Brian Fallow on the economy

Brian Fallow is the Herald's Economics Editor

Brian Fallow: PM's stance on super mostly specious spin

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The OECD Pensions Outlook says 67 or higher is 'becoming the new 65'. Photo / Thinkstock
The OECD Pensions Outlook says 67 or higher is 'becoming the new 65'. Photo / Thinkstock

Some people just want to hear New Zealand Superannuation is perfectly affordable, just as it is, forever and ever, amen.

They would have been reassured by what Prime Minister John Key had to say on the subject at his post-Cabinet press conference on Monday.

To anyone else most of it was specious spin.

First he tried to insinuate the idea that the only countries raising the age of eligibility are those which have a much bigger fiscal problem with pensions than New Zealand has.

"If you look at 31 countries in the OECD, 15 are looking to raise the age either up to 65 or beyond 65. Of the 15, 14 have a current cost of super of 9 per cent of GDP," he said.

New Zealand Superannuation, by contrast, costs 4.6 per cent of GDP.

Whatever the Prime Minister's source for these numbers it is clearly not the OECD's own Pensions Outlook 2012, released 10 days ago.

It says, "67 - or higher - is becoming the new 65. Some 13 countries ... are either increasing pension ages to this level or, in the case of Iceland and Norway, are already there".

But according to the OECD, of those 13 just seven are currently spending 9 per cent or more of their GDP on the public pension, all of them continental European countries.

In Australia it is 3.6 per cent, the United States 4.6 per cent and Britain 7.7 per cent.

Those three are raising the age of eligibility and face a much smaller rise in the cost of the pension by 2030 than the 2 percentage points of GDP New Zealand has ahead of it.

If Key's aim was to suggest we face a smaller fiscal adjustment on this score than other developed countries, he is at odds with the International Monetary Fund.

Its estimate of the net present value of the change in New Zealand's public pension expenditure from 2010 to 2030, adjusted for the relative size of the economies, is nearly twice as large as the average for advanced economies and three times Australia's.

And that assumes the longevity projections can be relied on.

The IMF points out, however, that, "20-year projections have underestimated life expectancy at birth by an average of three years in Australia, Canada, Japan, New Zealand and the United States."

The OECD says life expectancy is expected to rise by seven years over the next 50 years in developed countries.

Key next tried to imply that because Labour agrees with Retirement Commissioner Diana Crossan that the age should be progressively raised to 67 between 2020 and 2033, it must also agree with her that the pension should be indexed to the consumers price index, not the average wage.

It doesn't follow, of course, and it is not Labour's policy.

The Prime Minister was on firmer ground when he said, "Simply raising the age does not deliver the economic panacea to the problem that some people think".

He is right. It is no cure-all.

The most we can expect from raising the age is to manage one of the three demographic problems facing NZ Super, namely increasing longevity.

Even on the official central projections by 2033, when the age would reach 67 under Labour's policy, life expectancy at 65 will be about two years longer anyway.

All it does is stabilise, for a while, the number of years a person can expect to draw super.

It does not address the two other demographic challenges: the baby boom and the exodus of taxpayers.

The oldest of the babyboomers have already started to retire, so it is getting a bit late in the day to devise ways for them to contribute more to the cost of their retirement incomes.

The best time to introduce an element of save-as-you-go was when they started to join the workforce 40 years ago.

The Kirk Government tried. Robert Muldoon's dancing cossacks saw that off.

And myopic, revenue-grabbing changes Roger Douglas made in the late 1980s to the tax treatment of private super was a further blow to providence.

Moving on to play the men and not the ball, Key said the Financial Services Council's proposal released last Sunday to beef up KiwiSaver was self-interested, as the council represents the savings industry.

Of course it was, but if lifting household saving rates is not part of the solution, why is the Government raising KiwiSaver contributions to 3 per cent for employers and employees next year? Is 5 per cent by 2025 an unreasonable extension of that trend?

The Government has said that the first call on the fiscal surplus, when it returns, will be to resume contributions to the Cullen Fund.

Budget projections were that the soonest there might be enough in the kitty would be 2015/16.

But that is based on Treasury forecasts of economic growth that already look out-of-date.

The consensus growth forecasts, from mainly private-sector economists, released this week are much closer to the Reserve Bank's last week than the Treasury's last month.

The bank expects it to take two years longer to return to surplus than the Budget forecast.

Key conceded on Monday there could be some slippage in the target date. It was not something the Government would pursue come hell or high water, he said.

Nor should it.

But the longer it takes to resume contributions to the Cullen Fund, the less contribution the babyboomers will make to their own super.

Which brings us to the other side of the intergenerational compact we call New Zealand Superannuation.

The year to April this year saw a record net loss of people to Australia of 39,800 or 0.9 per cent of the population.

Between March 2011 and March this year the population aged over 65 increased by 23,100 or 4 per cent.

The population aged between 15 and 64 increased by just 6600 or 0.2 per cent.

"Pay-as-you-go means that today's taxpayers pay for today's pensions. If they are not here to be taxpayers, the dependency problem [a shrinking ratio of workers to superannuitants] is greater," says Financial Services Council chief executive Peter Neilson.

"There has got to be a stable deal between generations. The young have got an option of where they go, the old don't have the same option."

- NZ Herald

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