Half a hand clap?

For the leader of the National Party, Bill English, that is, for announcing yesterday that if his party is in government after September’s election it will seek to

(a) lift the residency requirement from 10 years to 20 years, starting some way down the track, and

(b) lift the age of eligibility for New Zealand Superannuation from 65 to 67, but not starting until 2037.

It is a topsy-turvy political world in which at the last election the National Party was campaigning on, in essence, no changes to NZS ever (talk of everything being “affordable” for the next 50 years), while the Labour Party was campaigning on a rather faster move to age 67 than the National Party is proposing now.  But now the Labour Party appears staunchly opposed to any increase in the eligibility age.   Perhaps if Bill English and David Cunliffe had held the reins at the same time, a cross-party accord might have been in prospect?

It is also a bit odd when media start talking as if political promises made today, even if enacted next year, actually make very much difference to what will happens in 2037 and beyond.  For all the talk of “giving people certainty”, it is most unlikely National will be in office for the next 20 years and all-but-certain that Bill English won’t be.  Office-holders change, and so do circumstances.

In 1859, no one really envisaged the Land Wars, gold rushes, or the massive transfomative effects of the Vogel public works and immigration programmes.

In 1879, no one was probably planning on having a state age pension at all  (let alone the economic opportunities of refrigerated shipping etc).  That came in 1898.

In 1899, no one was expecting World War One, and the huge toll of lives and money that took.

In 1919, no one was expecting the Great Depression, or an overhang of debt so severe the New Zealand government defaulted on its domestic debt, and almost had to do so on its foreign debt.

In 1939, even if people anticipated war, they probably neither conceived of one as long and devastating as it was (globally), or that over the following couple of decades New Zealand would enjoy high commodity prices, and end up with very little public debt.

In 1959, few people probably planned on the basis on the “end of the golden weather” –  the severe and sustained fall in our terms of trade over the late 60s and especially in the mid-late 70s, that undermined fiscal prospects and opportunities for improved living standards.

In 1979, probably not many envisaged Think Big as the massive fiscal disaster it was, or the disruption (and loss of revenue) that the (overdue) economic reform and liberalisation process would entail.

In 1999, well…..perhaps there have been fewer disruptions in the last couple of decades (even allowing for earthquakes and a serious recession).  But it seems unlikely that history is ending.

No one knows what the next 20 years hold, for good or ill, and it would be crazy for anyone to plan today based on a political party’s promise of what welfare payments might be available 20 years hence.    My (considerably younger) wife was stunned to learn yesterday that if the new proposed policy carries through she will be eligible for NZS at 65.  Since anything can happen in 20 years, I discouraged the idea of starting planning for an extra overseas holiday

And government plans and policies do change, often considerably.  In the late 80s, the then Labour government announced a very slow increase in the NZS age, only to have that overturned (and rapidly accelerated) by an incoming government only two years later.  And in the 25 years from the early 1970s to the late 1990s, we went through numerous, quite substantial, changes in NZS policy, each no doubt intended by the governments that proposed them as “providing certainty”.

If the National Party really thinks change is needed, they should have promised something that might have involved gradual increases in the eligibility age starting in the next term of Parliament –  age-indexed beyond that.  If not, they should have bequeathed the issue to their successors.

My own view, outlined in a couple of posts late last year, is that the case for changing the NZS eligibility age (and residence requirement) isn’t primarily one about future fiscal balances.  As I noted when the Treasury released their long-term fiscal statement,

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.

And perhaps that is the sort of thinking the National Party had in mind.  There just isn’t a pressing near-term fiscal issue  (although, of course, taxes could be lower, or the money spent on other priorities).

My take was different.

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,

From the SNZ life tables, we can trace changes in life expectancy since 1950.  Here I’ve shown life expectancy for those reaching age 20 (ie old enough to have reached the workforce).

life expectancy

The observations aren’t always evenly spaced (especially towards the end), but over the full period, of 64 years, average (across male and female, Maori and non-Maori) life expectancy for people who get to age 20 has increased by 9.8 years –  about 1.5 years per decade.

At the first observation, centred on 1951, life expectancy at birth for males was only around 67.2 years.  Too many died very young –  in 1948 (the first year with data on Infoshare), just over 10 per cent of all male deaths were of children under 5.     But around 1950 a large chunk of the men who reached adulthood, and the taxpaying years, still died before they were 65 (around a third of all male deaths of those over 20 occurred before age 65.   The female numbers weren’t that much lower.  None of those people lived to collect a state pension payable from age 65.

By contrast, in 2015 only 18 per cent of adult deaths occurred before age 65.

