years. However, I would suggest the NZ government also pursue further social security arrangements with more countries at the same time. I know that NZ already has arrangements with the UK and Australia for transferring pensions (according to the WINZ website, NZ has formal agreements with 10 countries, although this includes, Jersey, Guernsey and Malta), but there are many other countries without formal arrangements where things get complicated. I currently live in a continental European country. I make pension contributions to both a work fund and to a government fund. If I choose to retire in NZ, I should receive payments from my work pension fund, without too many problems. However, from what I have heard anecdotally (from people in this situation), the government funded part (from my current country of residence) gets greatly eroded once it has gone through European and NZ bureaucracy. Australia on the other hand has social security agreements with 30 countries, including my current country of residence. Australians in my situation can retire in Australia knowing that they will be eligible for Australian super, because they can get their government pension contributions transferred to Australia.

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    • The agreements may be in place for the transfer but NZ IRD will tax the lump sum transfers at 33% as far as I am aware. This change came in place in the last couple of years. Unfortunately someone has to take care of your ageing health issues and this is one way to help fund the health system but it does reduce your amounts going into the super fund which is a bit like robbing Peter to pay Paul.

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  11. BEST THING WE COULD DO IS CASH IN THE NZ SUPER FUND AND PAY DOWN GOVERNMENT BORROWING

    THE PROBABILITY OF BORROWING COSTS GOING UP – AND ASSETS VALUES DROPPING- IS VERY HIGH CASH/LOWER DEBT IS A BETTER POSITION TO BE IN FOR THE FUTURE

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