Peter Whitmore: Govt must wake from Super dream

In 2001, there were around five workers supporting each retiree. By 2050, there will be just two. Photo / Getty Images

Given the enormity of the challenges we face in funding our National Superannuation system, the question of raising the starting age from 65 to 67 is almost like a side issue.

Although recent census data indicates it would reduce the number of people eligible for this benefit by around 13 per cent, the resulting saving is dwarfed by the cost increases that are rapidly descending on us.

These increases are coming about because the baby-boom generation is now starting to reach retirement age, an occurrence that is set to totally change the make-up of our population.

While there were around five workers supporting each retiree in 2001, this is expected to drop to two workers per retiree by 2050.

As a consequence, Treasury projects that the cost of funding National Super will grow by 40 per cent over the next five years and by around 100 per cent by 2050.

Even these figures may be conservative. The Financial Services Council thinks the cost increase by 2050 could be more like 150 per cent.

Although these coming cost increases were well understood when National Super was introduced in 1977, they were not adequately explained to the public and no provision was made to set aside any funds to meet them.

Instead, we were assured that it was both workable and affordable to pay everything out of current tax revenue with no income or asset test applying.

In practice, though, funding National Super has been a challenge almost from day one, and we have seen numerous changes to try to address the problem. The ones that have stuck are an increase in the age of eligibility from 60 to 65 and a reduction in the level of payments for a married couple from 80 per cent to 66 per cent of the average wage.

One positive but belated step taken was the establishment of the New Zealand Superannuation Fund in 2001. For the first time capital was being set aside to help meet future payment requirements. This does not address our immediate problems, though, because the current intention is not to use this resource until 2029. Also, because of financial difficulties, the National Government suspended contributions to the fund in 2009.

Since it was introduced, the cost of providing National Super to many recipients has increased because the tax system has totally changed. Back then, the marginal tax rate for high earners was 67 per cent, which meant that beneficiaries in this tax bracket had two-thirds of their Super payments taxed away, leaving only one-third to be paid for by other taxpayers.

Now we live in a different world with a top income tax rate of only 33 per cent. What this means is that, even allowing for the effect of GST (introduced in 1986), the after-tax portion of Super payments made to beneficiaries on higher incomes is much higher than it used to be, and other taxpayers therefore have to pay a lot more to support them.

Recent statistics show that around 18 per cent of people aged 65 or over have incomes of at least $700 a week and 9 per cent receive at least $1000. Around 60 per cent of the population have lower incomes than this. We therefore have a system where people on lower incomes are being taxed to support others who are better off.

Because no funds have been set aside to meet current costs, National Super is superannuation in name only. It is basically just a benefit, similar to the Old Age Pension first introduced in 1898 and to other benefits that followed, but without the means test that then applied. One has to ask whether providing this benefit, without any income test, is either sensible or fair.

In its current form, it appears to be nearing the point of collapse because the Government is not able or not willing to collect sufficient revenue to fund it. Delaying action by selling state assets and using part of the resulting revenue to prop it up for a few more years will just make matters worse.

To meet future payments, the Government and the New Zealand Superannuation Fund need to increase the assets they hold, not reduce them.

People rely on National Super to support them in their retirement. This means plenty of warning needs to be given before major changes are introduced. But it is very clear that changes are needed and that the sooner action can be taken, the more likely we are to arrive at a viable way forward.

Those who think that National Super can continue in its current form seem to be living in a dream world. We need to promptly and properly address the situation we face and then take appropriate action.

Peter Whitmore, a former Auckland publisher with a background in engineering and economics, expects his National Super would fall if an income test were introduced.