The Retirement Commissioner and “ethical investment”

Presumably someone pointed the Retirement Commissioner to my post yesterday ,as I gather the online version of the triennial report now has a “Foreword”, rather than the “Forward” that appeared until yesterday.  We all make mistakes, typos, and literals, but you’d suppose that well-funded government agencies would have prominent parts of high-profile documents proofread.     Anyway, enough of that (perhaps rather petty) point.

One other aspect of the Commissioner’s report that caught my eye was the bit about “ethical investment”.  This was prompted by the government, which had asked the Commissioner to report on

Information about the public’s perception and understanding of ethical investments
in KiwiSaver, including:
a) The kinds of investments that New Zealanders may want to see excluded
by KiwiSaver providers; and
b) The range of KiwiSaver funds with an ethical investment mandate.

 

As I noted yesterday, there is a make-work element to the Commissioner’s role (and his supporting office, the so-called Commission for Financial Capability).  You might have supposed that firms operating Kiwisaver schemes, or attempting to sell their products to managers of Kiwisaver funds, might be best placed to work out what, if any, investments “New Zealanders” didn’t want to invest in.  It is a (potential) marketing opportunity, and one the providers are strongly-incentivised to tap.  They also get to experiment, and see which products actually attract (or turn off) savers –  revealed preference often being quite different than (say) idle costless, perhaps even virtue-signalling, response to surveys.

Strangely, the Retirement Commissioner starts this section of the report by mischaracterising the terms of reference

In term of reference five, the Government asked us to provide information about the public’s perception and understanding of ethical investment.

Except that (see above) that wasn’t what was asked for at all.

Anyway, they commissioned a report from consultants at KPMG.  KPMG appear not to like the notion of “ethical” investment, and prefer “responsible investment” instead.    I guess if you poll people and ask if they want “responsible investment” you’ll probably get 100 per cent saying yes.  It all rapidly becomes rather empty –  your “responsible” is, often enough, my “deeply corrosive”, and vice versa.  You can read the KPMG report and all the discussion of how funds can/do try to take account of ESG (environmental, social, governance) considerations.  But there isn’t really much there –  in my observation (as trustee of a couple of funds)  much of it is marketing hype.  Perhaps the one bit of the KPMG report that caught my eye.

kpmg resp i

The key sentence is that one just above the table.   It (and the data in the table) do not make into the Retirement Commissioner’s report.

The Retirement Commissioner’s report then moves on to public opinion noting that

In addition to the KPMG work, CFFC includes ethical investment in its own regular surveys of the public.

There is a footnote there to this internal note, but unfortunately there is no link to the full results of the poll, including either the exact wording of the questions or the respondent comments (selected ones of which are quoted in the report, but with no way to judge how representative these observations are).

They are keen to talk up the results

From this, we know that ethical investment is important to the majority of
respondents, with only 26% of overall respondents, and 18% of contributing KiwiSaver members, stating that they are NOT interested in ethical investment.

Actually, I was little surprised that 18 per cent of respondents were prepared to tell a survey taker that they had no interest in an ethical approach to their investments.  But just saying it just doesn’t mean much.

Anyway, this was the main table on specific types of industries (although it isn’t clear whether respondents were prompted –  I’m guessing so –  with this particular list, or whether everyone came up with their own preferences).

ethical investment

The Commissioner writes about this table thus

We also know that:
• In terms of which investment most want excluded from investments, animal cruelty, worker exploitation, whaling and pornography top the list, with over 70% of
respondents agreeing these are exclusion priorities.

But without knowing the precise wording of the question, we can’t even be sure that is right. The Commissioner seems to interpret the results as meaning people don’t want to invest in these industries, but the description in the table suggests the question might have along the lines of “if there were an “ethical investment fund which industries should be excluded”.  They are two quite different things, as revealed preference seems to confirm.  It is, for example, hard to believe that 43 per cent of New Zealanders really don’t want beer or wine company shares in their Kiwisaver investment –  it not being 1918, and the near vote for Prohibition, actual teetollars being probably no more than 20 per cent of the population.  But perhaps they think it is what an “ethical investment fund” might exclude?  And since parties supporting disbanding the military are notable by their absence, one might also be a little sceptical about what people actually had in mind –  feel-goodness apart –  in their weapons answers.

(There is some interesting demographic data, notably that in all the categories above women were more likely to favour exclusion than men.)

Then it starts to get a bit awkward

A majority of respondents are satisfied with available ethical investment options within KiwiSaver and of those contributing, 70% are satisfied with the range of ethical investment options.

This high level of satisfaction is a surprise because most ethical investment funds do
not meet the expectations reported by survey participants.

But perhaps not so much, because in the internal research note –  but not in the published report –  we find this

However, only a minority selected ethical investment when asked about the criteria for selecting a fund. A possible explanation is that respondents show social desirability bias (select the “right” answer) when asked about ethical investment directly, but their actual behaviour shows limited consideration of ethical investment in KiwiSaver funds.

Revealed preference seems to be that the public don’t really care much at all (and/or, it might be hard/costly to evaluate funds for your own preferences).

But despite all this, the one recommendation in this section of the report is

PUBLICLY FUND MINDFUL MONEY TO ERASE ANY POTENTIAL CONFLICTS
OF INTEREST: INTRODUCE TAXPAYER FUNDING FOR MINDFUL MONEY TO GUARANTEE THE CHARITY CONTINUES TO PUBLISH UNBIASED, RESPONSIBLE INVESTMENT INFORMATION.

Of Mindful Money

Mindful Money is a charity that promotes ethical investment, and was recently
launched (September 2019) in response to the public demand for more knowledge
and options to invest ethically. Mindful Money’s mission statement is to: ‘empower
investors and make investment a force for good. Over the next five years we aim to
switch $6 billion of investment funds away from pollution, exploitation and inequality towards a low emissions, sustainable and inclusive economy.’

It is run by someone who was a Green Party MP until the last election.

