Bernard Hickey 's Opinion

Bernard is an economics columnist for the NZ Herald

Bernard Hickey: Key's retirement promise a costly drain on all of us

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The debate is not going away. Photo / Mark Mitchell
The debate is not going away. Photo / Mark Mitchell

Prime Minister John Key's promise to resign if he ever changed the entitlements to New Zealand Superannuation has cast a giant shadow across New Zealand's long-term fiscal outlook.

In 2009, the Treasury released its second long-term fiscal outlook showing that New Zealand's ageing population and its current superannuation and health settings would drive net government debt to 223 per cent by 2050.

Treasury suggested in the politest of terms that the age of eligibility could be nudged from 65 in 2017 to 69 by the late 2040s to help avoid the debt blowout. It also suggested indexing NZ Super to consumer price inflation, rather than the higher figure of wage inflation. Both would significantly reduce the expected rise in the share of GDP going to NZ Super by 2050.

John Key simply said talk to the hand and the debate was stone dead on arrival.

Retirement Commissioner Diana Crossan recommended in 2010 that the age of eligibility start rising by two months a year, starting in 2020 to 67 by 2033.

Key again rejected the proposal before the 2011 election, saying the Government's policy of keeping the age at 65 had been costed and was affordable until 2025. This contrasted with Labour's stance before that election, which was to implement the Crossan plan.

Key's re-election again seemed to shut down the debate for another electoral cycle. The improvement this year in the Government's fiscal outlook, thanks to a surge of economic growth from the Christchurch rebuild and the Auckland housing boom, has bolstered the Government's resolve to stick to 65.

But this debate is not going away. Treasury is legally obliged to publish its projections for New Zealand's Long-Term Fiscal Position every four years and it did that again this week. The immense demographic force of an ageing population will almost double the share of GDP going to pensions and healthcare to 19 per cent by 2060, Treasury reckons.

Assuming pensions and health policies don't change and the share of GDP being collected in taxes doesn't change, then the Government's net debt will still blow out to 198 per cent of GDP by 2060 from around 25 per cent now, Treasury projects.

So Treasury is again suggesting a range of options for gradual change that would avoid that blowout if implemented early enough. Surprise, surprise, they include lifting the retirement age by six months each year to 67 between 2020 and 2024, and indexing NZ Super to price inflation rather than wage inflation from 2020. Currently, NZ Super for couples is indexed at 66 per cent of the average wage after tax.

Yet again, within minutes, the Government was pooh-poohing the need to think beyond the next few years, pointing to how the spending restraints of the past two years are driving debt down to around 20 per cent of GDP by 2020.

But as the Treasury pointed out in its excellent series of papers and reports, neither economic growth, migration nor even the tooth fairy will blunt the eventual impact of our ageing society.

This is the elephant in the room that won't go away. It will keep ambling back into the political debate every two or three years until some politician addresses it.

- Herald on Sunday

Bernard Hickey

Bernard is an economics columnist for the NZ Herald

Bernard Hickey is the publisher of Hive News, a Wellington-based political and economic subscription news email service. He also writes for Interest.co.nz and appears regularly on Radio New Zealand, Radio Live, TVNZ and TV3. He has been a financial journalist for 25 years, having worked for Reuters, the Financial Times Group and Fairfax Media.

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