This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
It is said that the only certainties are death and taxes, but a lack of each causes uncertainties. As longevity increases, the pressures on state spending increase. A reluctance to increase taxation means the pressures on the elderly increase.
The dilemma is usually presented by the rising ratio of those over 65 years of age, who are net consumers, compared to those in the 15-to-65 age bracket, who are net producers. Sometimes called the dependency ratio, it is currently about one to four but is expected to rise to about one in two by 2074. (It was one to seven in 1974, although there was also a higher proportion of children, and women’s participation in the paid workforce was not as great.)
In some respects the ratio is misleading. Many people over the age 65 are still in the paid labour force. Others retire before they are 65. Many in the working age groups do not work full-time. Patterns change over time. Moreover many of the (especially younger) retired participate in the unpaid voluntary labour force making a positive contribution to their communities, if not to GDP.
A further complication is that the over 65s are far from homogeneous. At the very least, it is useful to distinguish the young-elderlies from the old-elderlies. The over-80s get almost treble the healthcare and social support that the 65-to-69-year-olds get from the public purse. For a 90-year-old it amounts to about as much as they get from New Zealand Superannuation (NZS). Increasing longevity means the number of (more expensive) old-elderlies are growing faster than the young-elderlies.
While selecting an age such as 65 is a mechanical attempt to portray a complicated situation, the actual age is a key one in fiscal management. At 65 almost everyone is entitled to NZS, which gives them a minimum after-tax income of around 40% of that average wage for a single person (currently about $27,000 a year), irrespective of their other income. It is taxed, but because our income tax system is not very progressive, it remains valuable to those on high private incomes.
The Treasury has recently, and once more, pointed out that with the expected increasing numbers of the elderly the current regime is going to put increasing pressure on the fiscal regime. It is hard not to conclude that current arrangements are fiscally unsustainable unless tax rates are substantially raised in the long run. (There are other great pressures for more government spending which also demand higher tax rates. Borrowing is a short-term measure which defers raising taxes to a later date.)
If you think there is a fiscal sustainability problem which cannot be resolved by higher tax rates – I do – then there are two major ways to the resolution, aside from mañana, which I also discuss.
The first is to raise the age of eligibility for NZS. The National Party campaigned on raising it from 65 years to 67 years. (The coalition agreement with NZF abandoned this proposal.) I leave you to judge whether the proposal to raise the age from 65 to 67 was courageous or timid; I think it is the wrong strategy.
What we should be doing is setting a formula for the age of eligibility based upon life expectation, not a numerical age. When in 1993 the age was last raised to 65 (by agreement between the unlikely pair of Ruth Richardson and Michael Cullen), a person of that age had a life expectancy of another 25 years. Today a 67-year-old has a life expectancy of about the same 25 years. In the twenty-odd years since 1993, people’s life expectation has gone up about two years. (These figures are based upon the Statistics New Zealand life table, and yes, the data really shows that one has about a quarter of century more life at 67 on average.)
I suggest that we should set the age of eligibility for NZS at where there is an average life expectation of, say, 25 years. As life expectancy rises (or falls), then the age of eligibility should automatically rise (or fall).
Two important caveats. The eligibility age should not be jumped up but rise incrementally, as it did under the Richardson-Cullen scheme. And second, there has to be an incomes-tested benefit for those who are unable to provide for themselves below the age of eligibility either by working or having insufficient savings. Again that was a feature of the Richardson-Cullen scheme. (Cullen’s personal contribution was the introduction of Kiwisaver, which boosts private retirement incomes.)
A second strategy is to abate more strongly the NZS of those on higher incomes. An easy way would to be to put all superannuants on a separate tax code with higher income tax rates which reduce the state contribution as private incomes rise. The bleed-out rate should be high enough so that the very well-off would opt back to the standard tax rate and forgo NZS completely. (This regime is not very different from what I suggested for a universal family benefit.)
The alternative strategy to these two might be called ‘mañana’, where we put off decisions until later, perhaps in the hope that we shant have to make them in our lifetime. But something will happen in most people’s lifetimes. It may be an ‘overnight’ crisis, as has happened in a number of countries when a fiscal collapse forced a sharp rise in the state retirement provision – none of this planned incremental increase stuff with a good warning it was going to happen.
