The Government's proposed changes to New Zealand Superannuation are way too little and way too late.

If I belonged to Generations X or Y, I would not be angry at the prospect of having to wait another two years for super.

But I would be angry that the Government plans to wait 20 years before even beginning to nibble at the problem of the ballooning cost to taxpayers of an ageing population.

By 2037, when it is proposed to begin raising the age of eligibility, there will be about two-and-a-half people of working age (15 to 64-year-olds) for every one over 65, according to Statistics New Zealand's projections. That would be only half as many as the five to one ratio in 2011 when the oldest of the baby boomers started to retire.


At the moment, more than one dollar in every six dollars of tax is paid out to superannuitants.

Finance Minister Steven Joyce says that by the time the age of eligibility has been raised to 67 (mid-2040) that, and the tighter residency requirements, will save the taxpayer $4 billion a year.

That sounds like a lot. But the Treasury's modelling indicates the cost of superannuation on current settings would be $40b a year by then, compared with $11b this year (net of the income tax superannuitants pay on their super).

By 2040, on current settings, super would cost the equivalent of 6 per cent of gross domestic product, net of tax, up from 4.2 per cent now.

To calibrate the scale, 6 per cent of GDP is what the Government spends on health.

Raising the age of eligibility would only claw back one-tenth of that cost, the Government estimates.

That makes sense. Given current life expectancy, someone aged 65 can expect to live, and draw the pension, for 20 years. Shaving two years off that would have a correspondingly modest impact on the cost. And even that saving would erode over time if life expectancy continued to rise.

In any case, the bigger effect on public finances of an ageing population is expected to come from health costs, not the pension - if only because there will be more of us in that expensive last year of life.

On top of that, the current level of super payments assumes that by the time people retire, they will own the roof over their heads. But home ownership rates are declining, implying a greater need for the accommodation supplement or some such assistance for the elderly in the future.

Despite these stark trends, the Government proposes to do five-eighths of not very much at all about superannuation entitlements.

Not only does it plan to wait 20 years before beginning to adjust the age of eligibility, it has pledged there will be no change to indexation of the pension to wage inflation, or to its universality.

Labour, meanwhile, plans to do even less. It has abandoned the policy of raising the age which it took to the last election. Instead, it talks about resuming contributions to the NZ Superannuation Fund sooner than the 2020-21 year the Government plans.

The problem is that the Cullen fund was only ever designed as a very partial pre-funding of super, shaving about 1 per cent of GDP off the top of the future cost.

The 11-year contribution holiday the present Government has imposed will diminish even that.

Treasury modelling indicates that even with the resumption of contributions in three years' time, the fund will meet less than 10 per cent of the cost of super when drawing down its capital begins mid-century. In other words it has about as much - that is, as little - impact as raising the age by two years.

So what about the other two main parameters of New Zealand superannuation: universality - everyone gets it, whether they need it or not - and indexation to the average wage? The problem with means testing super is that it would create the same issue as arises from targeting welfare benefits and Working for Families tax credits.

Super is already taxable income. If the entitlement were abated as other forms of income increased, it would create a zone of high effective marginal tax rates which provide a disincentive to earn additional income, whether that is from savings or employment.

As it is, New Zealanders are lousy savers. So much so that the Reserve Bank estimates the household saving rate is negative, meaning we are collectively spending more than our income.

On the other hand, labour force participation has been boosted by the fact that nearly one in four of those over 65 continue to be employed. Discouraging that through a tax increase does not seem clever.

As for indexation, having super increase at the same rate as the average wage is intended to maintain relativity between the incomes of the retired and the working population.

If it was indexed to the consumer price index instead, not only would that relativity be undermined, but the real value or purchasing power of the pension would decline. That is because the cost of living for superannuitants tends to rise faster than for all households, according to Statistics New Zealand's household living cost price index data.

The cumulative effect is significant. Over the eight years to December 2016, the CPI rose 12.2 per cent, but the living cost index for superannuitants rose 15.1 per cent.

Indexing super to the CPI rather than the average wage would, according to the Treasury's long-term fiscal statement, entirely offset the projected increase in the cost of super by 2060. But it would also be a recipe for elder poverty.

Something between wage indexation and CPI indexation, however, might be an option.

Any serious attempt to put retirement income on a sustainable footing has to look beyond the state pension to private provision.

In particular, it has to address the toxic consequences of the tax treatment of savings and residential property investment.

Ever since Sir Roger Douglas changed the rules in the 1980s, the tax system has discouraged saving through financial assets.

If instead you put your spare cash and as much as you can borrow into rental property, you are treated as having gone into business.

You can deduct all your costs including interest, and sit back and enjoy the profit-amplifying benefits of leverage in a rising market until you are ready to sell and collect your tax-free capital gain.

So long as the tax system tells people the best way to provide for their old age is not to save money but to borrow money and bid up the price of housing, we will be left with sterile and generationally divisive debates about super.