Super An age old problem

As election day looms, the focus is on national super - the pension available to every Kiwi over 65. Westpac chief economist Dominick Stephens won't be drawn into the politics, but he's keeping an eye on the money.

New Zealand's superannuation scheme is simple, efficient and generous - the problem is that it's also expensive.

The ballooning cost means the country is sitting on a fiscal timebomb, says Westpac chief economist Dominick Stephens.

"My view is that it's very clear the current trajectory in New Zealand isn't sustainable. We can't continue to provide as much as we currently provide in health care and national superannuation."

New Zealand has a relatively generous pension for people over 65, compared to other developed countries.

"There are very few over 65s in (New Zealand's lowest socio-economic group). That's not true of some countries that are less generous in providing pensions, or provide them in an unequal way," Stephens says.

National super, as the pension is known, is available to everyone over 65, provided they have spent enough time in the country. They can still get it if they are working, when it is added to their other income and taxed.

Its simplicity is good, Stephens says, and it tends towards keeping incomes equal. Because the super is paid regardless of whether a person is still working or has other income, it encourages people to keep on working and accumulating wealth.

If it was available only after people stopped working, that would encourage some people to stop a bad idea in an economist's view.

Another possible way to tackle the question of people still working after the age of 65 would be to start stockpiling their national super when they reached retirement age, and pay them the lump sum when they actually stopped work.

The Government uses general taxation to pay for pensions, Stephens says. In future, an investment fund started by former Finance Minister Michael Cullen may come on stream to help. With the number of people over 65 increasing, it will be difficult to keep the pension exactly the same. If nothing changes, its cost is projected to grow from the 4.5 per cent of New Zealand's total economic production that it is now to 6.1 per cent by 2026.

What is even more expensive and increasing more rapidly - and less predictably - is the cost of healthcare, Stephens says. Something has to change, and there are several possibilities. One is to find a way to spend less on healthcare or rest homes by providing less in the public system and getting people to pay for private health care.

Another is to change New Zealand's total taxation system, he suggests.

It's now mainly based on taxing income from work. People pay a lot of tax during their earning years, and at the same time most of them try to acquire property which will result in a capital gain later.

The country could move to a sales-based system like the goods and services tax (GST). Every financial exchange during a lifetime would be taxed, and the sale of property would attract a capital gains tax.

If it is national super itself that has to change, that could be done by means testing and providing the pension only to the poor. Stephens says that will encourage some people not to work or accumulate wealth, in case they spoil their entitlement. It will also lead to inequality.

Or the age of receiving national super could increase. If that is done it will have to be done in a staged way, to give people plenty of warning so they can start saving.

Or residents could be enrolled in a compulsory savings scheme like KiwiSaver, with top-ups from the Government if they can't save enough. This can also lead to inequality, and will seem unfair to some, especially women who often spend years working unpaid to care for children or elderly and sick family members.

Stephens says there's no perfect answer to the difficult question of how to provide for increasing numbers of older people.

In democracies, change to such systems generally happen suddenly, as the result of a crisis. Greece is in that situation now.

Any change to the pension system is usually opposed by older voters, who are more likely to vote than those under 30. Stephens says. And those under 18, who will be most affected, do not vote at all.

"Democracy tends to favour the older people," Stephens says.