So, the public show little practical sign of caring very much, civil society has set up its own entity (which has managed to attract some commissions for referrals) and yet one well-funded government agency’s proposal is that yet more public money should be pushed in the direction of this charity.

As they recognise, simply funnelling money to one brand-new private charity would be unusual

While conscious that the regular process would be to go to tender first, we think in
terms of efficiency and cost, and considering that the public want information now so that they can make informed choices that align with their personal values, funding Mindful Money is the most efficient and simple step for the Government to take.

Oh well, never mind about good process, or whether Mindful Money might just be channelling a particular subset of distastes….toss them some public money.  Barry Coates must have welcomed the report.

As I noted at the start, the Retirement Commissioner was landed with this particular term of reference, so they had to write something.   But how they responded was up to them, and it simply wasn’t particular thoughtful or rigorous, more about how do we get on the bandwagon.

In truth, ethical investment is hard, and something of challenge to each of us as to how much we care about particular issues.     Personally, if I were buying company shares directly, I would refuse to purchase companies operating in the small handful of the sectors listed in the CFFC table above (gambling, pornography, and –  depending on definition – animal cruelty).  But there are plenty of other activites I would also refuse to invest in (including hospital companies providing abortions, any PRC company, companies that actively facilitate the interests of the worst regimes on the planet –  including the PRC).   That is easy to say, and actually fairly easy to do.

But once you get into collective investment vehicles –  where the diversification gains and low transactions costs (and even PIE tax rates) are very real advantages –  it quickly becomes very difficult.  For example, much of my retirement savings is in a scheme I joined –  as a manadatory condition of service –  almost 40 years ago.  My ethical views aren’t necessarily those of other members, and even though I’m a trustee of the scheme I have legal constraints on my ability to make what seem like ethical choices to me (and that is probably as it should be).  I’d find it all but impossible to find a Kiwisaver vehicle offering my list of exclusions –  and, on the other hand, I’m very happy to have an interest in shares in arms companies, oil companies etc –  and so, in practice, I do not do anything about the issue.  I’m a trustee of another pension fund –  where there might actually be some commonality of ethical preferences among members –  but even then it is difficult to get members to reveal those preferences consistently and (again) legal constraints.

But all of these issues are yet another reason why I favour winding up the New Zealand Superannuation Fund.  Holding a particular Kiwisaver fund is strictly voluntary (you might not find an ideal fund, but there is quite a bit of choice), but your exposure or mine to the assets held in the New Zealand Superannuation is inescapable.  They like to boast about what “responsible” investors they are, but all that really tells you is that they line up with the personal political/ethical preferences of Matt Whineray and his Board (or Adrian Orr before that).   We simply should not have money coercively taken from us and invested in causes and companies we individually find distasteful, even reprehensible.   That is true whether your burning concern (so to speak) is fossil fuels, pornography, marijuana, abortion, the whales, or whatever.  There is no compelling public policy case for the fund, and the way its investment policy trespasses – ignores – the ethical preferences of many citizens  simply further undermines that case.

Some thoughtful discussion of issues like that might usefully have found a place in the Retirement Commissioner’s report.  It didn’t of course.   Some hardheaded analysis of just how much people really valued “ethical investing” might have made it into the report.  But it didn’t either.

It was a pretty disappointing report all round.

 

Retirement, NZS and all that

How the years fly by.  My youngest child headed off to high school for the first time this morning.  Only five years of the school system to go.

But it was the other end of the age spectrum I wanted to write about today, in particular the recent report of the Retirement Commissioner (in this case the interim one), reviewing –  as required by law to do  –  retirement income policies.    Very conveniently for a government going into an election with the key party (Labour) campaigning against (its own previous policy, not that many years ago) any idea of raising the age of eligibility for New Zealand Superannuation, the Interim Retirement Commissioner has come out in support of that conclusion.  Apparently, according to Mr Cordtz, the age that was chosen in 1898 –  when the new age pension was hard to get –  is still appropriate into the indefinite future now when (a) health standards are so much better, (b) most jobs are less physically demanding, and (c) the benefit is universal.   Take a look at theterms of reference for this latest review and it looks as though the government was looking to the Commissioner to steer away from any suggestion that raising the NZS age might be a good idea.  So they will be pleased –  not so much by the substance of the report (there isn’t much there) as by the headlines, which are all most will see.

I’ve never been persuaded that taxpayers get any real value out of having a Retirement Commissioner, or the supporting staff in the “Commission for Financial Capability”. That has been so whether or not, from time to time, I might have agreed or disagreed with particular suggestions they were making.    It is a classic make-work bureaucracy, costing quite a bit of money, serving no useful purpose, and typically run by people with no particular relevant expertise, other (presumably) than appealing to the government of the day.  That was true of the previous troubled Retirement Commissioner (who seemed to know about marketing), the current Interim Retirement Commissioner appointed by the current government who seems to know quite a bit about rugby league, and also of the incoming commissioner Jane Wrightson, whose expertise seems to consist in getting a succession of small government chief executive roles.   The money spent on this body could almost certainly be more effectively spent…..almost anywhere in government (health, educations, statistics, whatever).  And at very least it is time to rethink whether we really need a triennial report on these issues (as I noted in a previous post, Parliament should also revisit the current statutory requirement for a Long-Term Fiscal Statement every four years).

But if one is going to write about a report one should actually read it.  Perhaps the low point of the entire document was the Interim Retirement Commissioner’s opening statement.   It was headed “Forward”, but I have to assume he really meant “Foreword” –  especially as he ends his comments  with a pithy quote

“I walk backwards in the future, with my eyes fixed on the past”

that seems singularly inapt when even the government’s terms of reference asked the Commissioner to focus on the future.

Much of the “Forward” reads like something a zealous 22 year old might have written, but which his or her boss would have sent back for a rewrite.  The Retirement Commissioner had no boss, no Board (for example) to which he was accountable.

