By Gareth Vaughan
The Government could run a second retirement income scheme alongside NZ Superannuation as part of a transition to a new system, but according to Andrew Coleman, this couldn't be done without an increase in taxes on older people, or more general tax increases.
Fresh from his 13 part interest.co.nz series on NZ's government retirement income system and associated taxes, Coleman spoke to myself and Terry Baucher on a combined episode of the Of Interest podcast and the New Zealand Tax Podcast.
Coleman is currently a visiting professor at the Asia School of Business in Kuala Lumpur while on extended leave from the Reserve Bank. He has also worked for Treasury and the Productivity Commission. The views expressed are his own.
Coleman says the urgency for making change isn't just down to an ageing population and the increasing taxes he says young people will have to pay. It's also because those under 45 are inheriting a very costly system, which might not be what they like or want.
He uses an analogy of a 22 year-old who recruits help from their father or uncle to buy a car.
"And he says, 'oh, cars, I'm good at cars. You know, when I was a kid we had these great Holdens and you could put six people in them, everyone in the whole family would fit in them. And they had a big six litre engine'... And you say, 'oh, well that's maybe not what I wanted.' But he says 'oh look, I'll go and get you the car, just give me the money and I'll get you the car.' And so you give him ten grand and [he] comes back [with an] old Holden, which is a gas guzzler and not particularly safe."
"And you've only got a girlfriend or a boyfriend and no kids and it's nothing like the car that you want and yet you've paid for it. And it's got these high ongoing costs because it's chewing down the petrol," Coleman says.
"You wanted a little hybrid or electric car or maybe just a Toyota Corolla, which was quite small and fits in your little parking place. And it's a bit like that. Young people today are inheriting a [retirement income] system designed in the seventies when Holdens ruled. And it may not be what they want and it's very costly."
In his series Coleman suggests a new pension system, which he calls KiwiSaver 2.1, which would be a shift from pay-as-you-go funded pensions to save-as-you-go funded pensions. I asked him whether a transition could be made to the new system for those under 45, with the current system kept in place for older people, without higher taxes on older people which he suggested in his series would be required to change to a new system.
"There's no reason why you can't have two systems going. And one of the reasons is that your entitlement would depend on your birth date...that's very straightforward. We would just at some point introduce the second system for people under 45 and build it up and keep old people on the current system," says Coleman.
"Can we do it without an increase in taxes on older people, or more generally? No."
"There is a transition issue. It's like digging a hole. Once you've dug the hole, if you want to get out of the hole, you have to do some work to fill it in again. And so when we adopted a pay as you go system or expanded it significantly back in the 1970s, it meant that to reverse it, some future generations are going to have to be worse off than they otherwise would have been. And that's the political difficulty here. It's like there's this beautiful thing that you want over there, a beautiful island that you can go to, but you can't get there for free."
"But there's goodwill out there. I think a lot of people my age... recognise that young people are paying a disproportionate amount of the costs and that if we can find a way of increasing taxes on ourselves in order to make the system better for younger people, that's something that a lot of people would be prepared to do now. It won't have to be a permanent increase in taxes. It's a transitory phenomenon," Coleman says.
"Once we've got the new system up and running, taxes would come down and we would have a much better tax system. There should be, if we do this, a statue to the unknown 75 year-old who paid a few more taxes so that all the young New Zealanders of the future could be better off and have a better system."
In terms of what tax(es) are used, Coleman says a transitional social security tax on older people is an option. Social security taxes, such as Accident Compensation Corporation levies, are paid on labour income.
There's much more detailed discussion in the podcast audio including on taxes.
*You can find all episodes of the Of Interest podcast here.
46 Comments
Sadly, for this government, making very necessary structural changes comes way down the list of priorities in their way of thinking.
One hopes the opposition parties are making good use of their free time by boning up on Andrew's series and coming up with something sensible for the next election. Maybe one opposition party can focus on this, and another opposition party on tax rebalancing, and then (as this government has done) do both as part of a coalition agreement?
We really, really need real change. And like 20 years ago would have been nice.
We got our chance at Change but decides to call it the GFC instead of using it as an opportunity to do something constructive. As you suggest, politics being politics, no incumbent Party is going to risk upsetting any set of voters by making a Change. So we'll have to wait for the Market to do its thing again, and hopefully, we have the sense to use its destructive power to our advantage. But you know what? WE won't. Because that might mean a few of us losing a lot.
