Is it right to pay more than the dole to wealthy superannuitants?
The debate about how to rein in the fiscal cost of New Zealand Superannuation, in light of an ageing population, tends to focus on two of the available levers: pushing up the age of eligibility, or scrapping the indexation of super payments to the average wage, in favour of some other metric which would rise more slowly.
But there is a third option, means testing. A version of that, founded on the notion of basic income, is advocated by Professor Susan St John of Auckland University's Retirement Policy and Research Centre in a recent paper, Improving the Affordability of New Zealand Superannuation.
Raising the age is unpopular but inevitable, given the trend of increasing longevity.
But as people need to be given plenty of notice, and as the oldest cohorts of baby boomers are already retiring, even if the policy were adopted now - and there is scant political prospect of that - it would only nibble at the fiscal problem for years to come. It also raises the issue of providing a decent income for those whose occupations mean they are physically worn out by 65.
Progressively weakening the relative value of the pension for everyone who receives it - for example, by raising it by the average of consumer price inflation and average wage growth - is also problematic.
According to the most comprehensive report on household incomes, most older New Zealanders (aged 66 or more) are very reliant on New Zealand Superannuation: 40 per cent have virtually no other income and the next 20 per cent get on average 80 per cent of their income from super and other government transfers.
"The current level of New Zealand Superannuation as a long-term support for people over 65 with no other income is far from generous," St John says.
Poverty or hardship among the elderly is less prevalent than for other age groups, but declining rates of home ownership, especially in Auckland, combined with any weakening of the indexation of super, could imperil that.
So that leaves the option of clawing back New Zealand Superannuation, via the tax system, from those who have reached their senior years with ample incomes.
Superannuation is taxable income, but the progressivity of the income tax scale means that those with no other income lose only a small proportion of it to the taxman.
Even those whose other income puts them in the top tax bracket still receive two-thirds of the gross payment, or a bit over $11,000 a year for a married superannuitant. As St John points out, that is $2000 a year more than an unemployed married adult on Jobseeker Support gets.
A single superannuitant living alone but in the top tax bracket gets nearly $4000 a year more than a single person on Jobseeker Support.
As a means of targeting super, St John proposes a basic income approach. New Zealand Superannuation would be a tax-free grant and everyone would get the same amount. Where there is a case for a higher payment for single superannuitants, it could be addressed through the Accommodation Supplement, rather than the current system where they are paid a higher percentage of the average wage than a married superannuitant.
But for those receiving New Zealand Superannuation, a separate income tax scale would apply to their other income.
The net value of super would be whittled down until at some, quite high, income level it was entirely clawed back.
Where that cutout point comes, and how much the taxpayer saves, would of course depend on what tax rate, or rates, and threshold(s) were chosen.
For instance, if there was a flat rate of 39c in the dollar on other income, a superannuitant would have to have $93,000 of such income before he or she would derive no financial benefit from super (compared with an ordinary taxpayer on the same income).
Or if there was a two-tiered rate of 17.5 per cent for the first $15,000 earned and 39 per cent above that, the cutout point would not be reached until other income hit $147,000.
When the Treasury ran these scenarios through its tax model for the three years ended June 2013, the average fiscal savings were 15 per cent for the first scenario and 8 per cent for the second, if the current differential rates for married, single sharing, and single living alone were kept.
If everyone was moved on to the married person's rate, the fiscal savings would be 24 per cent and 16 per cent respectively.
As New Zealand Superannuation is budgeted to cost $11.6 billion this year, or 18c in the dollar of forecast tax revenue, savings of that order are not to be sniffed at.
The problem is that the means-testing option still lives in the cold, dark political shadow of the widely detested surcharge, which applied in various iterations between 1985 and 1998. It was both cruder and more complex than what St John is advocating.
People resented the fact that it represented broken electoral promises, first by Labour and then by National. And, like any form of means testing, it undermined the longstanding universality of superannuation.
"I've paid tax all my life," people said. "I'm entitled." In fact, though, research by economist Andrew Coleman, who now divides his time between the Treasury and Otago University, found that on average what we pay in as taxpayers covers only about half of what we can expect to get out as pensioners. The rest is a transfer from each generation to the one before.
Pay-as-you-go New Zealand Superannuation, in short, is a very good deal. It is worth preserving.
Too bad the number of workers per superannuitant is set to halve over then next 30 years, to just two to one. And they are not serfs. They are free to leave.
So St John's latest contribution to the debate - the debate we ought to be having, but aren't really - deserves careful consideration and not to be dismissed with craven phrases such as, "Third rail. Touch it and you die."
(Weekly payment, after tax at the lowest rate)
• Single person, living alone $366.94
• Single, sharing accommodation $338.71
• Couple, both qualify $564.52.
See the full report here: