On Colin Espiner’s Blog (see below Alec’s Letter)
Published 20th October
Colin Espiner “Our pension penchant” continues a regular theme of headline articles on retirement income, with superficial comment, and doom and gloom ingredients. Espiner needs to come to grips with the fact the universality of NZ Super and the model utilized is recognized by informed commentators as a world leader, and its simplicity to be treasured and nurtured. The Kiss principle applies, otherwise NZ gets into the maze of difficulties that Australia and the United Kingdom and others have and continue to experience. Espiner’s article is a simple litany of exaggerations, containing one liners and left hooks, targeting baby boomers and using emotive words including financial freight train, gold plated, unfair, not affordable etc. What’s needed in the context of reviewing this superficial article, is not a defence of the status quo, with both sides slinging mud at each other, but a calm and reflective look at policy levers that could be applied to a range of formula and models applying to retirement income, evidence based research on the various assumptions, trends both financial and social over reasonable time frames, cross party consensus on issues like this, so impulsive decision making and Government tampering does not occur, and long lead in time frames so the New Zealand population as a whole can adjust to new directions and also build that knowledge into their own financial planning. The Financial Literacy and Retirement Commission planning document is no timid report, instead it’s a thoughtful and succinct overview of the many issues and policy levers that could be applied to retirement income, containing recommendations to assist future discussion and decision making. Unfortunately the Espiner article contributes little to this conversation!
The founding father of the United States saw plenty of both in his time, and while he lived to the ripe old age of 84 most of his countrymen weren’t so lucky.
The average life expectancy when Franklin made his quip was just 36. Today, it’s between 72 and 79 years old depending on where you live. And it’s rising fast.
Even in the time since New Zealand implemented a flat-rate, universal superannuation scheme in 1938, the average life expectancy has increased by nearly a decade.
And our population is ageing. Those aged over 65 currently make up an eighth of the total population. By 2061, it’ll be a quarter. We’ll have twice as many people aged 65+ as we do now.
You can see where I’m going with this. New Zealand is one of just four countries in the world with a universal, flat-rate superannuation scheme. And it’s breaking the bank. At a whopping cost of $10.9 billion a year, it already accounts for nearly a quarter of the government’s total expenditure. At current projections, it’ll be nearly $22b by 2060.
Meanwhile, the proportion of taxpayers shouldering the burden of paying for our gold-plated scheme is shrinking fast. In 1975 there were seven taxpayers for every person drawing their super. Now, there’s five. By 2031 – that’s in less than 20 years’ time – there’ll be just 2.6 workers for every retiree.
As a proportion of GDP spent on pensions, New Zealand is not particularly high on the list among its OECD neighbours. We currently spend about 4.3 per cent of total GDP on superannuation, compared to 7.7 per cent in the UK and 10 per cent in Denmark.
But we’re out on our own when it comes to projections for what will happen next. New Zealand’s rate of expenditure is projected to nearly double to 7.9 per cent by 2060 – the biggest jump in the OECD.
You’d think alarm bells would be ringing in the Beehive, wouldn’t you? But not a bit of it. The normally phlegmatic finance minister, Bill English, has gone all Pollyanna over our own fiscal cliff, claiming the country can afford to fund universal super despite hand-wringing from the Treasury.
His colleague, Prime Minister John Key, has his head so firmly stuck in the sand on superannuation that he’s pledged to resign if the entitlement is raised beyond age 65 by any government he leads.
Not only is this government ignoring the approaching financial freight train, it’s actively made the situation worse by suspending contributions to the NZ Super Fund, set up by Labour to help pay for the looming burden, into the political never-never land of 2021.
Last week, the Commission for Financial Literacy and Retirement Income issued a report on the issues facing our ageing population and outlined the costs of doing nothing. It was a pretty timid report, to be honest, suggesting only a very gradual rise in the age of entitlement to a pension.
Under the commission’s plan, someone my age (45) would wait just nine more months to claim their super, and the age of entitlement would not hit 67 for 30 years.
But most of the countries we compare ourselves with have already raised the age of entitlement to 67, or have plans to in the near future.
The commission admits this gradual rise won’t be enough to save us financially, but offers the hope that perhaps economic growth and a rise in taxation might bridge the gap. It rules out one obvious solution – giving the pension only to those who actually need it – as “not favoured by New Zealanders”.
Really? I wonder if the commission has asked an 18 year-old packer on the minimum wage in Otahuhu whether they are happy paying taxes so a wealthy retired couple in a freehold home in St Heliers can continue to draw $549.88 a week from the state without being means-tested.
It’s an argument as much about fairness as affordability. Even if the state could afford to keep the baby boomers in universal superannuation for an average of 20 years each, should it? I’m not so sure.
The current system was designed in a different world – by a Labour government at the end of the Great Depression, when you could count the number of millionaires on both hands and the average bloke keeled over not much more than five years after his entitlement began and his missus wasn’t far behind.
We’re not only living much longer now, we feel and look younger and we’re working for longer. The average 65-year-old isn’t parked up on the porch under a towelling hat – they’re jetting off around the world, going back to university, divorcing and dating, starting a new career or driving around Australia in a motor home.
We can’t keep applying yesterday’s mentality to today’s reality – it isn’t relevant, it isn’t affordable, and it isn’t fair.
But that’s just what this government plans to do. The political reality is, the elderly are the most powerful voting bloc in the country. And with the greatest of respect to our senior citizens, they can be a little self-centred in their demands. After all, they won’t be around to weather the economic consequences.
Labour has been bold enough to suggest at least a gradual rise to a retirement age of 67, but without National’s consent even this will go nowhere. Superannuation is one subject that demands cross-party consensus.
It’s time our politicians collectively took a hard, honest look at our pension system, and whether we should be focusing on need rather than entitlement.
– © Fairfax NZ News