# Old Money: if Life Expectancy Is Rising, Should the Age for the Pension Rise, to

Listener 15 November, 2003.

Keywords: Social Policy;

In 1998 our life expectancy at 65 was 17.6 years, so over half those who go onto New Zealand superannuation pass their 80th birthday. In 1898, when the much less generous Old Age Pension was introduced, life expectancy at the 65-year-old age of eligibility was 13 years. Over the century the average life expectancy at 65 has increased by almost five years. Can the state pension be as relatively generous as longevity increases?

Consider Robinson Crusoe, castaway at age 25. Suppose that he is capable of collecting 30 nuts a year. He wants to retire in 40 years when he turns 65, and suppose that he knows he will live exactly 10 more years after retirement. He calculates that in the 40 working years he collects 1200 (40×30) nuts. But because of his 50-year life he can consume only 24 (1200/50) nuts a year. While productive, he must save a fifth of his income if he desires a comfortable retirement.

Suppose that he learns he is going to live 20 years after retirement. He collects the same number of nuts while working, but now he can consume only 20 (1200/60) nuts a year, because he has to provide for 10 extra years. So he saves a third of his income for his retirement, and his consumption during his working life is correspondingly lower.

What about interest? Suppose that Robinson invests his nuts with Man Friday. It is not necessary to show the calculations. The simple point is that Friday has fewer nuts after he pays interest to Robinson. Interest shifts the entitlement to consume between people. Its effect on average consumption is negligible.

Admittedly, Friday may have shrewdly used the nuts for some other purpose (planting easier-to-harvest trees?). Economic growth complicates the calculations, but as long as the retired expect to share in any prosperity, the broad analysis is the same. If the retirement pension was set at its 1898 rate (eligibility was highly selective then) and adjusted only for inflation, the state pension scheme would face no great pressures. Unlike the elderly, since the pension would be \$50 a week today. (It was seven shillings a week then.)

What about setting up a pension system, in which people contribute to a fund that pays out the retired? Suppose that five workers paid five nuts into the fund, which gave them to a retired Robinson. (There would be much paper work to obscure this, but the reality is that they are producing saving, and spending nuts – real goods and services.) Everyone’s consumption would be 25 nuts. Problem solved.

However, to work in perpetuity, the scheme requires five collectors for each of the five when they retire, a total of 25, and when those 25 retire there will have to be 125, and … Viability of this pension system requires high population growth. When the growth slows down, the scheme is not viable. In most Western nations, population growth has stagnated, and the private and state pension funds are no longer viable, though various magical money illusions are temporarily hiding how desperate things are.

New Zealand, demographically younger, has the same looming problem, although perhaps not yet as acutely. As we live longer there are more oldies, and as we have fewer children there are relatively fewer workers. We are going to run out of sufficient nuts. The irresponsible strategy is a possum sitting on the road with the headlights a long way away, hoping to be dead by the time the truck runs over us all.

Perhaps we should gradually raise the age of entitlement for New Zealand super. The problem is the politics. Suppose, following interparty negotiations, it was agreed to increase (say, by three months every year) the age of entitlement until it reached the point where life expectancy was 15 years. (The age of 70 would be reached in 2026.) Also, there would be less generous provision for those under retirement age who could not work and had inadequate savings, just as there is today. The policy would come into effect after the next election, and sufficient parties (including, ideally, Labour and National) would promise to enact the provisions after the election, irrespective of whether they were in government or not, to ensure it passed.

Nobody currently in receipt of a state pension will be worse off, so the policy would have little immediate electoral impact. This is why sufficient of the political parties could co-operate, favouring the long-term gains of sustainability with negligible short-term losses. The difficulty with the strategy is that implementation requires statesmen and stateswomen – on both sides of Parliament – not politicians or possums.