A rerun of the election debate on the age of eligibility for NZ Super ignores the real costs and the real unsolved problems for both paying for superannuation and making it fair

For the third election in a row, Labour is vowing to keep giving people the pension at age 65, saying the plan is affordable.  

Also, for the third time since John Key's departure, National is vowing to gradually increase the age of eligibility, saying the current system is unaffordable.   

And so the argument goes on, with little intellectual progress being made, election after election. 

But there must be more to this debate than I-say-toMAYto-you-say-toMARto.   

There should be objective facts to guide this argument, because there usually are when one person has to pay hard cash to another.   

Two facts are certain. One is that the Government is budgeting to pay $21.6 billion in superannuation for one year alone:  2023-24. A second is that the NZ Super Fund, sometimes called the Cullen Fund, currently stands at $62.4 billion.

Simple arithmetic says that means the NZ Super Fund will be able to pay superannuation for three years, and additional public money will have to fund at least 14 years more based on the average life expectancy at birth in 2018 of 82.

But the argument is far more complicated than that.  

The NZ Super Fund is not supposed to start paying out money till the mid 2030s, when its capital sum will almost certainly be far higher than it is now, so it will have more money to spend.   

One the other hand, there will be more older people to spend it on. No-one is certain exactly how big that number will be.  And their proportion to the rest of the population will vary, depending on immigration and birth rates.  

Furthermore, the whole issue is thrown intro flux by unpredictable rates of economic growth. And life expectancy will increase, but it is not certain how high it will go.     

For these reasons, actuaries run a mile to avoid commenting on the affordability of NZ Super, preferring to stick to micro issues instead, like KiwiSaver. 

Treasury, however, takes up the slack. It has written repeatedly on superannuation. Its latest forecasts indicate the NZ Super Fund will meet on average 16% of the cost of paying superannuation over the 50 years between 2040 and 2090. Adding the tax paid by the NZ Super Fund to the state, the total figure is around 20%.   

These numbers appear to be behind government assurances of affordability. 

But Ministers don't mention the other 80%. Nor do they say whether this money could be found from annual revenue or whether it would have to be borrowed. Nor is there much discussion of other problems of an ageing population, such as the healthcare costs.   

Nor is much attention given to other future risks. There could be a war, a big earthquake or another pandemic in future, not to mention climate change.

Paying the costs of these could prove too much if for state finances are burdened down with huge pension costs.

More elderly people

A pension for those aged 65 and older, NZ Super is a cash payment that is not means-tested.

Treasury has previously said the number of pensioners relative to the population at large will rise from approximately 15% of the population to over 25% by 2070. But even as it makes these projections, Treasury hedges many bets, relating to birth rates, immigration, life expectancy, interest rates, productivity and other factors.   

Braiding these multiple strands together leads to several scenarios, but they usually involve either a rise in government debt or a cut in government services. 

One large scale report on this was done by Treasury in 2021: He Tirohanga Mokopuna.    

It looked at both superannuation costs and the elderly’s disproportionate share of funding from the health service.  

It forecast total Crown revenue to remain constant till 2061 at around 29% of gross domestic product (GDP).  But total expenses would rise from 33% to 45% of GDP.  

The impact of this would push net debt up six fold to 196% of GDP. 

Treasury is at pains to say these figures are based on trends at the time and they could change. In addition, the debt figure is based on the debt-assessment methodology in place in 2021, which was changed by the Government last year. 

But at any rate, the Labour Party previously concluded that that all this would be way too expensive. So, it went into the 2014 election, saying a change to age 65 as an automatic qualification date had to be considered.

"Labour will ensure the future sustainability (of universal superannuation) and will consider options to achieve this, including raising the eligibility age," the party pledged in its 2014 manifesto.

"If this occurs, we will ensure that those who cannot work past 65....will receive the equivalent of the superannuation payment from the age of 65."

But this commitment by Labour lasted for just one election campaign. Subsequently, the party did an about face, with Jacinda Ardern mimicking Key and pledging to resign before raising the pension age from 65. 

Different for different people

One reason for the change was that Labour recognised the retirement age is not the same thing for all people.  Working past age 65 might be okay for white collar workers, but not for manual labourers whose bodies are sometimes broken by years of heavy lifting. 

“We have debated this for years,” says the president of the Council of Trade Unions, Richard Wagstaff.

“It has been the blue-collar workers and manual workers in particular, who have made it clear that at 65, their bodies are worn out, and they have to stop work.

“Life expectancy has been increasing for the average population, but people who have been working in manual labour are ready to retire at 65.” 

And there was another factor that made Labour switch tack besides the plight of older, vulnerable manual workers. This was the potential inequity for groups such as Maori and Pasifika, whose average life expectancy is lower than for Pakeha.

This means they do not get the same benefit from superannuation in the long run, even though they paid taxes during their working life to fund it. 

For the Maori Party, this issue is so critical they are insisting on a different age of eligibility for Maori compared with other ethnic groups. 

But there may be more to it than this. These problems might not be a game changer at all, despite the claims of the current Labour leadership. 

These were dealt with earlier in a comparatively nuanced policy pushed by the then deputy party leader, David Parker, for the 2014 election.  

His plan sought to alleviate the financial danger from pension costs while preserving humanitarian conditions for worn down manual workers.

"It was always recognised that different population groups aged differently," was how a a party insider puts it. 

"Maori and Pasifika have a shorter life expectancy, and manual workers also have a shorter life expectancy.

"Further work needed to be done to ensure that there was (genuine) equality across the different population groups."  

A lot of the analysis needed to develop a flexible but sustainable pension system was done by Parker.  And more analysis was planned to deal with differential Maori life expectancy. The aim was to avert a future fiscal black hole while avoiding self-evident humanitarian suffering.   

But post 2014, Labour did a U-turn and has remained unmoved by the argument that the fiscal costs of its policy would be too high.

Doubling down

And in the run up to the election, Labour is doubling down on its policy.  

“We have one of the simplest superannuation schemes in the world," the deputy leader Carmel Sepuloni told her party followers at their recent annual conference.

"It is universal and generous.  As long as we keep paying into the Super Fund it is also affordable."

The Prime Minister, Chis Hipkins, has the same message.  

“We believe with the right economic management we can fund superannuation for the longer term," Hipkins told journalists.

"But it does involve things like contributing to the NZ Superannuation Fund. 

"The Super Fund won’t fund 100% of the cost of superannuation, it was never intended to do that. What it was intended to do was fill the gap that could be created if we didn’t pre-prepare now for an increasing number of people over the age of 65."

However, critics of this position argue that the NZ Super Fund will pay for just a small number of retirees.

They say the real outcome of this policy will be an intergenerational transfer of wealth, and that from younger people who are already burdened down with student debt and high house prices.    

And anecdotally, it is common to hear young people say they don’t believe the system of state super will last, there will be nothing for them when they retire, and they had better start saving now.