Age of eligibility

The current age of eligibility for New Zealand Superannuation is 65, the same as the age of eligibility for the first New Zealand age pension, introduced in 1893.

In 1891, the life expectancy for non-Ma¯ori males at age 65 was 13.08 years and 14.73 for non-Ma¯ori females.[50] By 2005, the life expectancy of a non-Ma¯ori male aged 65 had risen to 17.4 years and, for a non-Ma¯ori female, to 20.39 years.

Source: Human Mortality Database

In terms of New Zealand Superannuation, this increase in life expectancy means that, on average, each person receives the pension for a far longer period. And, as noted above, increasing numbers of people are expected to live beyond 65 in the future.

It is the combination of these effects that is driving the projected increase in spending on New Zealand Superannuation.

A recent proposal by the Turner Commission illustrates the size of these effects. This Commission was appointed by the United Kingdom Government to inquire into the future of pension policy in that country.

The Turner Commission’s proposal was that the age of eligibility for the age pension should be linked to life expectancy. Specifically, they suggested that, in future, one third of any increase in life expectancy should be taken in employment and two thirds in retirement. In May, the United Kingdom Government announced that the state pension age for men and women would increase to 66 in 2024, 67 in 2034 and 68 in 2044. Each rise will be phased in over two years.

As can be seen later in Figure 8.7, the United Kingdom-type approach does have a significant impact on the timing of the increase in expenditure on New Zealand Superannuation. However, the shape of the spending track in Figure 8.7 is still linked to the changing nature of the population. The only way to break the demographic link would be to change the basic nature of the scheme; for example, by increasing the number of old people who are “self-financing” their retirement. Changing New Zealand Superannuation payments will feed through to changes in the New Zealand Superannuation Fund.

Sensitivity of superannuation payments to changes in the age of eligibility

As discussed above, this section examines the possible effects of indexing the age of eligibility to projected changes in life expectancy, using the formula that is gaining some currency in Europe: one third of the gain in average life expectancy is taken in work, two thirds in leisure. If the gain in longevity in New Zealand were almost six years between now and 2050, under this policy shift, older people would work for an extra two years, on average.

Source: The Treasury

The changes during the 1990s that lifted the age of eligibility from 60 in 1992 to 65 in 2001 led to rising labour participation by people aged 50 and over through this period (Hurnard 2005).

Figure 8.7 illustrates the impact of two assumptions about when and how quickly the eligibility age might be raised to 67. The slow track lifts the eligibility age to 65.5 in 2010 and then by six months every five years. The fast track lifts the age from 65.5 in 2010 to 67 in 2016 at the rate of six months every two years (the same pace as in the 1990s).

Source: The Treasury

Lifting the age of eligibility results in a reduction in spending on New Zealand Superannuation of 0.7 percentage points of GDP by 2050. Because of the cumulative effect on debt, the two tracks have different effects on debt by 2050. The fast track reduces the base-case debt by 22 percentage points in 2050, while the slow track lowers debt by 17 percentage points.

Indexation

New Zealand Superannuation is currently indexed by changes in prices (as measured by the CPI), but is constrained for a married couple to the equivalent of 65% to 72.5% of average weekly earnings. This policy was formally adopted in 1993.

For modelling the long-term fiscal cost of New Zealand Superannuation, payments are assumed to be set at the level of 65% of average wages. This is because New Zealand Superannuation is currently close to the floor (rates from 1 April 2006 are about 66%) and wages are assumed in the modelling to be always, on average, increasing faster than prices.

Indexation by prices means that the retired can continue to purchase the same bundle of goods and services as they did when they retired.

Indexation by wages, on the other hand, means that the bundle of goods and services that can be purchased can be increased each year.

Put another way, and based on the proposition that it is increases in productivity (economic growth) that lead to increased wages, wage indexation means that (part of) the national dividend from economic growth also accrues to the retired. Price indexation, on the other hand, means that few, if any, of the gains from growth go to the retired.[51]

Thus, the decision whether to index by wages or prices can be seen as one about to whom the benefits of economic growth should accrue.

Given the long-term nature of this Statement, the cumulative effects of different indexation arrangements can be marked. Indexing New Zealand Superannuation to prices, not wages, over a 50-year period would result in the combined married rate falling from the current 66% of average weekly earnings to about 32%.

Indexation to prices over such a long period would shift New Zealand Superannuation even further towards meeting only a poverty-relief objective. It is an open question whether such a marked reduction in relative standards of living between those in employment and those retired would be acceptable, especially given the notion proposed by the 1972 Royal Commission of Inquiry into Social Security, which still seems current, that the objective of the welfare system was to allow recipients of government income support to “belong and participate.”

Sensitivity of superannuation payments to changes in the indexation regime

Two alternatives to the base wage indexation case are growing superannuation payments by the rate of CPI inflation and by CPI inflation plus 1%. Other options could include mixed indexation: increasing the payments for first-time recipients by the growth of the average weekly wage, but then growing those payments by CPI inflation. Figure 8.9 illustrates the large effects of changes in indexation from 2011 onwards. Changing from wage to CPI indexation lowers spending by 4 percentage points of GDP, while CPI+1% reduces it by 1.6 percentage points.

Source: The Treasury