Would you be prepared to pay more tax if it meant your parents and grandparents continued to receive New Zealand Superannuation? Photo / Graphic
Would you be prepared to pay more tax if it meant your parents and grandparents continued to receive New Zealand Superannuation?
Or would you prefer it if the government spent less on health or the education of your children, to keep paying the elderly?
It's not a burning issue right now, but in 30 years it could be the decision that future governments have to make, as they face the rising costs of an ageing population.
Former Finance Minister Sir Michael Cullen is well aware of the issues.
In 2001 he tried to address the rising cost of pensions by launching the New Zealand Superannuation Fund.
The "Cullen fund", as it is colloquially known, was designed to help governments put aside a prescribed amount of money every year, with the initial expectation that withdrawals would start by 2025.
The fund began investing in 2003 and was on track to build up a sizeable war chest to help take the edge off the future tax burden of NZ Superannuation.
Then, the National-led Government put contributions on hold in 2009 for eight years as it grappled with getting the books back into surplus.
Last year the new Labour-led Government began contributing again but the fund is now an estimated $23b smaller than it could have been, had the previous Government continued to make contributions.
And it will be 2021 before government contributions get back up to the fund's mandated level of about $2.5b a year.
Cullen admits that without a fairly high rate of contributions over the next 10 years, it is going to be difficult for the fund to catch up and meet its original obligations.
"The fund's performance has been very strong but that said, nine years of no contributions ... that has a big impact on how much you can draw out of the fund in the future."
The Super Fund has averaged returns of more than 10 per cent per year since it began investing. Based on its track record, it could have been worth more than $60b by now. Instead, it hit just over $37b at the end of last year.
The fund was originally projected to rise to $109b by 2025, but is now expected to be only about $75b by then.
Cullen describes the halt to contributions as a "lost opportunity", especially when global sharemarkets were at a low in the wake of the global financial crisis.
But Cameron Bagrie, ANZ's former chief economist, who has since gone out independently, is more pragmatic.
"Hindsight is a wonderful thing but we had to make some tough choices," he says.
Bagrie says that during that nine years National was in power, the balance sheet wasn't looking so flash, and with the cost of the Canterbury earthquakes and the global financial crisis the Government had to prioritise.
If the National Government had continued to put money into the fund, he says, it would have had more money on one side of the equation - the assets of the Super Fund - but would also have had more debt.
Bagrie says the fund's performance justifies "shoving a bit of money into it", but it will only help mitigate some of the extremes.
"Is there still going to be a tax burden on the next generation? Yes."
He believes paying for the future cost of New Zealand's retirees is one of the intergenerational issues of our time - like climate change and housing, only less visible.
Bagrie says if taxes are not raised in the future, it could mean anything that is not health or superannuation will face a big squeeze in the Government's budgets.
Cullen says that to have superannuation and healthcare remain at the same levels but not increase taxes is just not possible.
But he doesn't want to panic people. "I wouldn't say any increase would be big. It is not a situation people need to get panicky about."
"I don't think you will see big change in the next five to 10 years."
The cost of New Zealand Superannuation is projected to rise from $13b in 2016 to $76b by 2050.
The percentage of GDP that goes towards paying for it will increase from about 4 per cent in 2001 to 7.1 per cent in 2049 and 7.9 per cent by 2059.
But Bill Rosenberg, economist at the Council of Trade Unions, argues the rising cost as a percentage of GDP - to 7.9 per cent by 2059 - doesn't tell the full picture, and things might not be as bad as some predict.
"It is a bit alarmist to use the 7.9 per cent figure if you look at other countries around the world, many are already on around 7.9 per cent of GDP."
The Commission for Financial Capability points to concerns about the dependency ratio, as New Zealand goes from five workers for every person over 65, down to two by 2060.
But Rosenberg says that dependency ratio doesn't include children, whose numbers are also falling.
He says paying for older people is still more expensive than children, but the shrinking percentage of young people should be factored in, as should the growing number of over-65s who are continuing to work and pay taxes.
Already, higher than expected fertility rates and net migration have dropped the percentage of GDP expected to be paid out on NZ Super from 10.5 per cent (as forecast in 2001) to 7.1 per cent by 2049, and pushed the need for the fund to start paying out money back to 2033.
Rosenberg points out that the percentage can be changed to some degree, by luck or by planning.
He says New Zealand could think about more migration or introducing a baby bonus to encourage people to have more children. "New Zealanders should debate that."
At the moment, he says, we are in a "Goldilocks zone" - having fewer children but not yet reaching the maximum number of retirees New Zealand is set to have.
He says the Super fund is "still going to do a useful job", but it won't be as effective as it could have been when it was set up.
Whether that is a future problem, he says, is a matter of values.
"Affordability is not a problem if people are willing to pay more in taxes to look after their parents."
"If people aren't willing to pay, they will have to do something about it."
But others are less convinced of the merits of the fund.
Susan St John, a director at Auckland University's Retirement Policy and Research Centre, is concerned that the money for the fund is coming out of current workers' taxes, which effectively means they are being double taxed.
"First they are taxed to pay for current superannuitants, many of whom are a lot wealthier than they are themselves, and second, they are taxed extra to help pay for their own New Zealand Superannuation."
