New Zealand Superannuation (NZS) is one of the simplest Tier 1 pensions in the developed world. It provides a net 66 per cent of the net national average wage for a married couple and about 43 per cent for a single person who lives alone. It is adjusted annually to reflect changes in inflation but with an underpinning link to the national average wage.
NZS currently costs a net 4.2 per cent of Gross Domestic Product (GDP) and the Treasury says that this, without change, would have increased to a net 7.1 per cent by 2060. The changes announced by the government this week will cut about 0.5 per cent off that - down to a net 6.6 per cent.
In 2011, the average net cost of public pensions in all OECD countries was 7.3 per cent of GDP. Even before the recent announcement, our Treasury expected New Zealand to spend, in 40 years, less than the average pension spend of all OECD countries in 2011.
Health spending will have a similar trajectory to the cost of NZS. Currently, the gross health spend is about 6.1 per cent of GDP. The Treasury expects that to be 9.5 per cent by 2060.
We don't say that health spending is 'unsustainable' and must reduce today (or in 2037).
So, what do we make of the government's changes to NZS?
The first, less important, point is that the government has been smart about the politics of change. John Key's critics said that we could not afford NZS, that change was inevitable and that not talking about NZS failed to acknowledge New Zealanders' concerns. Bill English has spiked that particular gun. Whereas previously, other political parties could say that the government was avoiding the issue, Bill English has tossed down the gauntlet. The government is listening, will be trimming the sails (in 20 years) and what are you other political parties going to do about that?
The more important issue though is that the government wants to avoid any real debate about NZS by focussing on what just two (of a possible 14) aspects of its benefit design might look like from 2037. New Zealand has never had a research-led, national discussion on any aspect of the NZS benefit design since it began 119 years ago. Today, we spend more than $11 billion on NZS. The government's decisions aim to side-line the possibility of any debate on whether NZS might be made better today (spoiler alert: it can be).
Tomorrow's taxpayers might be unhappy about the cost of NZS or health (or both), but that will be an issue for 2060 taxpayers to resolve. Voters in 2017 cannot bind 2037 taxpayers, never mind taxpayers in 2060.
If the government's decisions intend to address concerns about what the cost of NZS might be in 2060, why aren't we even questioning today's cost? Is that a good use of taxpayers' money; do we have the design of NZS right? We should be discussing that today because the answer is 'no'. It's the best Tier 1 public pension scheme in the world but we can improve it.
The government has effectively shut down the possibility of a proper, evidence-led discussion - smart politics perhaps but not the right benefit-design decision. New Zealand must eventually have that debate; but it will now have to wait.
- Michael Littlewood had a career in superannuation as an adviser, author and commentator. He helped start the Retirement Policy and Research Centre (www.RPRC.auckland.ac.nz), was a member of the government's 1991-92 Task Force on Private Provision for Retirement, is the author of How to create a competitive market in pensions - the international lessons (IEA London, 1998) and is the principal editor of www.PensionReforms.com.
Now retired, Michael maintains his interest in public policy issues associated with retirement, saving and pension issues.