And so we read

In approaching this review as Interim Retirement Commissioner, I have of course brought my own views and experience to bear, which are naturally different to those of previous commissioners – and no doubt, of future ones also. I come with perhaps less direct experience of the inner workings of government or of the financial sector than some previous commissioners, but believe I have brought a more hands-on view of how a diverse array of lower income and vulnerable New Zealanders experience material hardship.

So, he’ll be out of the job again in a few weeks, knows little or nothing about the policy issues, but he has apparently had a bit to do with poor people.

Then we get a rant about how in his view differing average life expectancies  of Maori and other New Zealanders is somehow a breach of the Treaty of Waitangi.  Err, but…

But I am also aware it is not the role of the Retirement Commissioner to make
findings about breaches of the Treaty, and accordingly my recommendations focus on improving the system for all New Zealanders.

Might have been better to skip the rant then.

Then we get a little essay (“A Note on Language”) about how uncomfortable he is with the term “retirement”, but is constrained by the Act and has to use it to some extent.     It seems never to have occurred to him that an age benefit might originally have had in mind people who were doing exactly that –  retiring –  generally because they had got to the point where it was physically difficult to work.   The fact that “retirement” might not describe the experience now of many 65 year olds should probably be a hint that we shouldn’t be paying a universal welfare benefit to everyone at 65.  But Mr Cordtz shows signs of being keen on a UBI, so I guess that thought didn’t cross his mind.

Then we are told that “NZ is good value”, and with a dig at his predecessors, Corditz claims to offer “a more nuanced point of view” than they did –  this despite earlier suggesting himself that he limited expertise in this area.   He quotes a net fiscal cost of NZS, and then a few lines later goes on to claim that there is a significant offset to the NZS cost because NZS recipients pay tax on their NZS (hint: that is how you get to net numbers).

The benefits abound apparently

NZS also enables many NZ Superannuitants to undertake unpaid, voluntary work in their community. This is a huge contribution relied on in many communities and which should be accounted for in considering the costs and benefits of NZS.

Well, no doubt, except that as he noted lots of people  in their late 60s are still in paid work, and more would be if the NZS age was raised.  There are benefits in paid work too, including in the additional tax revenue.  And the relevant debate isn’t whether we should have an NZS but whether it should be all-but universal at 65, even as life expectancy has increased a lot.   And there is no hint from the Interim Retirement Commissioner that he recognises that NZs universal at 65 also helps to pay for more than a few European holidays in New Zealand winters (probably quite a few good quality European cars as well).

I”m pretty sure that not once in the report did I see any mention of the trend in so many other OECD countries to raise the age of public pension eligibility beyond 65.  And while there are repeated references to how NZS lifts the material living standards of quite a few people who transition onto it (NZS is paid at higher rate, and with fewer conditions, than other benefits), this is presented as a good thing, rather than as incidental feature of a universal system.  You get the impression that Mr Cordtz would be a champion of higher benefits all round.

Now, I’m not suggesting that are no useful –  if unoriginal  –  lines in the report.  Ruinous land use and housing policies are making things ever harder for a ever-larger proportion of the population, including now the newly-old. But it isn’t as if the Retirement Commissioner has anything useful to add to debate around the best policies in that area, other than more roles for government.   And there is little or no rigour in what is there. The report touches on growing life expectancy, but offers nothing on (for example) ideas for sharing the gains of life expectancy increases by progressively (but not necessarily fully) raising the state pension age.   And it barely mentions at all issues around the easy eligibility for NZS of people who haven’t spent much of their working lives in New Zealand (whether migrants or New Zealanders working –  and paying taxes –  abroad).

And, as it happens, I don’t totally disagree with Mr Cordtz that fiscal considerations alone do not compel us to change our NZS policy.  We could afford to keep the system as it is.  But we shouldn’t do so.   Here was the last few paragraphs of a post on these issues late last year

As for NZS itself, personally I’m not overly interested in arguing the case for reform on fiscal grounds but on a rather more moral ground.    Even if we could afford it, even if there were no productive costs from the deadweight costs of the associated taxes, there just seems something wrong to me in providing a universal liveable income to every person aged 65 or over (subject only to undemanding residence requirements).    45 per cent of those 65-69 are now in the labour force –  suggesting they are physically able to work –  which is substantially greater than the 30 per cent of those aged 60-64 who were in the labour force 30 years ago when NZS eligibility was at age 60.

I don’t consider myself a welfare hardliner.  I think society should treat quite generously those genuinely unable to work, especially those who find themselves in that position unforeseeably.  Old age isn’t one of those (unforeseeable) conditions, but personally, I have no particular problem with something like the current flat rate of NZS, or even of indexing it to wage movements (which would be likely to happen over time anytime, whether it was the formal mechanism from year to year), from some age where we can generally agree a large proportion of the population might not be able to hold down much of a job.  I don’t have a problem with not being overly demanding in tests for those finding work increasingly physically difficult beyond, say, 60.   But what is right or fair about a universal flat rate paid – by the rest of the population – to a group where almost half are working anyway?  It is why I would favour raising the NZS age to, say, 68 now (in pretty short order) and then indexing the age in line with further improvements in life expectancy, and I’d favour that approach even if long-term fiscal forecasts showed large surpluses for decades to come.    At the margin, I’d reinforce that policy change with a provision that you have to have lived in New Zealand for 30 years after age 20 to be eligible for full NZS (a pro-rated payment for people with, say, between 10 and 30 years of actual residence).  Why?  Because in general you should only be expected to be supported by the people of New Zealand, unconditionally, in your old age, if most of your adult life was spent as part of this society.

Reasonable people can, of course, debate these suggestions.  But they are where I think the debate should be –  about what sort of society we should be, what sort of mix between self-reliance and public provision there should be, even about what mix of family support and public support there should be, or what (if any) stigma should attach to be funded by the taxpayer in old age –  not, mostly, about long-term fiscal forecasts.

And it doesn’t seem as though the Retirement Commissioner –  interim or otherwise –  has much to add to those inherently political, even moral, debates.   The latest report seemed particularly poor, but I guess it (those headlines) will have been welcomed in the Beehive.

