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New Zealand's Long-Term Fiscal Position [June 2006]

8   Superannuation

New Zealand Superannuation, the tax-funded, universal pension scheme, is currently the largest single item of government expenditure. How expenditure on this scheme changes in the future is, therefore, one of the key drivers of the overall long-term fiscal position.

The current legislative basis for New Zealand Superannuation is the New Zealand Superannuation and Retirement Income Act 2001.

The basic structure of New Zealand Superannuation is summed up in the slogan “65 at 65”; that is, a married couple receives a combined pension equal to at least 65% of the average after-tax wage, payable from age 65.

More precisely, to qualify for New Zealand Superannuation, a person must be 65 or older, live in New Zealand when applying and have spent at least 10 years in New Zealand since turning 20 and at least five years since the age of 50.

The rates of New Zealand Superannuation (after deduction of tax at the standard rates) currently payable are:

  • a single person living alone: $263.90 a week
  • a single person not living alone: $243.60 a week
  • a person who is married or in a civil union: $203.00 a week.

New Zealand Superannuation Fund

In 2001, the New Zealand Superannuation Fund was established. Annual contributions by the Government to the Fund are calculated over a 40-year rolling horizon. This smoothes financing the cost of New Zealand Superannuation over successive annual budgets. It is a form of tax smoothing or partial pre-funding, with the objective of assisting the Crown’s finances as a whole in adjusting to significant pressures over the next few decades, mainly as a result of population ageing. [48]

Comley and McKissack (2005) have recently reviewed pre-funding strategies in OECD countries. They define a pre-funding strategy as one that involves an increase in a government’s net financial asset (or net debt) position. Such a strategy raises more taxes than are required for current needs, resulting in greater financial resources in the future to deal with any additional expenditure needs. Comley and McKissack identify two categories of pre-funding: “strong pre-funding countries” display evidence of past pre-funding (which would include declining net debt) and a forward-looking commitment to further pre-funding; “mild pre-funders” show less pre-funding in the past, or a forward-looking pre-funding policy that implies less pre-funding, or weaker compliance with their own policy.

Based on their analysis of net debt paths, primary balances and stated policies, New Zealand is in the strong pre-funding group, along with Belgium, Canada, Denmark, Finland, Luxembourg, Norway and Sweden. Mild pre-funders comprise Australia, Iceland, Ireland, Italy, Korea, the Netherlands and Spain.

Establishment of the New Zealand Superannuation Fund did not involve any changes to the parameters of New Zealand Superannuation payments to individuals. Hence, no effect of the New Zealand Superannuation Fund is included in these projections of levels of future New Zealand Superannuation payments, because the fund is concerned with the timing of the financing of those payments.

These timing effects should not, however, be underestimated. Part of the current strong fiscal position is the result of the build-up of the New Zealand Superannuation Fund, because current revenue is being saved (via the Fund) to be used to finance future costs. In the government accounts and in the Long-Term Fiscal Model, the gross earnings of the New Zealand Superannuation Fund are recorded as investment income to the core Crown. These flows represent a large element of the non-tax revenue discussed in Chapter 5. Part of this income is returned each year to the Crown as income tax and is available to meet spending needs. The after-tax earnings are retained in the Fund for the future benefit of the Crown.

Projecting future expenditure on New Zealand Superannuation

Assuming that the parameters of New Zealand Superannuation stay the same, it is possible to project the level of expenditure on this programme.

New Zealand Superannuation is modelled in the Long-Term Fiscal Model as follows:

Bt = Bt-1 x (1+n),

where

B = the married benefit, and

n = nominal wage growth (3.53% per annum after 2010).

If Et is spending on New Zealand Superannuation in year t, then

Et = Et-1 x (1+b) x (1+r)

where

b = the growth of B (nominal wages), and

r = the growth of the population aged 65 and over.

Figure 8.1: New Zealand Superannuation: base-case projection under current policy.

Source: The Treasury

In line with the doubling of the numbers of people aged 65 and older between now and 2050, it is not surprising that spending on superannuation relative to GDP grows by 2 ¼ times (the growth of eligible population between now and 2050 divided by the growth of the labour force). Figure 8.1 shows how expenditure on New Zealand Superannuation would grow, as a percentage of GDP, if current policy settings (essentially the “65 at 65” rule) were to apply into the future.

Superannuation as a share of GDP is driven by the ratio of older people to the working-age population (the aged ratio of Chapter 4). This can be seen as follows. The annual payment of superannuation is roughly proportional to the average nominal wage times the number of people 65 and over. On the other hand, nominal GDP is proportional to nominal labour productivity (average wage) and the labour force (proxied by people aged between 15 and 64). Hence the ratio of superannuation to GDP is driven largely by people 65 and older divided by people 15 to 64: the aged ratio. In 2005, there were 469,000 people receiving New Zealand Superannuation.

Figure 8.2: NZ Superannuation payments to GDP closely tracks the ratio of people 65 and older to those between 15 and 64.

Source: The Treasury

Notes

  • [48]See McCulloch and Frances, TWP 01/02
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