The Government should consider raising the retirement age to 67, winding up the New Zealand Superannuation Fund early and stopping all KiwiSaver subsidies to get debt levels back under control, a think tank says.
David Law, senior research fellow at the New Zealand Initiative said the Government's response to the economic challenges of Covid-19 had primarily focused on new spending, which will increase public debt from 19 per cent of GDP last year to nearly 54 per cent by 2024.
"Getting debt under control is the most important thing, especially when the next crisis requiring large debt is as unpredictable as Covid, such as earthquakes."
The Labour party yesterday announced it would bring in a new top tax rate of 39 per cent for those earning over $180,000, bringing in $550 million a year.
Law said fiddling with the taxes for 2 per cent of the workforce was not the way to get debt under control.
"On the expected revenue from this tax change, it will take 26 years to pay off the debt accrued by that wage subsidy. In fact, the new revenue may not even be enough to service the interest on our total Covid-19 recovery."
Law said instead the Government should focus on "low hanging fruit" like stopping contributions to the New Zealand Superannuation Fund (NZS), slowly increasing the age of eligibility for New Zealand Superannuation from 65 to 67 and indexing payments to the average of wages and consumer price index growth rather than only to wage growth.
"If, for example, the Government raised the age of eligibility for NZS by two years from 2025 and slowed the growth of individual NZS payments slightly through indexation adjustments from 2021, Government debt as a share of GDP in 2034 would be approximately 12.4 percentage points lower."
Prime Minister Jacinda Ardern has previously ruled out raising the retirement age while she remains in Government.
Law said the New Zealand Superannuation Fund held $44 billion for a rainy day. It was set up to help pre-fund part of the cost of future New Zealand Superannuation payments.
"Despite the Covid-19 situation, the Government still plans to borrow an additional $10.4 billion over the next five years to make further contributions to the [fund]."
Law said at the least contributions to the Super Fund should be suspended, as happened during the 2008 Global Financial Crisis, and serious consideration should be given to winding up the fund early.
"The expected balance of the NZSF in 2024 is approximately $60 billion, which would just about pay for what the government expects to spend on its Covid-19 recovery.
Re-starting contributions to the Super Fund was one of the first policies Labour enacted when it got into power in 2017.
If contributions to the fund had continued through the GFC it is estimated the fund would have been a lot bigger given the strong returns it posted between 2009 and 2017.
Law also suggested ditching the Government subsidy for KiwiSaver. The Government puts in 50c for every dollar a person contributes to KiwiSaver up to a maximum of $521.43 for every member every year.
Law said two studies on KiwiSaver had showed only a third of contributions to the scheme were new savings while the rest would have happened without it and KiwiSaver's effect on national savings was negligible.
"Overall, KiwiSaver has performed poorly and Government subsidies represent poor value for money. In the current dire economic context, it would make a great deal of sense to end Government subsidies to saving through KiwiSaver.
"If this were to happen in 2021, Government debt as a share of GDP in 2034 would be approximately 4.5 percentage points lower, all else equal."
Law said looking at New Zealand's retirement income policy settings was a good place to start for cost reductions since Kiwis were essentially contributing to their savings' accounts by topping up the national credit card.
"Taken together, ending subsidies to KiwiSaver, increasing the eligibility for NZ Super and slowing the growth of individual NZS payments slightly could reduce Government debt to about 25 per cent pf GDP in 2034 instead of 42 per cent as is currently projected."
Finance minister Grant Robertson said after the May Budget that it planned to pay down the increased debt level over time as a result of the economy growing rather than taking an austerity route and making cut-backs.
"We will pay that debt down over time, that will be as a result of the economy growing and growing sustainably."