But, Gareth, what guarantee is there, that the proxy will 'buy' anything in the future?
Did you ask?
Eric Frykberg did the same conjure-up in a recent Listener article - one sentence a forward guess; the next taking the guess as gospel. So too, Coleman. I'm told he is a smart guy and a nice guy (mutual acquaintances) but he's dealing in proxy, not the real stuff it might be exchanged for in the future.
And his replies, when challenged, were lame; standard economics "we haven't run out of anything yet" nonsense. Did you ask this (I'll listen when I have the time)?
Why ? Pretty obviously they are in the majority, held by older people, you know the ones that have been working for longer, saving it and not wasting it so you would expect them to have the most right ? Just because older people have savings, why should they get pinged ?
It's a real pity the boomer remover virus didn't do it's thing properly. The young are getting fleeced by intergenerational theft and no hope of any improvement with the current government or the previous one. Can you blame yuppies for leaving? Unless you're a landlord, retired, plummer or accountant NZ doesn't have much for you. High tax rates almost exclusively targeted at the productive individuals to deliver dysfunctional public services and unlike most countries there is no tax efficient vehicle for retirement saving besides real estate which is out of the reach of many.
National just fast tracked a couple of car dependent housing developments in the middle of nowhere with no proximity to jobs or amenities. The developers just happened to have donated to the Nats or be related to the party members. The new residents will end up driving for hours every day compared to building near existing urban areas.
No, it won't.
See my post upthread; proxy might be, but REAL WEALTH is the ability to buy REAL STUFF.
Meaning having access the energy and resources in the future (sigh).
The BBs are consuming the REAL STUFF now.
Leaving the proxy - which will be worth somewhere between worth less, and worthless. We can call that theft (unwittingly done) or fraud (continuing to advocate, after being informed).
Is my comment incorrect in your context? How much diesel does one of those bi-annual cruises burn up?
Reverse mortgage -> funds bi-annual cruise -> house sold to developer to repay mortgage -> developer uses resources to increase housing density -> energy scarcity arrives -> people return to "living off the land" -> no land to live off because everyone's in high density dwellings.
All well and good however unless you inherit a good swathe of land that you could live off, then it isn't valuable [at this point in time] to someone if their parent carks it and leaves them with 2000L of petrol, 12 new car tyres of the correct size for them and 17 packs of cards. The inevitable resource depletion you speak of will come to fruition, that's an inevitability, however the timeline may not be for those alive today and so everyone will continue with what is tangible and impacts them. Human psychology is a hard one to fight against.
The pop of Pakistan is over 200m and they use very little electricity compared to developed countries. What they do generate is not reliable nor shared fairly. I'm guessing most of them rely on burning wood - a renewable resource. However solar has suddenly become affordable; they predict an increase in electric production of about a third all in just one year. Put a panel on your roof and you have a reliable source of electricity - add a battery and they can run fridges for preserving food and medicines. Freedom from govt control. During the life of the solar panels they are a renewable source of energy.
Real stuff? Until 200 years ago about 95% of humanity had nothing. 20 years ago that was 30% and now it is well under 10%. [World Bank figures for extreme poverty].
Your comments have a really good point - the link between wealth and access to oil (the main cause of WW1 and WW2). But that is a stretchy kind of link so the fears that oil would run out in 1995 that I read as a student didn't happen. If solar continues to become more efficient and cheaper then the problem your problem will go away. Admittedly a big 'if' for humanity to pin its hopes on.
I've lived on solar for 20 years - but it isn't oil; far from it. Indeed, nothing is as portably potent - which is why we will never see big or long-haul e-planes.
You must have listened wrong, or perhaps are of linear-thinking persuasion (this link is a cracker: Programmed to Ignore? | Do the Math (ucsd.edu) )
Peak by 200, was the Hubbert hypothesis in 1970. Deffeyes narrowed it down to late 2005, for light/sweet/crude, and was correct. Other sources, all lower EROEI, have kept the show going until about 2018, in hindsight. But remember, that's Peak; not 'run out'. Peak is somewhere near half-way through, and a decade either way is no big deal. Just makes the overhang worse, when it hits (easier to peak at 70 million barrels a day than 100 million....)