Or it may be a creeping crisis, in which the government struggles with its fiscal position which it resolves in regard to the elderly by cutting back their provision for healthcare and state support. So they – the old-elderly especially – find themselves either paying for more of it themselves or going without. (Yes, it may be already happening; we practise mañana a lot in this country.)
That would mean that many of the young elderly would remain reasonably well-off, but as they age and their frailties increase, they will find themselves living in increasingly difficult circumstances.
Actually, that is not quite right. Under mañana, an increasing number of the young elderly are going to find themselves coping financially with their parents in their nineties. Those parents will be lucky to have their children’s support; others will not.
In making the case for the strategies of raising the age of eligibility for NZS and bleeding-out the payment at a higher rate (yes, I’d probably go for both), I am not so much arguing for cutting back funding on the elderly but allocating the funding to deploy it more effectively. I remain of the view that tax rates are going to have to rise in the future.
As for the individual reader, I don’t give financial advice but commonsense may well conclude that if you are young, you are unlikely to get your NZS at 65; if you are older, you are likely to have a difficult old age if we continue with mañana. In both cases, prudence suggests that private provision for retirement remains a personal priority.
(A recent Treasury view on these issues is Longevity and the Public Purse Fiscal and Economic Impacts of Increasing Longevity by Dominick Stephens who is Treasury’s Deputy Secretary and Chief Economic Advisor.)
*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
50 Comments
"The Treasury has recently, and once more, pointed out that with the expected increasing numbers of the elderly the current regime is going to put increasing pressure on the fiscal regime."
Not everyone agrees with Treasury.
https://www.downtoearth.kiwi/post/the-nz-treasury-s-lack-of-imagination…
'... abate more strongly the NZS of those on higher incomes. An easy way would to be to put all superannuants on a separate tax code with higher income tax rates which reduce the state contribution as private incomes rise. The bleed-out rate should be high enough so that the very well-off would opt back to the standard tax rate and forgo NZS completely. (This regime is not very different from what I suggested for a universal family benefit.)'
It makes perfect sense to reimpose some form of the surcharge on NZ Super that National abolished in 1998 at the behest of Winston Peters. This would steer the state pension towards those who need it, and away from those who don't.
Susan St John has argued for something similar:
https://www.auckland.ac.nz/assets/business/about/our-research/research-…
Easton's suggestion that the qualifying age for NZ Super be raised to match life expectancy, on the other hand, will be responded to with anger by those sections of New Zealand society that statistics show have a life expectancy several years less than the average. These groups already argue that for them the qualifying age should be lowered by five years or more. Best not to talk about changing the qualifying age if we want to keep discussion civil.
Then again, there is Andrew Coleman's entertaining proposal of introducing a compulsory contributory savings scheme to provide the income-earner's own superannuation from 65 till 75 (with a top-up for those unable to save) and making the state pension fully available from 75. This would effectively raise the qualifying age by 10 years gradually over a 45-year working-life-span.
https://www.interest.co.nz/public-policy/129892/andrew-coleman-calls-ne…
Magicking up more money without either reducing consumption or increasing production will just result in price increases, not increased wealth. As others are increasingly pointing out one way or another on this site: to be able to supply everyone's needs in future is going to require us to waste fewer of our precious physical resources on things we don't need. There are lots of (mostly unpopular) policies that could help achieve this, but relying on compound interest - or any other form of paper wealth - isn't one of them.
Oh dear here we go again -
And second, there has to be an incomes-tested benefit for those who are unable to provide for themselves below the age of eligibility either by working or having insufficient savings.
Write clearly has no idea how difficult this is - easy for those who have live here on paye forever, but what about the others?
We would need another army of forensic accountants required to track down overseas investments (how), gifting, trusts, companies, non or low income producing assets( the home, the farm, gold, btc...and on and on..
UBI is the answer, not more bureaucracy.
Thanks for the article. I think the solution should be asset test for super , BUT you can only lose 50% no matter how much you have. This should immediately raise a lot of money. (depends on the asset test of course).
Basically we need to have a generational shift from the old to the young. The old ( like me) had it easy and did not provide a pension plan that was funded. Muldoon has a lot to answer for his scrapping of a valid retirement plan in the 70's.