She worries the double taxation will result in shifting debt to today's workers who may, for example, end up with bigger mortgages which will make it harder for them to save for their own retirement.
"There are always trade-offs."
St John says having the Super Fund doesn't change the cost of New Zealand Superannuation. "Taking money out of one pot rather than the other doesn't make it cheaper."
And she says it doesn't guarantee NZ Super will stay the same for future generations.
"We might be sold on the idea that it somehow guarantees NZ Super for the future. But the Government can and is likely to have to change the shape of NZ Super for sustainability."
But St John is also cautious about saying the fund should just be cashed up and the money returned to taxpayers.
"There is an argument for having a strong balance sheet but let's not have a fixation with putting a ring around these assets."
"If there was a big calamity, you can't tell me the Government wouldn't tap into it."
St John says at the very least, the Government should allow itself to count the fund's financial assets against its gross debt when calculating its fiscal targets.
"Why does Government get no credit whatsoever for saving for a rainy day?"
If the fund was included, it would show that New Zealand's net debt level was extremely low, she says.
Michael Chamberlain, an actuary who has been critical of the fund since its launch, says the fund itself does nothing to reduce the cost of New Zealand Superannuation.
"The presence of the NZ Super Fund doesn't change the cost of New Zealand Superannuation ... the only way to make it more sustainable is to change its cost."
Chamberlain doesn't believe the current Government should be putting money into it and says it would be far better off using the money to invest in infrastructure to help buoy the economy.
"The best way to make superannuation affordable is to have a buoyant economy," he argues.
"At the end of the day, in order to pay New Zealand Superannuation this year the economy has to produce some income to pay for it."
Contrary to popular belief, the money being paid to today's superannuitants comes from today's taxes. The Government does not squirrel away money from the taxes you paid over your lifetime, in order to pay it out when you reach 65.
"In any individual year, it comes from the income from the economic activity of that year."
Chamberlain says that while the Super Fund gives a future Government more choice, it doesn't make it any more certain that it will be able to pay the rising cost of New Zealand Superannuation. That's because paying money out of the fund will rely on it being able to sell assets at that time. And for that to happen, there must be buyers.
He says that even if the cost of paying for NZ Super rises to 7.9 per cent of GDP, that is low compared to many other countries - in particular, parts of Europe, where the cost is already 14 per cent of GDP.
And whether or not it is affordable for New Zealand will come down to the taxpayers of the day.
"If at the peak they take 7.9 per cent of the economic wealth of the country and transfer it to the elderly ... it is affordable if taxpayers of the day say it is."
Chamberlain says that is the just the same as today, where taxpayers say it is affordable to pay 4 per cent of GDP. "Maybe when it gets to 7 per cent we say it is not affordable."
But that is not going to become apparent until 2040 or 2050.
He says what we should be doing today as a country is understanding the trend in NZ Super costs and healthcare, so we can prepare and are not forced to make decisions.
Chamberlain says a worst-case scenario would be what happened after the Muldoon Government left the country in financial strife in 1984, and the new Lange Government had to make big spending cutbacks.
"I think what we should be doing is making sure there is very good information. To signal things in advance."
"We were in a very awkward halfway spot where there was a clear formula and it wasn't being used," says former NZ Super Fund chief executive Adrian Orr.
"It was run for a long time by a Government that didn't invent it, so we had the hold on capital contributions."
Orr, who is now Reserve Bank governor, says he understands the short term fiscal arguments for suspending contributions.
"I struggle to accept them," he says.
"How can saving less generate more savings? I know that the line used to be: you can't borrow to invest. No, you're not borrowing to invest. You are saving and this is a perfect savings vehicle."
Orr says he agrees with the argument that we don't account for the Super Fund in a balanced way.
"The asset sits on the Crown balance sheet; the liability that it's trying to fund doesn't," he says.
"It leads to poor analysis. So when the asset is going up or down, people say: look at the volatility. But put that against the liability it is trying to offset. Then we're being completely honest."
Orr is unashamedly proud of the Super Fund's progress under his watch — but he's not crowing about the stellar returns it achieved.
"What I said early on is if we only judge our reputation on the monthly mark to market then we're doomed."
"We actively chose the risk appetite we needed. We knew the volatility that would come with that. And if we were going to catch posies when it went up then we were going to have to catch bricks when it went down."
Instead, when Orr talks about his success at the Super Fund, he refers to the culture he instilled and the recognition it has received from the industry around the world.
"I know we are we referenced around the world. We are more famous throughout the world than we are in New Zealand — for our investment type, our risk appetite, our responsible investing framework, our transparency, our governance — right across the board."
Orr says he thought very hard about the fund's vision.
"Which was: a great team, best portfolio, benchmark 'great', benchmark 'best'. Best was about being the most cost effective and fit for purpose portfolio. Great was about having true concern for each other, true courage and constructive behaviour as a team."
Orr says he feels the fund is in good shape in terms of succession.
"I think they are spoilt for choice internally. I think the board is going through an appropriate process. I hope it's over soon. I'd hate to see talent leaving because of uncertainty."
- Liam Dann
'I don’t remember a time where people have asked me more redundancy questions.'