Energy aside, many other resources, including spatial ones, are being drawn-down/used up.
M. King Hubbert, a Shell geologist predicted U.S. oil production would peak between 1965-1970 in his 1956 paper "Nuclear Energy and the Fossil Fuels".
Jimmy Carter's "Crisis of Confidence" speech warned Americans that world oil production would peak in the 1980s. He stated: "In little more than two decades we've gone from a position of energy independence to one in which almost half the oil we use comes from foreign countries, at prices that are going through the roof."
Oil production did peak a few years ago but the predicted price explosion hasn't occurred as expected. Wind, Solar, Nuclear and other renewables have had a rocky start and are still insignificant compared to world consumption. But solar prices and performance sem to be following Moore's law for computers - getting cheaper and better faster than even the experts thought possible.
An analogy: US railways were considered a blue chip stock until quite rapidly in the fifties they weren't; the public moved from buying rail tickets to buying airline tickets. Of course railways still exist and oil will continue to be consumed.
Everyone is looking at this situation.
"A British tax change looks set to deprive Australian expats in the UK of the benefit of negative gearing on their properties back in Australia, and could also keep them in Britain’s inheritance tax net for a full decade after going home. The rules will also mean that long-term Australian residents of the UK will not get the benefit of franking credits on any Australian shares they own. And if they retire in Britain, they would pay tax on any superannuation income streams they bring across from Down Under."
We have to actually move on this. National Super is a drain now and will become a huge problem soon.
Do we want:
A - political inaction, and National Super collapses. Just breaks. Finish.
B - A new scheme, which will hurt at the start.
I'm for B. There is no magic money tree.
> Surely easy to get all party agreement?
Do you not understand politics mate?
Parties can agree as much as they like but half of all voters are aged 50+
Wake up!
The present value of tax contributions towards super on the median wage is fairly close to the present value of super payments.
Those who earn more than the median wage get ripped off, those who earn less benefit. Those who earn nothing are leaches on everyone else.
Among the many problems the hundreds of thousands of life-long losers who never pay tax, are takers their entire life, and expect to keep taking in "retirement" (not that they ever contributed anything to New Zealand).
They are rare so will not save enough to solve the not simple problem.
I get just over $20 in Super and an unspecified benefit from owning my own home (say $700pw). I have rentals but they never made much and will lose money this year. However if I had more and better rentals and ended up in your over $70k earning range I'd just transfer some to my wife, children and grandchildren. Similarly my wife who plans working beyond 65 will reduce the number of days she works rather than lose her Super.
A lot of reasonably comfortable retirees will have calculated that they will live on 5% of their wealth per year. This will include superannuation. Generally it will be a conservative calculation. It would be sensible to err on the safe side after all. I'm not sure how reliable it is but a video I watched that focuses on things like this claimed that what tends to happen is that when the retirees expire they still have on average 80% of their wealth left. This is because many people don't have too many years in retirement and their investments do better than they anticipated.
Cutting the superannuation of such folk through means testing or taxation would likely not impact them too much in reality. It may mean they instead expire with 50% of their wealth unused. It would be quite a feat of will power for nervous folk to use up all their wealth.
A risky strategy if they live a long time and their investments don't do so well. This is why almost all "comfortably off" superannuants would resist the cutting of their superannuation. They need it just in case. It's possible a death tax could be used to claw back superannuation payments. Perhaps a tax limited to a maximum of the total superannuation they received.
This couldn’t be done without …. More taxes
last time I read something about his brilliant plan, he basically saying current young people are paying double of the retirement. Now the current working population needs to pay more taxes?? No kidding!
as for tax more for older folks, they are either already retired, or working without much in savings, more taxes? Who are you kidding?
Perhaps if you read a bit more carefully, you would find out that the argument is
(i) young people (say those under 45) are being asked to pay more in taxes for the retirement benefits they will receive than older generations
(ii) it would be possible to design a variety of tax and retirement systems for young people that will deliver a similar level of benefits but only cost about half as much as they are currently paying and will be expected to pay in the future, which means if they started afresh they could design a much better and cheaper system involving far fewer taxes.