In truth, the Treasury’s Long-Term Fiscal Statement –  due, I think, in March –  is also not likely to add much new, but it is at least likely to be a bit more rigorous.  And if there is an opening comment from the chief executive, the title is more likely to be Foreword.

 

Participation rates for older people: kudos to SNZ

In my post yesterday on labour force participation rates I included this chart

p rates old

There has been some increase in participation rates for those aged 70 and over, but the really striking movement has been in the 65-69 age group.   More than half of men, and almost 40 per cent of women, in this first NZS recipient age group, are still in the labour force. (Interestingly, the gap between male and female participation rates for this age group hasn’t materially changed over the 30+ years of the chart.)

I went on to observe, relevant to NZS policy, that (emphasis added)

If you are able to work and are financially able not to, that is almost entirely a matter of individual/family choice, but you (generally) shouldn’t be eligible for long-term state income support.  New Zealand’s experience suggests that the overwhelming bulk of those aged, say, 65-67 are well able to work (we don’t have the data, but presumably –  given what happens from 70 on (see above) –  participation rates of those 68 and 69 are materially lower than those for people 65-67).   Against that backdrop, there is something just wrong about having a universal pension paid to them –  well, me not that many years hence on current policy –  simply on the basis of having got to that age.

My post caught the eye of someone at Statistics New Zealand who dug out the data by each year in the 65-69 age range, and sent me the following chart.

alex snz 2

The standard errors on some of these estimates are quite large, so don’t pay much attention to the year to year changes in each series. But it was good to see a consistent monotonic pattern in which –  beyond the NZS eligibility age –  the older you are the less likely you are to be working.

Using the data she sent me, here are what the participation rates look like for men and women separately at ages 65 and 69 (also for September years).

65 and 69

So almost 70 per cent of men aged 65 –  almost all of whom will be recipients of NZS –  were still working (or, in small numbers, actively seeking work).  In some cases, of course, that work will be part-time only (being employed, in HLFS terms, means a minimum of an hour’s paid work in the reference week), but even a half-time minimum wage job would pay as much or more as a single rate of NZS.

As interesting perhaps is that even at 69 40 per cent of men were still active participants in the labour force.   Since women have a longer life expectancy than men, presumably the materially lower female number is a reflection of past cultural practices and expectations –  or perhaps even a  stronger preference to spend time with grandchildren or in community activities –  rather than physical incapacity.

I don’t often praise SNZ but today I offer only unmitigated kudos

(Well, perhaps mitigated only in this sense that if the annual data are readily available, and they are happy for people to use them –  as they told me they were –  why not make them routinely available on Infoshare?)

 

Participation rates

A passing comment in a post the other day about the labour force participation rates of older people prompted me to pull down the fuller data and see what we could see about various participation rates over the decades since the HLFS began in 1986.   As it happens, the unemployment rate in 1986 averaged 4.2 per cent, exactly the same as the current unemployment rate, so cyclical factors shouldn’t materially mess up long-term comparisons.

Here are the quarterly participation rates (employed plus unemployed as a percentage of the working age (15+) population.

p rate q

From which I’d make only three quick observations:

  •  how stable the male participation rate has been since the end of the 1980s (even through a couple of very nasty recessions),
  • the strong upward trend in the female participation rate, and
  • while there is some modest cyclicality in the overall participation rate, it isn’t a stable or reliable cyclical indicator (eg the peak in the 00s was a year after the recession started, while the 90s peak was a year or so before the recession started).

But aggregates can mask a lot of interesting patterns, and around participation rates that has been particularly so for men (the female participation rates are just dominated by the strong upward underlying trend).   From here on, I’m using annual data (years to September), as there is less noise and more data reliability for some of the small age groupings.

Here is the data on participation rate for what you often see referred to as “prime age” people, those aged 25-54.

prime age total

Prime-age male participation isn’t back to where it was in the 1980s but over the last couple of years it has been higher than the 2000s peak.

What about the two youngest age bands?

partic youth

In the 1980s (until 1989), people could leave school at 15, but I was interested –  and a bit surprised –  in the further step down in the participation rates of the 15-19 year olds ver the last 15 years or so.  Presumably there is some mix of factors at work: kids being less likely these days to have after-school jobs that was once the case, minimum wage changes, and……  Given the cost of tertiary education now (relative to say the 1980s) it still surprises me though.

Perhaps the bigger surprise though (at least to me) is that only around 80 per cent of 20-24 year olds are in the labour force.  You only need to have done one hour’s paid work in the reference week, or to have actively looked for work, to be included in this measure.

What sparked the post initially was participation rates of those in the older age groups.  Here are those for the 55-64 age.

p rate 55-64 Participation rates for this age group are much higher than they were for both men and women.   When the data start, the full rate of New Zealand Superannuation was available at age 60 (at, if I recall correctly, a higher rate relative to wages than is the case now).  I was a little surprised to note the dip in participation rates in the last couple of years: for this group of women the latest observation was lower than in any year since 2013.

And what about the participation rates of those 65 and over, almost all of whom have been eligible for NZS throughout?

p rates old

There has been some increase in participarion rates for those aged 70 and over, but the really striking movement has been in the 65-69 age group.   More than half of men, and almost 40 per cent of women, in this first NZS recipient age group, are still in the labour force. (Interestingly, the gap between male and female participation rates for this age group hasn’t materially changed over the 30+ years of the chart.)

And here is the comparisons between those aged 60-64 and those aged 65-69.

p rates NZS transition

In my post last week, I noted that the participation rates of those now aged 65-69 were higher than those for people aged 60-64 when the survey started, at a time when the NZS eligibility age was still 60.    I see this as a fact buttressing the case for raising the NZS eligibility age now (to, say, 68, and life expectancy indexing beyond that).  By some mix of revealed preference to work, and of need, large proportions of the population went on working for some years after being eligible for a universal pension, suggesting not only that they were physically capable of doing so, but that many of their peers who chose not to work would also be physically capable of doing so.