Muldoon has little to answer for unfortunately. He clearly campaigned on the issue, it wasn't done by stealth, even commissioned a Hanna Barbera animated TV advertisement with some dancing Cossacks.
It's the voters of the day that have a lot to answer for and given the current entitlement mentality of many not surprising how they cast their vote back then.
As for the individual reader, I don’t give financial advice but commonsense may well conclude that if you are young, you are unlikely to get your NZS at 65
And for the imminent retirees, common-sense says do not expect young NZers to stick around and prop up your retirement with their wages if they are going to have to somehow find the means to entirely self-fund their own, on top of the huge living costs they face.
People cannot save what they do not have.
That is why you have to get organized and take some responsibility. I know loads of people in their 40s, who have done nothing, and are just starting to think about this topic. They are stuffed. I have been saving like you are supposed to for 30 years, so I am sorted, but obviously I will still take the super payment when the time comes, as it is the cherry on top of a well planned retirement, as all the advisors will tell you.
Our biggest problem in NZ is poor education (this stuff really should be taught at school), and people not taking responsibility for their lives and wanting others to pay for their every need. If you start young, like you are supposed to (and generally need to to get the desired outcome), you will find the money to save. If you don't, then you become reliant on spending all your income, and you will never make it. That is why people make the excuse that they do not have the money to save (it's because they put themselves in that position).
That is why people make the excuse that they do not have the money to save (it's because they put themselves in that position).
Oh, I thought the exploding cost of housing and cost of living might have had something to do for it. Guess not.
The fact that there are plenty of formerly comfortable professions that now cannot support a mortgage or household (say, during a period of parental leave if you want people in NZ to actually have kids) is just a trifling inconvenience, but I guess given that this tends to be your most mobile and transferrable demographic, you can just wave it away and it become a problem that sovles itself!
Your solution to 'stuff is too hard even for white-collared professionals to get by' can't just be 'It's your fault for not being born a decade earlier'.
That is nonsense. Houses used to be cheap, because they were cheaply made, generally ugly houses. Now everyone wants a flash now one with all the mod cons. That is where the money goes. White collar professionals that cannot live on their salary, should really re-assess whether they should be called professionals or not....I am betting the HP, Car loan, Credit card and all the other stuff that has been purchased on tick is responsible for them crying poor rather than the mortgage and the supermarket bill. Sure the mortgage is higher, the low rates were temporary, which should have been clear to everyone. You only need to save 20K or something as soon as you leave school or university and save very little to have a million dollars when you retire.....but it is all too hard. It's a little bit pathetic really, all these professionals that you say cannot save 250 bucks a month. Are you serious ?
Hey that's great. None of that changes that house prices have rocketed relative to wages and again, that formerly comfortable professions that could support a whole family on one income are now barely enough to qualify for a mortgage in a two-earner household. But I'm sure it's... Netflix... or avocados... or something.
No amount of boomer reckons about iPhones or car loans (I don't know anyone in my social circle who has financed a car) changes actual measured reality, which if you took the time out from making up things to get angry about, clearly show that affordability has gone backwards and people are making sacrifices like putting families off later and later to try and get the same level of financial security their parents had.
I don't think it is I that am getting angry, seems to be it is the other way around. House prices are dropping quite nicely, which you should be happy about....but many others are not, as they slip into negative equity etc. It is a two way street. I see we are back to the sad old argument, where, when faced with facts you start calling people boomers. These boomers (whoever they are) must be really bad people, as they are used as the excuse for all manner of the ills affecting the lazy and disorganized.
An excellent argument for capital gains tax, inheritance tax, and gift tax:
https://www.oneroof.co.nz/news/couple-who-bought-grey-lynn-villa-for-21…
Australia and other countries will be delighted to welcome those who do not agree with your tax ideas, Norway just discovered the cost of raising of raising the wealth tax from 1% to 1.2% - a Billionaire uped sticks to switzerland taking his casn and tax contribution with him leaving norway revenue worse off as a result.
Why is it these cheaply made, generally ugly houses also rocketed up to stupid prices if everyone wants a flash "now" one with all the mod cons?
