Patrick Nolan says getting our retirement policy right now is important for the long-term, young people and future generations

By Patrick Nolan*

You don’t get long-term gains with short-term thinking. Long-term thinking is needed to highlight future needs and illustrate the impact of current trends.

This is especially important in areas like retirement income policy – where demographic changes loom and policy changes need to be signposted early and to stand the test of time.

To help with this long-term thinking NZIER investigated how Aotearoa New Zealand could look in 2050 and what this may mean for our retirement income system.

Of course, looking out this far isn’t a simple exercise.

There are things that we can be confident about.

We can expect the average age of a New Zealander to increase – not only because of the ageing of the post-War baby bulge (the baby boomer generation) but because of trends for increasing longevity and falling birth rates too.

This also means we can expect working lives to keep getting longer.

And it means we will see a larger share of government spending going on areas like health and superannuation.

On the economic front, technological change will create new opportunities for economic growth, especially for a small economy that is physically a long way from major markets.

But there are also things we can’t be so sure about.

To give a few examples, given countries everywhere will be getting older, what can we expect to happen to migration and interest rates?

What about housing markets and wealth inequality, including gaps in saving outcomes between different population groups?

And although technology will surely change, how effectively will governments and firms adopt new technologies and transform the ways in which they work?

Given this mixture of knowns and unknowns, NZIER mapped out different scenarios for how things could look in 2050.

These scenarios vary depending on how key assumptions play out, such as how the economy performs or how policy is developed.

The value of this approach is that it highlights the future is not set in stone. There are different paths we could take and the policy choices that we make now and over the next few decades matter.

This is especially so for retirement income policies.

These policies do more than just shape the experiences of individuals in retirement, although this role is, of course, critical.

They also play a role in shaping wider economic and fiscal outcomes.

This is most easily seen in fiscal policy, given the importance of spending in areas like NZ Super.

But the impact of these policies in areas like national savings and, in turn, productivity, are important too.

This means governments will struggle to achieve their fiscal and economic goals without supportive retirement income policies.

So, what does the NZIER report highlight on the choices in retirement income policy?

One take-out is while there is a lot of debate around topics like the age of eligibility for NZ Super, these are more “operational-type” questions.

The big strategic questions relate to the overall role of the system and how it should be funded.

The answers to most other questions flow from where we land on these big questions first.

On this, distinctions are often made between two broad approaches – “pay as you go” or “save as you go.”

Of course, in practice retirement income systems employ a mixture of pay as you go (like NZ Super) and save as you go (like KiwiSaver). But for illustrative purposes it is still useful to discuss these approaches as alternatives.

Broadly speaking a pay as you go system is one where current taxpayers fund the retirement incomes of previous taxpayers, and so on. The focus in this system is on relieving poverty and redistributing income and wealth. This is what Nicholas Barr has called the ‘Robin Hood’ function of retirement income policy.

A save as you go system places more focus on the ability of retirement income policies to smooth incomes over the lifecycle, e.g., shift income from working life to retirement. This is what Barr called the ‘Piggy Bank’ function. As such there is greater emphasis on current generations pre-funding their own retirement.

Economists continue to debate the merits of these two approaches.

On the one hand it has been argued that the thing that really matters for affordability is economic growth not who pays – so why not have a pay as you go system and reduce economic inequality?

In contrast, the save as you go camp points to imbalances caused by demographic change and the ability of compounding to reduce future costs (when interest rates are higher than economic growth rates).

These debates are far from are settled.

However, the experiences of countries like Australia and Singapore appear to provide some support for the save as you go camp.

Given every country is ageing, countries using a save as you go approach appear to be buying themselves greater policy space in the future, and not just in relation to retirement income policy.

This could support a strategy emphasising economic growth based on investment and productivity not just boosting short term consumption, and be a future source of competitive advantage.

In this light, Nicola Willis is raising important questions when she said "I want to see KiwiSaver balances grow, both to make Kiwis better off in retirement and to grow our collective national savings.”

But, as hinted at above, there is still a lot of thinking to do.

Save as you go schemes have problems. By their very nature contributory schemes lead to inequalities in working life being mirrored in retirement. It’s hard to contribute if you’re not earning in the labour market.

This will especially affect women, Māori, disabled people, and other groups. Contribution rates of the self-employed – a growing share of the labour market – can also be a concern.

Any efforts to increase KiwiSaver contribution rates need to be supported by efforts to close these gaps.

This is something Te Ara Ahunga Ora Retirement Commission is working on as part of this year’s Review of Retirement Income Policies.

We’re looking at questions like how to optimise retirement income policies for women at key points in the lifecycle, such as parenthood, separation, or the death of a partner.

We’re also investigating the opportunities provided by iwi savings schemes, and how default contribution rates for employees may “anchor” the contribution rates the self-employed pay.

And any increase in the role of KiwiSaver or other private savings will mean savers need to be better at understanding and managing financial risk, so we’re looking into the advice and products available when people come to spend down their savings and wealth, including housing.

We’re also considering how to improve the use of data and evidence in retirement income policy. The goal here is to understand how transparency and collaboration can help ensure the retirement income policy continues to be fair and effective.

And on this it is important to note, as the NZIER report shows, New Zealand is in a relatively good position. By international standards, in the decades up to 2050 we will continue to have a relatively young population and government spending on retirement income policies will remain in the lower half of the OECD.

This doesn’t mean we should rule out change. But what it does mean is that we should make the most of the time and space available to get any future reforms right.

And in doing this we should always be thinking about the legacy we want to leave. What sort of retirement income system do we want to leave for our grandchildren?

*Patrick Nolan is Director of Policy and Research at the Retirement Commission / Te Ara Ahunga Ora