However, the comparative story over time is complicated at least a little by changing norms and expectations around female participation.  In 1987 under 20 per cent of women aged 60-64 were in the labour force: these were women born in the 1920s, (mostly) mothers of the first baby boomers at a time when female prime-age employment wasn’t that common.  Now almost 40 per cent of women 65-69 are in the labour force, almost as high a share as for the 60-64 year old males in the late 80s.    The increase in participation rates among males – today’s 65-69 year old compared with 1987’s 60-64 year olds is real, but less dramatic  –  up from just over 40 per cent to just over 50 per cent.

And just to end, a couple of international comparisons charts re participation rates for those aged 65-69.

Here is the participation rate in 2018

partic rates OECD 65 to 69.png

It really is an astonishing range.   It isn’t correlated with prosperity (there are poor performers at either end of the chart) or, that I could see, with life expectancy or health status.  I suspect –  but haven’t checked –  it is pretty strongly correlated with the abatement regimes (if any) around state pension.   One of the best things about the New Zealand system is that although NZS provides an income effect encouraging people to think about stopping work, there is no relative price or substitution effect: as an older person you can work as much as you like and it doesn’t affect how much NZS you receive.  In many countries, the rules aren’t like that; it often isn’t economically attractive to go working.

And what about the change over time in the proportion of those 65-69 in the labour force?  The OECD has complete date only since 2002 so here is the change since then.

chg in partic rates 65 to 69

What I found interesting about that statistic for New Zealand is that that further large increase in the 65 to 69 participation rate has been exclusively in the years since the NZS eligibility age got to 65 (in 2002).  You can see in the chart above that our participation rates for those 60-64 also increased markedly over that period.

I’m not one of those inclined to celebrate (paid) labour for labour’s sake. I don’t think I was when I was in the paid workforce and I’m certainly not now.  But when the alternative is state income support then I do take a harder line view.  If you are able to work and are financially able not to, that is almost entirely a matter of individual/family choice, but you (generally) shouldn’t be eligible for long-term state income support.  New Zealand’s experience suggests that the overwhelming bulk of those aged, say, 65-67 are well able to work (we don’t have the data, but presumably –  given what happens from 70 on (see above) –  participation rates of those 68 and 69 are materially lower than those for people 65-67).   Against that backdrop, there is something just wrong about having a universal pension paid to them –  well, me not that many years hence on current policy –  simply on the basis of having got to that age.

Fans of a Universal Basic Income will, of course, not agree.  I am not a fan, having both practical and moral objections to a UBI.

 

Long-term fiscal choices

Fifteen years ago now Parliament passed an amendment to the Public Finance Act requiring that every four years or so

the Treasury must prepare a statement on the long-term fiscal position

There is nothing in the Act as to what these long-term statement should cover, just a minimum time horizon” “at least 40 consecutive financial years”.

This wasn’t a pathbreaking fiscal reform by New Zealand.  By the time our amendment was enacted a fair range of other OECD countries had somewhat similar requirements (see table on page 4).

Fifteeen years ago I probably thought this new requirement was a good thing.  I’m much more sceptical now  It is unlikely that such reports do much harm, but:

  • they cost a lot to do (at least as Treasury typically does them –  the legal requirements could probably be met with a two page report),
  • come around much more frequently than any underlying issues change, and
  • there is little sign that long-term fiscal management is any better for them existing.

There are fiscally reckless countries and fiscally cautious countries, and there were both types before and after the introduction of long-term fiscal reports.  It isn’t obvious which country has switched sides (or moved much at all) as a result of these sorts of reports.  New Zealand, after all, introduced the requirement when our own fiscal surpluses were around an all-time high already.

What is more, the underlying issues are really pretty obvious to blind Freddy.   Here is what I wrote when the last Long-Term Fiscal Statement was released in late 2016

The Treasury yesterday released its latest Long-Term Fiscal Statement.  These documents, in some form or other, are now required under the Public Finance Act to be published at least every four years.  I was once a fan, but I’ve become progressively more sceptical about their value.  There is a requirement to focus at least 40 years ahead, which sounds very prudent and responsible.    But, in fact, it doesn’t take much analysis to realise that (a) permanently increasing the share of government expenditure without increasing commensurately government revenue will, over time, run government finances into trouble, and (b) that offering a flat universal pension payment to an ever-increasing share of the population is a good example of a policy that increases the share of government expenditure in GDP.  We all know that.  Even politicians know that.  And although Treasury often produces an interesting range of background analysis, there really isn’t much more to it than that.  Changes in productivity growth rate assumptions don’t matter much (long-term fiscally) and nor do changes in immigration assumptions.  What matters is permanent (well, long-term) spending and revenue choices.   

There really isn’t much more to it than that.

That statement was released in November 2016, which means –  time flying as it does –  the next report is due next year.   A Treasury that wanted impact might reasonably be expected to publish before the election, and if they do that they need to be sufficiently early in the year not to be caught up in the immediate highly partisan pre-election period.

As it happens I went to an event at Victoria University the other day at which one of Treasury’s researchers was presenting some modelling results of work done for the next Long-Term Fiscal Statement.  I can’t tell you about those results, but it did get me thinking about some of the past Statements and wondering how they looked with the passage of time.

In my excerpt above I referred only to spending on New Zealand Superannuation which, on current policies, will rise indefinitely as a share of GDP so long as life expectancy keeps increasing.  But the other big issue –  which sage Treasury officials will sometimes suggest is really the bigger one – is health spending.  There are new technologies and drugs, rising public demand, not much productivity growth (at least in the health sector in New Zealand), and an ageing population itself seems likely to create additional cost pressures.

This is the sort of chart The Treasury likes to show, from the background papers to the 2009 Long-Term Fiscal Statement.

health 09

On those numbers, health would be a simply huge fiscal pressure, and the case for higher taxes might be hard to resist.