Our cheaply made first home was built in the 80's, sold for $60k in 1990. We paid $200k in 2017 and sold it for just shy of $600k in 2021. The FHB that we sold to had no desire to buy a flash "now" one.
They are still cheaper than the expensive cookie cutter crap that people seem to like in the sub-divisions with the noddy size streets. The new ones only look nice, but they cost more, and are still crap. If I had to start again, I would probably go for the old ones...if fact that is what I did anyway.
So, it looks like you cashed out of a fake market at just the right time to me, so good on you. The price increase from 60k to 200k took 27 years. Not much of an investment, but in 4 years the increase of 400K was in a fake market and a direct result of the worst economic management in our history. So, that FHB you sold it to, is probably quite well underwater now as a result of the fake interest rates and fake market slowly collapsing.
Agreed they probably are underwater. According to homes.co (take it with a grain of salt) the value continued to climb to mid 600's before it dropped to $400k on 2nd May and $380k this month.
Our current property had a similar dollar drop on homes.co but we're still at about 75% LVR.
It was the Labour party. They promised to provide a stable housing market, opportunities for young families and provide lots of affordable housing. But....long story short, they failed at everything, made their supporters poorer, and everyone is pointing fingers in the other direction.
But they also made plenty of National voters a lot of money. I certainly did well out of a Labour Government despite never voting them, and I assume you did as well. But those who did well made the choice to do so with the opportunity presented to them.
Could've sold my house for $400k and still made a sizeable profit. Labour didn't force me to sell for what I received, and likewise the FHB could've put in an offer below our B.E.O which was $500k.
Everyone makes money when Labour are in power. They think that if they spray money about, their supporters will get it. But all they end up doing is increasing the equity of people that own assets, and then everyone complains about it. Really, you have do nothing to benefit from a Labour government. Personally it works well, but for the country as a whole. a total disaster.
"A second strategy is to abate more strongly the NZS of those on higher incomes. An easy way would to be to put all superannuants on a separate tax code with higher income tax rates which reduce the state contribution as private incomes rise. The bleed-out rate should be high enough so that the very well-off would opt back to the standard tax rate and forgo NZS completely."
I think this is a great option. It should be so that someone still working after 65 on the median salary or less still gets Super pretty much as it is now, but someone earning say 2-3x the median salary effectively gets no Super.
It doesn't solve the problem with people who are very asset rich still getting Super, but there are other ways around that
It doesn't solve the problem with people who are very asset rich still getting Super, but there are other ways around that
Oh is there.
So how we deal with the $5mill family home, multiple 'homes', homes for each kid, overseas funds overseas in no cooperative countries, trusts, farms, lifestyle properties, complex trusts, gifting, multiple exotic 'family' cars, Maori Land.
The other ways don't get those it should, they just get middle class ma an pa kiwi who have never lived anywhere else
It would be better if you spent more time planning for yourself and encouraging others, rather than trying to think of ways to penalise people that have planned, because that will not work anyway. There are a multitude of ways to get around inheritance taxes, gift taxes and whatever else. That is why we don't have them. as you will only get the people on the margins, that don't have the resources or the know how to avoid this type of stupidity.
So, this is a education and planning versus a lack of responsibility and intelligence conversation. The educated and planning side will always win.
You don't, and you can't. Taking responsibility generally means taking that responsibility yourself. i.e. you. I don't have rich parents. Why is it that you seem to be saying having rich parents is a pre-requisite for everything, and that success comes from your parents already being successful. Having successful parents helps only to the extent that they will give you nothing, but advice. Handing out money to your kids generally results in them going broke as they have no idea what hard work is if everything comes easy.
I think you are confusing how we solve this issue at an individual level vs as a country. Obviously taking responsibility for your retirement is a great thing to do personally, but it isn't going to solve the issues listed in the article above about an aging population and limited working people to support them.
It is all related. The reason we have this problem is everyone is relying on that payment being available so you cannot change it. Trying to restrict it or asset test is not going to work. So, long term, education is necessary and personal responsibility is required.
At the moment only 20% of kids (and 8% of Maori) have any clue about mathematics, and it's a key subject in relation to this. So, over the last 6 years we have moved further away from a resolution to this. Teaching mathematics through dance and all the nonsense implemented in the education system (which is happily being unwound), has actually made this problem much worse going forward.
