Coming Of Age: Can the Country Afford for Us to Retire?

Listener: 12 August, 2006.

Keywords: Social Policy;

It may seem absurd to ask the Treasury to project the government’s fiscal position, that is, its tax and spending, out to 2050, but that is what Parliament requires of them in its 2004 Public Finance Act. Given rising longevity, some of the study’s authors may be around in 2050 to see how wrong they were – but they will be well retired. In the interim, the projections force the Treasury to think systematically about the long-term implications of government policies.

For instance, the Treasury had to think hard about future levels of social security benefits. Currently the real level of the basic benefit is much the same as it was 50 years ago. Are we to assume that the basic benefit will have a similar purchasing power in 2050 as it had in 1950? By posing such questions the long-term fiscal projection asks us how we are to set benefit levels. Is increasing them for inflation but not real wage growth acceptable? A worry has been that the income of a beneficiary relative to wages is too high, and discourages beneficiaries from looking for work. But does it make social sense for real wages to quadruple over a century and for the benefit level to remain constant? That’s what current policy assumes.

The projections also force us to think about momentous issues now only on the distant horizon, such as the ageing of the population and the increasing work capabilities of the elderly? We seem increasingly able to work productively into our late sixties if we want or need to. Even then we may expect a longer and more satisfactory retirement than many of our great-grandparents. Such a retirement will be expensive to the state – on current policies – because of New Zealand Super and the associated health and disability care, and the ageing of the population means there will be a higher proportion of us in receipt of this support. The projection thinks that the cost of public superannuation alone will more than double as a percentage of GDP. However, there is a window for almost a decade before the proportion begins to rise.

So who’s worrying, and why? Treasury officials are, and they are right to. Any substantial changes to New Zealand Super need to be clearly signalled well ahead, so that people have time to adjust to the new circumstances while they are working and saving. And the changes should be incremental so that those close to retirement have to make less adjustment. (Political common sense, distilled from the experience of the past 30 years, adds that the changes should not affect existing retirees and they should involve a broad multi-party political consensus.) So we should signal any changes that we expect implemented in the next decade now.

The projections provide two scenarios. One involves indexing the superannuation level to consumer prices rather than wages. That would give big long-run gains, but I don’t think it is politically practical, nor do I particularly favour its impact on inequality. My preference would be to increase the age of entitlement – incrementally, say three months every year from 2010 ,  until it reaches the age where the average life expectancy is 15 years. Currently that age is about 70 so the age of eligibility would be reached on this scenario in 2030. (It would probably continue to rise after that, as longevity goes up.) The long-term fiscal projections provide enough information to suggest that this would generate useful reductions in fiscal pressures (which will be further lessened by people working through their sixties). Raising the age of eligibility to even 67 would cut 20 percent off the projected public debt in 2050.

Although this proposal may not be very contentious, most politicians do not see it as urgent, for they will be out of office when the benefits accrue. It will take an uncommon political courage and perspicuity to take the initiative now. But it is the minimum we owe our young: to give them some confidence that the fiscal path is sustainable and that they will have adequate protection in their old age. Plus the clear signal that if they want to do better, they had better start saving.