I’ve always been a bit more sceptical that health is quite the issue it is sometimes made out to be.  That is mostly because there are so many more dimensions on which government health spending can be adjusted than there are around NZS (for the latter, one can play with the age of eligibility, the rate, and the indexation formula, all of which get a lot of attention) and the societally-accepted boundaries are fuzzier (whose GP visits should be free or heavily subsidised, how much should be spent on drugs, how much other rationing should there be).

Anyway, on that 2009 Treasury chart, the projecting forward of historical trends (as Treasury did it) would have had government health spending by now (year to June 2020) well in excess of 7 per cent of GDP (eyeballing the chart suggests about 7.3 per cent).  Here is a chart from a recent post including budget numbers for the current (to June 2020) year.

cc2.png

Government health spending now is sitting just on 6 per cent.  It was about 6 per cent in the year to June 2008 (just prior to the recession) and not much below 6 per cent forty years (note that period –  the LTFS statutory focus) ago.

Now, quite possibly there is a totally unsustainable huge shortfall in government health spending at present.  But if so, none of the political parties is making that case (notwithstanding the rhetoric from Labour in the last campaign) or doing anything very much about, and since the issues around fiscal policy are really political in nature (how easy/hard is it to make decent choices in a timely way) it does suggest that the margins are more fluid, the fiscal outlook more readily malleable, than the quadrennial publications from The Treasury are sometimes taken as suggesting.   The system copes, and adjusts, perhaps less elegantly than officials might like, but that it does so nonetheless.  That is consistent with, now, 30 years of fairly sensible, often quite conservative, fiscal management by governments led by both main parties.  Adjustment rarely, if ever, occurs in response to projections 30 or 40 years ahead, but to pressures that become apparent within much more near-term windows.

As for NZS itself, personally I’m not overly interested in arguing the case for reform on fiscal grounds but on a rather more moral ground.    Even if we could afford it, even if there were no productive costs from the deadweight costs of the associated taxes, there just seems something wrong to me in providing a universal liveable income to every person aged 65 or over (subject only to undemanding residence requirements).    45 per cent of those 65-69 are now in the labour force –  suggesting they are physically able to work –  which is substantially greater than the 30 per cent of those aged 60-64 who were in the labour force 30 years ago when NZS eligibility was at age 60.

I don’t consider myself a welfare hardliner.  I think society should treat quite generously those genuinely unable to work, especially those who find themselves in that position unforeseeably.  Old age isn’t one of those (unforeseeable) conditions, but personally, I have no particular problem with something like the current flat rate of NZS, or even of indexing it to wage movements (which would be likely to happen over time anytime, whether it was the formal mechanism from year to year), from some age where we can generally agree a large proportion of the population might not be able to hold down much of a job.  I don’t have a problem with not being overly demanding in tests for those finding work increasingly physicallydifficult beyond, say, 60.   But what is right or fair about a universal flat rate paid – by the rest of the population – to a group where almost half are working anyway?  It is why I would favour raising the NZS age to, say, 68 now (in pretty short order) and then indexing the age in line with further improvements in life expectancy, and I’d favour that approach even if long-term fiscal forecasts showed large surpluses for decades to come.    At the margin, I’d reinforce that policy change with a provision that you have to have lived in New Zealand for 30 years after age 20 to be eligible for full NZS (a pro-rated payment for people with, say, between 10 and 30 years of actual residence).  Why?  Because in general you should only be expected to be supported by the people of New Zealand, unconditionally, in your old age, if most of your adult life was spent as part of this society.

Reasonable people can, of course, debate these suggestions.  But they are where I think the debate should be –  about what sort of society we should be, what sort of mix between self-reliance and public provision there should be, even about what mix of family support and public support there should be, or what (if any) stigma should attach to be funded by the taxpayer in old age –  not, mostly, about long-term fiscal forecasts.

The superannuation sky is not falling

When there isn’t much, if any, political or community impetus to do anything about a looming issue, it can still be useful to be told that the sky isn’t falling –  at least if that analysis is correct – but it probably isn’t an approach likely to attract too many readers.

The New Zealand Initiative last week released just such a report on New Zealand Superannuation, under the (slightly laboured) title Embracing a Super Model: The superannuation sky is not falling. (I was among those who provided comments on an earlier draft of the report.)

There are lots of interesting charts, even if perhaps most are familiar to anyone who has been reading in this area.  And there are helpful reminders of the (very) good features of our NZS system

There is a lot to like about the NZS model:

  • Low poverty rates: The material hardship rate for the elderly is low compared to other groups in New Zealand and is one of the lowest compared with European countries. The standard hardship rate for superannuitants is 3%, compared with 11% for the whole population and 18% for households with children.
  • Relatively affordable: NZS is more affordable than public pension schemes in many OECD countries, both today and in 2050. At around 8% of GDP, the projected public expenditure on NZS in 2050 is still lower than what many OECD countries are spending today. These include oft-acclaimed systems like in Denmark, Finland, Norway and Sweden.
  • Simple and efficient: NZS does not distort incentives for employment and savings as much as means-tested systems. When an NZS surcharge was introduced from 1985 to 1998, people went to great lengths to avoid paying it by hiding their assets. The simplicity of a universal benefit also lowers administrative costs.

(although, as I noted in a post a few months ago some OECD data appear to raise questions about those relative poverty rates.)

Our system has the further merit, at least in my view, that it explicitly focuses on providing a modest level of income support, leaving the responsibility for any higher material standard of living in old age a matter for individuals and families.  (Having said that, the tax system we have had in place since 1988/89 –  taxing income on savings made out of after-tax income at least as heavily as income from labour –  is quite out of step with that particular vision.)

When it comes to recommendations for change, the New Zealand Initiative report is curiously bloodless.  I agree with some of their recommendations, disagree with others, and noticed an important omission.  But with no sense of any fiscal urgency, the author seems a little at sea.  For my tastes, there was a missing moral dimension – a sense of right and wrong.  Debates about how we care for our elderly seem almost inescapably moral in nature.  Of course, economists have little or nothing distinctive to add in that area, but the Initiative seems reluctant to even attempt to make a case.