It is quite true that, on SNZ estimates, life expectancy at 65 has not increased as rapidly as overall life expectancy (up 6.6 years over 64 years), or even that at age 20.

life expectancy 3 ages

But the fiscal burden doesn’t just arise from how long people live once they get to 65, but what proportion of adults get to age 65 at all.

Here is a chart showing life expectancy at 20, and the NZS eligibility age.  The final two dots are what might have happened by 2040 if the life expectancy gains continue at the same rate as since 1950, and the NZS eligibility age if yesterday’s National Party policy proposal comes to pass.

life and NZS age

Over that full period, 90 years, the NZS eligibility age would have risen by two years, and adult life expectancy (those getting to 20) would have increased by about 13.5 years.  By 2040 it will be amost 40 years since the NZS age got back to 65.  In that time, adult life expectancy is likely to have risen by 5 to 6 years, and yet the NZS age will have risen only by two years, if the new National Party policy is implemented.

Something seems bad out of whack there, and that is before allowing for the fact that the typical person now enters the fulltime workforce considerably later than they did in earlier decades: many fewer leave school at 15, and now most do tertiary education as well.  The period the typical adult will be receiving NZS for, as a share of their time in the workforce (paid, or raising children) just keeps on rising.  And that seems wrong.   For some, no doubt, working until 67 or beyond would be physically difficult, or impossible.  In the past, for very many, even living to 65 was aspirational.

Overall, National’s proposal yesterday was a pretty feeble one.  Better than Labour’s stance –  which seemed to involve potentially reducing future pensions, but not increasing the age –  but so far in the future it should probably be discounted back to very little.    Perhaps it would have deserved a little more credit, if they had been willing to embrace –  and campaign on- the notion of formally indexing future increases in the eligibility age to future changes in life expectancy.  But they couldn’t even manage that, not even for the hypothetical adjustments that might occur in the decades after 2040.

 

 

 

 

 

16 thoughts on “Half a hand clap?

  1. As this blog is a supporter of NZS more or less in its present form, would you accept either of the following premises:
    a) a PAYG social insurance system of this type tends to decrease private savings over time.
    b) social insurance, in general, is a factor behind cost disease in advanced countries.

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    • On (a) relative to a baseline of no scheme yes, quite probably. But even then there is a question of magnitudes – for many people the alternative to NZS would be working much longer, rather than saving more (after all, that was the response we saw to raising the age from 60 to 65). To the extent there is a material effect, it is a case for govt running slightly larger savings than otherwise (eg a lower net debt target than might otherwise be sensible.

      And, as you know, I’ve argued that in contrasting Australia’s arrangements with our own, it is interesting that Australia’s saving rate did not rise relative to ours when they moved to the compulsory private scheme (which in some ways mimics a funded state scheme – of the sort very rare in the real world!)

      On b), I’m probably missing something obvious, but what channel did you have in mind?

      Lest i be thought some bleeding heart welfarist, my overall stance would probably favour a modest flat universal NZS from say 75 or even 80, generous welfare support to people totally unable to work (a properly capability-tested version of the old invalids benefit), and very tight constraints on other welfare (unemployment and DPB).

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  2. On the channel question, it’s really that when the consumer of a service is not paying for it, they lose the incentive to monitor the provider for wasting resources on things not connected to the original purpose of the service. For example, schools have a tendency to be run for the benefit of teachers, universities tend to be run on behalf of administrators, hospitals are stuffed with administrators, general government is stuffed with bureaucrats, health insurers compete by offering coverage for yoga etc. As a result we see 40+% of the economy in advanced countries with very little productivity growth. Real productivity only happens in industries with intensely competitive product markets, e.g. manufacturing, technology, food.

    Long discussion with lots of examples (but from a US perspective) here:

    http://www.themoneyillusion.com/?p=32312

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    • Oh yes, to that extent I’d largely agree. Supermarkets, by contrast, tend not to be stuffed with bureacrats/administrators, altho working for shareholders, they need to respond to customers who have exit options.

      Of course, it doesn’t help explain NZ’s own poor relative productivity performance.

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  3. It seems rather controversial to be bringing this change up in a election year. 20 years may be a long time and it excludes baby boomers which is the largest voter base but it does alienate the Gen X, Y and milleniums which could make the difference between getting into parliament or not. Seems to be poor public relations advice as the opposition clearly was not going to support it.

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  4. It isn’t clear to me how the politics will go. Most younger people (and most middle-aged people) probably assumed NZS wouldn’t be there at 65 anyway, so if the Nats have reasonable political sales skills they could yet look like the responsible realists, with Labour in la-la land (having previously favoured a tougher version of this same policy at the last two elections). After all, as i read what the Greens and NZF have said, it isn’t outright unconditional opposition.

