Michael Littlewood: Our pensions are affordable for future taxpayers

NZ First leader Winston Peters. Photo / File

Opinion

COMMENT:

In his recent article, "Ageing 'Ponzi' scheme needs to change fast" (Herald, August 8), Peter Davis suggested New Zealand's ageing population imperils the future of both health and superannuation. He describes them as "increasingly untenable as the ratio between contributors and beneficiaries gets out of balance". What we have, he suggested, looks "increasingly like a Ponzi scheme".

We apparently have "massive unfunded future liabilities" that can be resolved by compulsory private provision coupled with a means-tested state pension, a system that looks a bit like Australia's arrangements.

Davis seriously misrepresents what we have. He also didn't mention that a pension scheme, much like his suggestion, was rejected by New Zealanders in the 1997 referendum (92 per cent to 8 per cent, in case he has forgotten).

Even if today's pension were unsustainable — it isn't, as explained shortly — NZ Superannuation is not even close to being a Ponzi scheme where it all falls over the moment new "investors" dry up. Today's taxpayers support today's pensions and tomorrow's taxpayers will do the same.

The strength of today's economy drives the ability to support today's pensions and the same will apply in 2060. Incidentally, exactly the same applies to private savings, so shifting the liability for pension claims into the private sector, as Davis suggests, doesn't change the economic equation. It just changes the pockets from which tomorrow's pensions are drawn.

What actually matters to both public and private provision is the strength of the future economy from which those pensions are drawn. So, not a Ponzi scheme – not even close.

I think New Zealand Superannuation is the best Tier 1 pension in the world – simple, easy to explain and administer and very, very effective. It can be improved, of course, but we need serious amounts of impeccable data before we can start a national discussion on that.

But, is it unsustainable? No, but, as ever with all government spending, it will be a question of priorities.

The net cost of NZS today is 4 per cent of GDP. That's a lot but it's among the lowest total public pension spend in the developed world. Our Treasury thinks that in 2060, 42 years away, that net cost will be about 6.7 per cent of tomorrow's GDP.

That's a sizeable increase but to put that into perspective, the average before-tax public spend on pensions amongst all OECD countries in 2011 was 9.3 per cent of GDP (the net cost will be a little less). The 28-country OECD average spend on pensions today is somewhat more than we expect to spend in 42 years' time. So, not a crisis – again, not even close.

Davis' "massive unfunded future liabilities" associated with health and pensions do not exist. Tomorrow's pensions and health costs should not be pre-funded, not even a bit. Does Davis worry in the same way about the unfunded future costs of defence, education, security and all the other things governments spend our money on? I hope that's a rhetorical question.

Tomorrow's taxpayers might think a net 6.7 per cent is too much to spend on NZS in 2060. That will be a decision for tomorrow's, not today's, taxpayers.

New Zealand has never had an evidence-led, national debate about any of the 13 benefit design elements that drive the size and shape of today's NZS. The behaviour of this Government and the last suggests we won't get that needed debate any time soon. We have a good system, but we have arrived there by accident not design. It is time to re-visit that design to improve, not emasculate NZS.

Davis' suggestion that this is an appropriate topic for the Tax Working Group is completely wrong. New Zealand needs to talk about NZS but we don't have the data to start that discussion. For example, precisely when do older New Zealanders stop working? How do they transition between fulltime work and fulltime retirement? What do their household balance sheets look like during this transition? Without this information, we cannot start a discussion about the state pension age.

An actuarial colleague and I published a report last year called The Missing 2016 Review. In that, we identified 125 questions that need answering about retirement, saving and pensions. Gathering the evidence to lead that debate and answer those questions is what should happen first.

• Michael Littlewood is principal editor, www.PensionReforms.com and former co-director of the Retirement Policy and Research Centre.