Their first recommendation is one I’d agree with

Recommendation 1: Link the pension age to health expectancy

Doing so would save some money –  potentially quite a lot of money over time.  But to me, the stronger argument isn’t about saving money per se, but about a sense of right and wrong.    In an age when most people aged 65 are perfectly capable of working –  thanks to the changing nature of jobs and the improvements in the health status of people –  what possible case can there be for paying a near-universal living allowance, raised by taxes with all their deadweight costs, to everyone of that age?   No one argues –  the Initiative certainly doesn’t –  that people who are physically unable to work should have to, but that is true of people at any age (it is why, for example, we have the Invalids Benefit).   I also don’t have a problem with society agreeing that it doesn’t expect people past a certain age to provide for themselves (or within families), unless they particularly want to work.  But given the health status of most people aged 65 how can 65 possibly be the appropriate age now?   As a chart in the report illustrates, more than 50 per cent of men aged 65-69 are still in the labour force.

I’m much less convinced by the second recommendation

Recommendation 2: Index NZS to CPI only rather than both CPI and wages

• NZS is indexed to both inflation and the average ordinary time wage. Decoupling NZS from rises in wages is a way of ensuring productivity gains reduce the costs of NZS. The real purchasing power of NZS should remain the same while the real purchasing power of wages would increase.

Although it isn’t quite stated this way, this recommendation is an assertion that the relative living standards of a large chunk of elderly New Zealanders are too high (for the bottom four deciles of the over-65s, NZS makes up almost their income).  It is to guarantee a material increase in the relative poverty rate of older New Zealanders, substantially so over, say, a 20 or 30 year horizon. In fact, what would be likely to happen is that a whole raft of means-tested forms of assistance would be added to the system, detracting from one of the great strengths (see above) of the current system.  Also, even if the analysts recommending CPI indexation rather than wage indexation are willing to live with the full ramifications of such a system  –  in principle, 100 years from now the real value of NZS would be the same as now, even though real wages might be several multiples of what they are now –  the political system just won’t do so.   Break the link to wages now, and it is likely to be back a decade from now.

(One plausible compromise recommendation might be to lock in the real purchasing power of NZS at the point a person first receives it –  eg you might get 65 per cent of the average wage as it was when you turned 65 (or 68) –  and the person turning 65 (or 68) five years hence would get 65 per cent of average wages then.  Both would only be CPI-indexed from there forward, but future old people would get to share in the productivity gains the community manages to secure.  This approach would parallel how private defined benefit pension schemes work.)

What of the third recommendation?

Recommendation 3: Contributions to NZ Super Fund should not be at the expense of paying down debt

The Super Fund should not be relied on to reduce the future costs of NZS (it cannot do that), and contributions to the Fund should not come at the expense of paying down debt.

I get the impression that the New Zealand Initiative isn’t very keen on the New Zealand Superannuation Fund, but is reluctant to call a spade a spade and call for its disestablishment.  There is an analytical point to be made-  NZSF doesn’t materially affect the future affordability of NZS –  but there is an at least equally important debate to be had about whether runnning a highly-leveraged (wholly leveraged) investment fund trading world markets –  and making politically convenient plays whether around climate change, light rail, or whatever – is any sort of natural or appropriate role for government.   I don’t think so, and I doubt the Initiative does either, but they seem strangely unwilling to say it (I guess they want to keep on good terms with the government).  Note that the existence or not of the NZSF is a different issue from the question of whether governments running a welfare system, especially for old people, should also run much lower levels of net debt (even net assets) than some stylised government doing only law and order and infrastructure might. I think they should.

And what of the fourth recommendation

Recommendation 4: Productivity growth will make NZS – and everything else – more affordable

Faster rates of productivity growth relative to increases in the real interest cost of government borrowing can allow increased government spending without falling into a public debt spiral. Raising productivity growth is a way of making NZS (and everything else) more affordable, and gives future governments more options and flexibility to adjust to changing economic and political circumstances.

Well, of course, although on the narrow NZS point this is a less-strong argument than it appears.  When net debt is near-zero, debt servicing costs aren’t a particularly important consideration.  The Initiative argues for CPI-indexing partly so that productivity gains will improve the fiscal position, although that seems to me to put the emphasis in the wrong place.  Faster productivity growth –  and recall that ours has been lamentable for decades –  offers the prospects of better material living standards for almost everyone  including, as they note, flexibility about support for the elderly.

But in practice, this isn’t so much a New Zealand Initiative recommendation as an aspiration.   We’d all prefer that productivity growth had been, and would be in future, faster. But wishing it doesn’t make it so, and the Initiative hasn’t been particularly strong on identifying the key factors, or policy issues, that might explain that failing and offer credible New Zealand-focused pathways out of it.

Finally, turning back to NZS itself, it was striking that –  as far as I could see –  there was no discussion in the report of the rather weird aspect of our system: that in a country with so many immigrants and emigrants, we offer a universal benefit to anyone who has lived in New Zealand for 10 years after turning 20, including 5 years after turning 50.  It is made worse by the fact that we have Social Security Agreements with various countries, notably Australia and the UK, which mean that residency in those countries counts as residency in New Zealand for NZS purposes.  Is this affordable?  Perhaps so in the same sense the New Zealand Initiative notes that the overall NZS system could be afforded. But is it right?  Well, that seems like a moral question –  informed no doubt by analysis –  and one where I’m pretty clear what the answer should be. It is simply wrong.

Welfare systems should be about “looking after our own”, and if you went to Australia at 20 and spent your entire working life there, I don’t see any good reason for New Zealand taxpayers to support you back here in retirement (of course, we don’t know how material these numbers might be).  Or if you happened to come to New Zealand first at 55.    A graduated system, in which NZS payments are proportional to the time spent in New Zealand between 20 and 65, seems both fair and fiscally prudent.   Take the 10 year residency (real residency) as a starting point at which you might get, say, a third of the standard NZS at 65, and scale it up so that after say 30 years you get the full benefit.  (Will there be a few hard cases? No doubt, but that is where charity and family support should be expected to fill the gaps.)