As has marketing and consumerism and keeping up with the Jones's mentality that is pervasive everywhere.
I remember when lay buy used to be something you paid off in installments. Then once fully paid you'd get the item from the store.
Now it's totally reversed. Here, take the new lounge suite and massive tv, we'll sort out payment later. Or heck, take your groceries now and just pay off with installments. WTH.
Yes, well, the keeping up with the Jones's thing is really a sign of stupidity. I have no idea why someone would ruin themselves financially because they think their friends would be impressed. If you cannot afford cash to purchase these items, then you simply cannot afford it. I drive a car that is worth less than 5000 bucks, probably less than 2000 bucks. I could drive a Ferrari, which I am sure would impress people, but that seems like a waste of time and money to me. Do, I really want to associate with people that think differently of me because I have a flash car ? Probably not, as that would be stupid.
Yep, seems many are decrying the education(financial litteracy) of NZers. Nonsense of course. We are doing exactly what we have been trained to do. Spend every cent we've earned and every cent we will probably earn over our lifetime. We even had interest rates near zero and threats of negative interest rates, to ensure no one actually saved anything. And then the idiots that created this sh!tshow bemoan the fact no one wants to save anything!The situation is exactly as it's planned to be!
My generation. Gen X, is expected to live to their early 90s. I've accepted that I'll be working fulltime until 70 and part time until 80.
Several reasons: potential boredom if I were retired up to 30 years, financial because being retired so long is expensive. And simply to maintain a quality of life psychologically and physically. Use it or lose it as they say.
Yes, that is exactly what you need to do. One you get older you need to keep active, otherwise you will die. Many people just sit around and wait to die and cost the health system more and more money as they slowly waste away in old peoples homes on the tax payer dime. Staying active keeps your mind and body healthy, and it is a real positive. Others will call you selfish though and say you are stealing a job from a younger person. But....you can just ignore them.
Well done, you are in a tiny minority of your generation that still know everything and whinge about boomers, but the boomers created most things enjoyed by the generations that followed and will benefit from the transfer of intergenerationla wealth, lets hope they manage it as well as the boomers.
Brian Easton's proposals are just fiddling.
National Super will break it can't last. Gone entirely at some time. History.
We need universal Kiwisaver at high rates. Yes it's tough tough nasty, but beats starving in your old age.
Interesting idea the other day was start National Super at 75. But I think age 80. Or 85? Such reduces the taxpayer cost markedly
And your Kiwisaver to support you from 65 - 85. A predictable target to work on.
But.....if people commenting here are telling the truth then they have no money that can be saved. So, you would be pushing a massively unpopular program on to people that don't want it and say they can't afford it. They just want other people to pay, so they will just vote in whoever will dismantle it. Short term thinking yes, but people overall are not very bright and want something shiny and new today. Bugger tomorrow that is a different problem (hopefully someone else's problem too). When the time comes, they predictably turn to the people that did plan, and make up some story that it is not fair, unequal even, and start aggressively putting their hand out. Kind of like now.
"Or it may be a creeping crisis, in which the government struggles with its fiscal position which it resolves in regard to the elderly by cutting back their provision for healthcare and state support. So they – the old-elderly especially – find themselves either paying for more of it themselves or going without. (Yes, it may be already happening; we practise mañana a lot in this country.)"
Manana is the political consensus in Parliament.
Presumably the issue isn't so much how many workers there are, but their productivity. If average productivity keeps increasing, then the economy can pay for more "non-working" citizens - whether they be the conventionally retired or those who are rich enough to "retire" on their passive income. Alternatively, if productivity of NZ workers isn't increasing enough, perhaps the super fund(s) should be investing in overseas assets.
An idea I always like was that your retirement age is linked to how physically demanding the work you've done has been.
People who do the heavy work that actually makes society function - like nursing, farming, building or forestry - that's hard on the body, would qualify for an earlier retirement age than someone who hasn't had to exert themselves as much.
While it doesn't solve funding, it bypasses questions about entitlement, race or anything else; all it wants to know is how you have employed your life.
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