(iii) there is a legacy issue: what to do about the pensions currently being paid to people over 65 and scheduled to be paid for the people aged 45-65. Young people and future generations could adopt a much better system if they hadn't inherited an expensive legacy pension system. One way to get out of this problem is for people over 45 to temporarily pay more in taxes to help the transition to a much better and ultimately much lower tax system. This could be done with a tax surcharge on people aged 45-65 (or some subset of this group), or it could be done with a variety of other taxes. Consider it an investment to help remove the currently expensive system we have.
You might not like this suggestion, which is of course your right. But surveys show a majority of people of all ages would be willing to have higher taxes if this could reduce the increase in taxes that the younger generations are facing because the costs of NZ Superannuation disproportionately fall on them, not people over 50.
In any case, there is no reason to believe that young people want the type of system older New Zealanders designed in the 1970s and 1990s. They should no more be forced to use it than forced to drive holdens or forced to use land-line telephones. The system we use now simply is not particularly well designed. It is possible to design beter sustems just as it is possible to design better cars.
ac
"In any case, there is no reason to believe that young people want the type of system older New Zealanders designed in the 1970s and 1990s"
A bold and unverified statement....I would suggest that young people are more concerned that the system designed in the '70s and 90s' will be unavailable to them, not that they reject it.
are being asked to pay more in taxes for the retirement benefits they will receive than older generations
if you don't pay retirement benefits, even if it might be more than what you get, you will pay other taxes to look after older people unless it's acceptable for older people end up on streets.
(ii) it would be possible to design a variety of tax and retirement systems for young people that will deliver a similar level of benefits but only cost about half as much as they are currently paying and will be expected to pay in the future,
as you have mentioned, the current 46-65 generation already paid for even older generations retirement, they deserve to get what they've promised. translation, it's already liability to entire working population, including people under 45. initiate another scheme will actually mean young people pay twice.
in short, if we, by we I mean all Kiwis, really want to switch to a new system, government will need to borrow to fund the switch, which is well, a prices paid by all people.
and your whole logic around 'I will not get as much retirement benefits in future hence I will not pay taxes' is very strange. if young people refuses to pay taxes because 'those monies are used to pay retirees', then why should working people to pay for other people's 'unemployment benefit'? or why does a single person pay to 'raise other people's child'? Tax is mandatory to pool part of the GDP for public use. Hence, the tax you pay is never meant to get back to one in future for the same amount in terms of dollar terms.
You might want to really question your retirement logic here.
Saving money and financial claims on companies and other governments 'for the future' while running a current account deficits is stupid. We should be investing now in making our future lives more energy and time efficient so that the real resources available to us at the time are sufficient to meet all of our needs.
Focus on creating a system where people can actually live on a universal basic pension (topping up with work if they can / want) by providing basic universal services funded in the here and now, with capital gains / LVT / inheritance tax etc preventing spiraling asset prices and inequality.
https://www.goodreturns.co.nz/article/891752323/the-removal-of-the-surc…
Or do we need to bring back the surcharge and police it better this time?
This is one of the flaws of democracy.
The age structure in NZ is forcing policy in a direction that does not maximise the wellbeing of all NZ Inc including the distributional impacts.
Its the same issue with housing and its tax advantages.
No politician is will to make the necessary changes, and no politician would get voted in if they did.
NZ Is basically screwed. We are headed towards a chaos system “strange attractor” which will end in a crisis from which we will have to dig ourselves out.
Here's a question from history Andrew. During Piggy Muldoon's time he rewrote the law and dumped an embarassingly large (for him) super Fund into the consolidated fund to rescue his economic policies. Recent research has suggested that had he not done that and the SF continued as it was going, today NZ would be one of the wealthiest countries per capita in the world.
Today we have Kiwi Saver, and there is also the OBR. Within the OBR there is the "haircut" provision where a bank can just take a portion of depositors funds to pull themselves out of a pickle (that they likely created themselves) but is having ripple impacts throughout the economy. This to my mind is nothing more than state sponsored theft of priviate property by private business's. What makes you think politicians in the future will not rewrite the law to enable them to just take Kiwi Saver funds?
he is also ignoring the problems of the 'save-as-you-go' system. save as you go system will mean some of the poorer population will not as as much, and will have a very bleak retirements, and the states will have to pick up the tab. so the current young generation will have other prices to pay.
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