Dialogue: Leadership, consensus needed over pensions

By JEFF TODD*

New Zealand Superannuation has survived for 25 years for all the right reasons. We need it, it is good public policy, it is relatively cheap to administer and it works.

The other critically important objectives in this significant area of social policy - long-term affordability, and financial security - are also within our reach. We need political and community commitment and consensus. Surely that is not beyond us.

Why do we allow politicians to tinker endlessly with superannuation and why do politicians believe they can build support for their party on the back of constant change? This is the mystery of our public pension system.

We urgently need leadership on this issue, not point-scoring. I wonder if there is any other country in the world where citizens allow their political leaders to use retirement policy in such an openly political way. Why is it so difficult for us to forge a non-partisan policy?

The good news is that the endless changes of the past 25 years have not struck at the heart of the scheme. New Zealand Superannuation is strong enough to last another 100 years but we need commitment to its central values and principles.

The basic principles are simple but the other elements that are not yet fixed in a credible way need to be debated so consensus may be reached. Then we must defend the broad structure against all comers while allowing for change in a controlled and predetermined manner.

New Zealanders want to understand the risks they face on affordability and security so that they can make rational decisions about private provision.

Private saving has always been a fundamental part of retirement provision and it is important that obstacles in the way of private provision are removed. Even for those who depend mainly on private provision, the design of NZ Superannuation (including features such as income or asset testing) will have an impact on employment-related and other savings habits.

Private provision is important and to be encouraged, but many New Zealanders will rely totally on NZ Superannuation for their income in retirement and others will depend on it for a large proportion.

All New Zealanders want to know what will be there for them so they can plan. Growing old is an uncertain process. Can we at least eliminate some of the uncertainty about retirement income and standard of living?

After years of instability, it is time to settle the key issues that affect the design and delivery of NZ Superannuation.

The question of affordability arises because of our ageing population.

By traditional measures, the number of retired will increase over the next 50 years while those of working age will reduce. This is expected to lead to an approximate doubling of the retired-dependency ratio (the number of retired who are supported by each working person).

In summary, the problem is that we might not be able to afford NZ Superannuation if present policy settings, savings patterns and retirement behaviour persist.

The proposed NZ Superannuation Fund doesn't deal with design issues or affordability issues in any real way. To suggest, as the Minister of Finance said in introducing the fund legislation, that it will end uncertainty is to raise expectations that cannot be justified.

If we are agreed that NZ Superannuation is basically a good scheme, what proportion of our national economic output might we reasonably devote to it? Are we agreed it would be acceptable to have, say, one-tenth of the nation's annual output taken from the working population through tax and handed over to those who are retired?

If we are (and this proportion appears to be in line with other comparable countries), we have already made a good start in confirming the parameters of our scheme.

Even with the possible impact of the proposed new NZ Superannuation Fund, the net cost of NZ Superannuation is expected to reach about 10 per cent of gross domestic product by the end of the century. That percentage is relatively low by comparison with other OECD countries.

What would help affordability? The two most useful and effective levers that could be used to reduce future costs are the age of eligibility lever and the proportion of national average wage lever.

The state pension age of 65 was set in 1898. Between 1977 and 1992 it dropped back to 60 but by April 1, it will be back to age 65 again.

Why 65? With improving mortality, we should be seeing a natural increase in the state pension age, certainly by comparison with the position that prevailed in 1898. By 2031, New Zealand males are expected to have a 19-year life expectancy at age 65 (at present 14.8 years); females will survive, on average, for 22.1 years (now 18.5 years).

Increasing the age of eligibility would have a huge impact on affordability. An increase in age from 65 to, say, 68 could be achieved over a six-year period at the rate of six months a year.

An increase from 65 to 68 over the period between 2020 and 2026 would make a huge contribution to the long-term affordability of NZ Superannuation and would help enormously in protecting the income requirements of our ageing population.

The size of the pension has had a varied history. When the age pension started, more than 100 years ago, it was relatively small. By 1940, the single person's pension was about 29 per cent of the national average wage. Over the 35 years to 1975, it fluctuated between 27 and 35 per cent.

The introduction of National Superannuation in 1977 brought a major lift but, despite the highly politicised nature of the issue since then, it has fluctuated over the past 20 years between about 42 and 47 per cent of the national average wage. It is now at 44 per cent on a pre-tax basis for a single person living alone. Any reduction in the pension should not be immediate but could be phased in from, say, 2020. This would protect the presently retired.

In 1989, the Labour Government decided that the after-tax married couples' rate should be between 65 and 72.5 per cent of the after-tax national average wage. There is no science to this. Is 65 per cent enough or too much? We need to decide the appropriate rate.

Until 1977, the old-age benefit was income-tested but universal superannuation was not.

National Superannuation changed that. The state pension age was reduced to 60 and the income test was eliminated. But Labour reintroduced income testing from 1985 (the surcharge). It was watered down later and finally eliminated by National in 1998.

Is there a case for income and asset testing or must we continue with the present system of universal payments?

The effect of increasing the state pension age from 65 to 68 combined with reduction in the pension from 65 to 60 per cent of the national average wage and phased in from 2020 would have a dramatic impact on affordability.

These changes would reduce the gross cost of NZ Superannuation from 12.1 per cent to about 10 per cent of gross domestic product - our target rate.

Despite our recent experience, superannuation isn't such a difficult issue. Complex issues can be resolved relatively simply but we need true leadership from politicians if we are to have a non-partisan policy in place for the next 100 years.

We have a good structural basis to build on but we need to lift ourselves above the political point-scoring that has marred debate over the past 25 years.

If we can agree on the issues that matter, we can reinforce the values that 60 years ago made us a leader in the development of social security.

* Jeff Todd chaired the Government taskforce on superannuation.

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