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    • I would prefer that employer contributions to Kiwisaver be increased to 5% as originally envisaged by Michael Cullen as we are way pass the GFC that had John Key suspending Employer kiwisaver contributions and have since left it frozen at 3%. For the sake of continuity in Labour policy, I would have thought the Andrew Little would have some sense to be pushing this continuation to at least get to 5% Employer contribution.

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    • It also seems to be rather contradictory when Bill English at the same time announces that the Treasury has a surplus of $1.1 billion.

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  5. When not being baffled by economics in this blog I read New Scientist to be baffled by science. It does seem probable (rather than possible) that a cure for aging will be discovered soon. Maybe tomorrow more likely gradually over the next decade. If so then it might extend some billionaires lifespan by say 10 years or it might mean everyone will live longer than Methuselah or somewhere in between. My bet would be after an initial high price service we could all live to a healthy 120 (well some rare people do so naturally). Although stopping aging may be possible reversing it is unlikely – once the brain cell has gone it has gone forever.
    My point is there will be little time for a government to act after the announcement of such a disruptive discovery so an all party policy is needed trying to anticipate all eventualities. Is the only solution a system that promises ‘x’ number of years of pension based on a continually recalculated life expectancy?

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  6. In trying to get my head around this, I find that in 2013, TSY projected super costs in 2060 to be 6.6% of GDP – as explained here;

    “Between 2000 and 2013, the 2060 point fell from an estimated net 9.7% of GDP in 2000
    to 6.6% in 2013, an apparent reduction of 32% in 13 years. The most recent 2013
    estimates are lower than all previous 13 estimates from 2021 onwards.”

    http://docs.business.auckland.ac.nz/Doc/PensionBriefing-2013-6-New-Zealand-Superannuation's-real-costs-%C2%AD-looking-to-2060.pdf

    Then in 2016, TSY projected super costs in 2060 to be 7.9% of GDP – as reported here;

    “If historical spending patterns were to be continued, the cost of healthcare would grow from 6.2 per cent of GDP in 2015 to 9.7 per cent in 2060, while NZ super would grow from 4.8 per cent in 2015 to 7.9 per cent.”

    Seems to me to be quite a large difference. Any idea what happened to their forecast model over the three year period?

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    • No, I don’t know, but it does sound a bit puzzling. One possibility that might account for some difference is if they shifted from projecting gross (pre-tax) numbers to net? Surprise immigration inflows, if assumed to last for a while, could make a difference too, altho in the lTFS the charts suggested that immigration really didn’t make that much difference. The other possibility is a change in the wage assumption – if wages are forecast to grown more slowly than GDP (than previously) that could make a big difference.

      If i get some time, i will try to take a closer look.

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      • Playing with numbers – A bit puzzling you say

        This goes to the heart of Government’s use of data and presentation

        Wonder if Bill was aware of this and had forgotten – he’s been around this all along

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      • The question is does he have the numbers to get it through parliament. I understand the Maori Party does not support this change. Clearly ACT is not going to support the change. That leaves only Peter Dunne and Peter Dunne would likely not want to stir up a hornets nest given his very precarious position.

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  7. PM English has kicked off his superannuation roadshows; Tells Kapiti Chamber of Commerce economic confidence allows for decision to be made now; Takes dig at Aussie super settings.

    https://www.interest.co.nz/personal-finance/86436/pm-english-has-kicked-his-superannuation-roadshows-tells-kapiti-chamber

    The difference between John Key and Bill English. John Key knows when it is time to stop poking the bear with a small stick. There is no underlying support for any change from any of National’s support parties nor from across the bench in the Opposition camp. The public is completely divided and increasingly this stunt is simply stirring up intergenerational bitterness.

    Could well signal the downfall of National at the polls. Now more than ever they will need Winston Peters and NZ First to stay in government. Dumb move.

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  8. I think that given Winston’s muted response, this roll of the dice to win the next election is probably not that risky. With the slow transition it does not attack his political base. If they are happy Winston won’t want to attack that. It mutes Labour’s status quo. Most New Zealanders expect the retirement age will rise and by doing this that National is being seen as pragmatic.

    Secondly the migration laws for access to super changing again plays to Winston’s base.

    Labour has not been successful in the last two elections to get enough people to consider them as a viable alternative. They may get there by death of a 1000 cuts but superannuation sold like this is not a silver bullet that would make significant change.

    When I hear talkback radio it seems to me that there is a lot of old thinking. People saying that retirees need to move on for the younger people. But if you look at the number of taxable people per retirees in 2040 there will be a jobs shortage that will either be filled by migration, people working longer or both. There still needs to be more thought in how if the basic policy is to be maintained how it will be sustained.

    The tax cuts issue could be turned into savings in the future. It is just that New Zealand always live in the attitude that I don’t want to pay high taxes but I do want support when I need it.

    But that is another issue for another day.

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