Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: At last - Labour breaks taboo on super

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Growth in the labour force which has to support older New Zealanders will dwindle to almost nothing by mid-century. Photo / Richard Robinson
Growth in the labour force which has to support older New Zealanders will dwindle to almost nothing by mid-century. Photo / Richard Robinson

Last year this column lamented the craven irresponsibility of our political leaders in refusing to even talk about changing the entitlement parameters of New Zealand Superannuation.

Labour has broken that taboo. That is progress, at least.

Progressively raising the age of eligibility for super to 67 between 2020 and 2033 does not solve the problem of an ageing population, however.

The oldest of the babyboomers are already 65. By 2033 almost all of them will already have retired.

But the post-war baby boom is only part of the issue.

No less important is rising longevity.

The Retirement Commission points out that on average a 65-year-old New Zealand man today can expect to live to 85 and a woman to 87.

Citing Statistics New Zealand projections it says that New Zealanders reaching 65 in 2031 will probably be able to expect to live until they are 87 in the case of men and 89 for women.

In other words pushing back the age of retirement by two years will only stabilise the average number of years on the state pension, not reduce it. But crucially it adjusts both sides of the ratio of superannuitants to workers.

The effect on the size of the workforce may well be the more important one.

That is because workforce growth is going to decline to a pretty meagre trickle.

Statistics New Zealand presents a range of projections on this.

The central one, which assumes medium fertility, mortality, net migration and labour force participation rates, still has a pretty steep decline.

After growing by 188,000 over the past five years, the labour force is projected to grow by 118,000 over the next five, by 78,000 in the five years to 2021, and by 56,000 to 2026, before flattening out at about 50,000 every five years for the following 20 years.

Workforce growth of just 10,000 a year would represent an increase of just 0.2 per cent a year and would entirely depend on net immigration.

So the current trends are stark.

The number of people drawing New Zealand Superannuation is set to rise from around 540,000 now to more that 1.3 million by mid-century, or a quarter of the population.

And they can expect to draw it for longer, while growth in the labour force which has to support them dwindles to almost nothing.

The Treasury's Long-term Fiscal Statement projects that this will push up the cost of NZ Super from just over 4 per cent of gross domestic product now to 8 per cent by mid-century.

We have been there before.

When Robert Muldoon in 1976 cut the age of eligibility to 60 the cost spiked from 3 per cent of GDP to a Budget-busting 6 to 7 per cent, until the age was pushed back up to 65 again over the 1990s.

So for Prime Minister John Key to insist that 65 is sustainable, provided we stick with National's economic strategy, is as fatuous as it is self-serving.

It also ignores that people are already choosing to work longer.

We get fresh household labour force survey data this morning. The last one three months ago recorded that the number of people 65 and over who were employed had increased by 13,900 over the year ended June.

It was the second largest increase for any age group and accounted for almost a third of the total increase in employment over the year.

It lifted the labour force participation rate for the older age group to 19 per cent, twice what it had been back in 2003.

The reasons for this trend, the retirement commission suggests, could be that some people need to continue to work and earn money, for example if they are still paying off a mortgage.

But not only that. "Some people want to work. They want to make a contribution, use their expertise and they enjoy the social aspects of working."

Retirement, the commission says, is now more a process than an event.

"For an increasing number of people, reaching the age of 65 years is no longer a marker for exiting from the labour market completely."

A survey released by Statistics NZ this week which seeks to gauge general wellbeing by a range of indicators found that overall life satisfaction reported by the 65-plus age group was the second highest of any age group, exceeded only by 15 to 24-year-olds.

Though 75 per cent of them have an annual income of $30,000 a year or less, just over 62 per cent said they had enough or more than enough income to meet their everyday needs and another 30 per cent said they had just enough.

That leaves 8 per cent saying they do not have enough to meet their everyday needs.

The 2011 New Zealand Income Survey found that for the 100,000 people aged 65 or older who are in paid employment, including the self-employed, their income from that source represented on average 64 per cent of their total income.

A recent OECD report on pensions policy across developed countries predicted that the public sector's role in providing incomes in old age would remain important but diminish.

"Working longer and private pensions will inevitably have to fill the gap," it said.

"Taking the long view, a diversified pension system - mixing public and private provision, and pay-as-you-go and pre-funding as sources of finances - is not only the most realistic policy but the best policy."

Inevitably this is hard on the "sandwich" generation who have to fund their parents' super on a pay-as-you-go basis while saving for their own retirement.

But they need to remember they will be doing so out of lifetime incomes substantially greater than previous generations'.

And the state pension is hardly the lap of luxury, at a third of the average wage.

In the New Zealand context the OECD's prescription means expanding KiwiSaver and resuming contributions to the New Zealand Superannuation Fund.

Both major parties accept this in principle. They differ on timing and degree. National will resume contribution to the Cullen fund when there are sufficiently large fiscal surpluses.

Labour would do so immediately even though that would mean additional borrowing for a while anyway.

National would introduce automatic enrolment of all employees into KiwiSaver, requiring people to opt out if they do not wish to belong, by 2015, provided the Government's accounts are back in surplus. And they would increase members' and employers' minimum contributions to 3 per cent in 2013.

Labour would make membership compulsory for employees from 2014, leave their minimum contribution at 2 per cent but progressively raise the employers' subsidy from 3 to 7 per cent over eight years.

Strangely, it would retain KiwiSaver's tax breaks. The Treasury will no doubt be quick to point out that if you make something compulsory you don't need to incentivise it.

- NZ Herald

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