It will be interesting to see what, if any, NZS policy the opposition National Party comes out with.  The previous government, at the very end of its term, and having changed leaders, did promise to phase in –  very very slowly – an increase in the NZS eligibility age to 67.  But only if they were re-elected, which they wern’t.  And doing nothing about other features of the system –  dealing with any life or health indexation (in full or in part) –  or the very short residency requirements.  With Labour and New Zealand First seemingly fully committed to the current parameters of the system, it would be a brave Opposition to campaign for change, especially from a party with little obvious sense of an ability to engage on matters of right and wrong.   One should probably never wish for a recession –  especially now given the limited capacity of the authorities in so many countries to respond –  but perhaps it will take a recession to get our leaders to more seriously address the NZS issue.  That was, after all, what it took in 1989 and then 1991 when Labour started, and National greatly accelerated, the move back to 65.

 

Relative poverty: old and young

When I was working on my lecture last month on productivity as the best sure basis for dealing with poverty across a society as whole, I did take the opportunity to read around some of the literature on child poverty in New Zealand.   A line that used to be quite common in the New Zealand debate was that we had high rates of child poverty but low rates of poverty among old people, and that this represented some mix of a misplaced sense of priorities and some imbalance in political clout.  On checking, I see that I previously used the “low poverty rate among the elderly” argument myself in a published report.  On further checking, this was the sort of chart we used to see.

oecd elderly poverty chart 2000s

I’m fairly sceptical of these measures of poverty or deprivation.   They are mostly measures of (in)equality rather than of poverty, being calculated as the percentage of people in any particular group with incomes less than some threshold percentage (typically 50 or 60 per cent) of the (equivilised) median.     Real incomes for everyone could be doubled over time – by some mix of economic good fortune, innovation, and fine management –  and yet if the distribution of income didn’t change, we’d be told that exactly the same share of the population was still in “poverty”.  Sure, the detailed reports will specify that what they are measuring is relative “poverty”, but (a) that is almost a meaningless concept (whereas income or consumption inequality is not), and (b) the “relative” qualifier is usually too readily lost sight of once we shift from detailed technical reports to political debate and the like.     And so, a few months ago we had a  (very capable and well-regarded) visiting economist and politician noting in his lecture that child poverty rates (on these measures) were very similar in New Zealand and Australia, while failing to mention that average or median incomes in Australia are much higher in Australia than in New Zealand   People will be classified as “poor” in Australian who would be close to the median income in New Zealand.

Of course, there is a place for redistributive policies, but over time lifting overall rates of productivity make much more difference: the difference between the “poverty” most New Zealanders lived with (by today’s standards) when we were the richest country in the world a century ago, and the living standards of today.

But the specific point of this post, was this OECD chart I stumbled when I was thinking about poverty issues.  The differences in the differences between male and female rates look as though they could be interesting, but my focus is on the blue bars –  the number for the entire population aged over 65.

elderly poverty

OECD data used to (see first chart) suggest that New Zealand had some of the very lowest rates of elderly “poverty” anywhere.  But, apparently, that is no longer so.  On this measure –  using the 50th percentile –  New Zealand elderly “poverty” rates are still a little below the OECD total, and are actually a little above the OECD median (the countries labelled in italics are not OECD members).

And even in the days when numbers like those in the first chart were widely cited, people used to point out that it made quite a difference whether one looked at the 50th percentile, or (say) the 60th.  The widely-quoted child “poverty” measures in New Zealand typically use the 60th percentile.

Somehow I managed to find the underlying data for the elderly on the OECD website.  The tables say that there is a new measure being used since 2012 (and thus the difference between the first two charts).   Here is an aggregate chart showing the share of the population aged over 65 with income below 60 per cent of median equivilised disposable income (ie the same measure as in the OECD chart above, just using a different percentile threshold).  Here are the data for 2015 (or most recent).

elderly poverty 60%

I was quite taken aback when I saw those numbers.   The results of this new methodology are so different from those under the old methodology (at least for New Zealand) that one would need to dig into the new and old methodologies to be at all comfortable with the results.  After all, it is not as if NZS policy has changed materially over the last 15 years or so, and we know that a relatively high share of New Zealand over-65s are still in the workforce.    And given the universal coverage of NZS, I find it a little difficult to believe that our elderly (relative) “poverty” rates are so much higher than those in, say, the United States.   Then again, it is interesting to see the Australian numbers – especially when we hear occasional calls to adopt something more like the Australian system (compulsory private savings and a means-tested age pension) here.

But if the OECD numbers are to be taken seriously at all, it looks as if  –  relative to the rest of the OECD –  our child poverty scores might be not much different than those for our elderly.   This is the OECD data on child “poverty” using the same 50th percentile benchmark as in the fancy OECD chart above.

child poverty 2014

New Zealand almost identical to the OECD average.

There will, unfortunately always be pockets of extreme deprivation and perhaps even absolute poverty (often perhaps not well-captured in these sorts of aggregate charts).  Some of that –  even after welfare system redistribution – will be about culture, some about personal poor choices, and some about misfortune.  Some of it will even be about atrocious policies –  for example, land use law in New Zealand.

But what we do know, with a very high degree of confidence, is that overall average material living standards –  for children, the old, and everyone in between –  in New Zealand are well below those in most of the “old” OECD countries, that we used to far exceed.  Remember the statistic I’ve quoted previously: it would take a two-thirds lift in average productivity in New Zealand to match that on average in Germany, France, Netherlands, Denmark, Belgium, and the United States.   The best way to sustainably –  including politically sustainably – and substantially lift the living standards of those at the bottom is to lift productivity across the economy as a whole.  And there is little sign that the government or the Opposition have any ideas as to how to turn the decades of underperformance on that score around,