New Zealand superannuation is unaffordable and could even be called "a pyramid scheme", according to a senior tax lecturer at the University of Auckland Business School, Mark Keating.

Either the amount paid in superannuation will have to fall or taxes will have to be significantly increased to cover the rising costs, says Keating - adding that a universal pension is socially desirable but it is generally accepted sharply increasing costs will make it unaffordable.

"It should be a warning that New Zealand is now the only country still paying a universal superannuation, regardless of the asset wealth or income of the recipient," he says. "All other countries have changed their system because it is simply unaffordable."

The debate about the affordability of universal superannuation has largely focused upon the age of entitlement and whether the rate of payment should be indexed to wage growth or the lower inflation rate.

But Keating demonstrates the system's unaffordability through examining the income tax and superannuation position of the "average person".

Currently, an average New Zealander will work for approximately 45 years on an average annual salary of $50,000, and will pay approximately $8000 per year in income tax. They will then retire at age 65 and receive superannuation while they live until almost 90.


"The problem is that average person can expect to receive more back in superannuation than they paid in income tax during their entire working life," says Keating.

When doing the maths, using current tax rates and superannuation rates, an individual will pay approximately $360,000 in income tax on wages over their working life, but will receive approximately $500,000 in superannuation. A couple, who receive less per person in superannuation, will still be paid $387,500 each, which is virtually everything they ever paid in income tax during their working life.

"Obviously those figures ignore that the person also paid other taxes throughout their life, including significant amounts of GST - but it also overlooks that the average individual will also have enjoyed a wide range of other Government services during their life."

The maths look even worse when including people who do not contribute an "average" amount of income tax. That includes citizens who spend part or even most of their working life outside the New Zealand workforce and immigrants - who are able to enjoy full superannuation benefits without paying taxes in New Zealand for their full working life.

"This clearly shows that, over a person's average life, that person will receive back more in superannuation than he or she ever paid in income tax," says Keating.

That means the Government has to fund all non-superannuation services and benefits from other sources of taxation (mainly GST, corporate tax and user-charges).

A universal superannuation system is sustainable in only two circumstances: either there are significantly more workers than retired people or many taxpayers die either before reaching retirement age, or shortly after, says Keating.

However, neither of these scenarios are likely to exist in future as the sheer numbers of the baby boomer generation, all reaching retirement together, have reversed the worker-to-retiree equation. The continued rise in life expectancy also ensures even the average retiree will now draw the pension for longer.

"As a result, the New Zealand superannuation scheme has become a pyramid scheme; it requires an ever-increasing number of young taxpayers to support the elderly, while the numbers suggest it will become impossible for those young people to draw the same benefit out when they finally retire," he says.

"Whatever politicians may promise, the system is unsustainable - the numbers do not lie."