Options for managing spending growth
Earlier sections have discussed the kinds of adjustments that are likely to be required in other government spending areas to ensure a sustainable long-term fiscal position. Some of these changes will require significant shifts in the way government services are provided and in expectations about what services will be provided. Changes to eligibility and entitlements for NZS that reduce its total cost would reduce the extent to which other public services would have to adjust.
Many countries have reacted to the fiscal effect of ageing on publicly provided pensions by announcing or introducing changes to the age of eligibility and indexation regimes in their pensions. These reflect similar debt, spending and demographic pressures we are facing in New Zealand.
This section looks at three aspects of NZS - the age of eligibility, indexing, and targeting - to illustrate possible types of changes and their relative effects on the balance between the affordability of superannuation and income adequacy for older people.
The eligibility age
When New Zealand's old age pension was introduced in 1898, the average person might have expected to start working at 15 years, life expectancy was around 60 and the retirement age was 65. In 2009, we typically do not start working until 20 years or so, have a life expectancy of 80 and a pension age of 65.
| 1898 | 1977 | 1990 | 2009 | 2030 | 2050 | |
|---|---|---|---|---|---|---|
| Life expectancy | 60 | 74 | 76 | 80 | 83 | 85 |
| Pension age | 65 | 60 | 60 | 65 | 65 | 65 |
Sources: The Treasury, Statistics New Zealand
Many countries are lifting their pension ages beyond 65 years: Australia and Germany to 67; the United Kingdom to 68; and Denmark to 67. Along with Norway, Iceland and the United States, that brings to seven the number of OECD countries that already have or plan to have pension ages above 65.
The Danish system
Denmark is the only country so far to enact legislation indexing the eligibility age to increases in life expectancy. This change takes effect with a long delay. One old-age scheme in Denmark is a universal old-age pension that has a residence test, but no work history requirement. The eligibility for this pension will rise by six months each year from 2024 to 2027, so that the pension age increases from 65 to 67 years. Thereafter, increases in the eligibility age will be tied to increases in life expectancy, with any increase required to be announced five years in advance. By 2045, the age is expected to reach 68.3 years. Similar changes are planned for an early retirement pension, where the present eligibility age is 60. The goal is for the early retirement age to be raised so that life expectancy from that age, measured at age 60, will be 19.5 years. Thus, the Danish reform does not split the increased life expectancy between the working years and the retirement years, but fully raises the eligibility age for increases in life expectancy.[48]
In its 2009 Budget, the Australian Government announced that it would move the age for receiving the pension from 65 to 67 between 2017 and 2023, giving future superannuitants at least eight years to adjust their saving and working patterns. We model the effects of a similar change here that also includes an additional six-month lift in the eligibility age each time life expectancy at 65 rises by six months. This would mean the eligibility age would reach 69 by the late 2040s.
A rising pension age may encourage more people to work a bit longer - they may work shorter hours or do a couple of part-time jobs. This means more output, more tax dollars and more time to save for retirement. The effect on GDP is relatively small but growing through time so that by 2050 GDP is 2.5% higher.
The modelled rise in pension age to 69 by 2050 produces a fall in the ratio of NZS to GDP by 1.5 percentage points. While this scenario reduces the potential number of NZS recipients, the size of the weekly NZS payments to people is not changed and the overall affordability of the programme is improved.
- Figure 7.11 - NZS spending
- Sources: The Treasury
Adopting these changes would mean that the basket of publicly-funded services in 2050 would be about 11% above 2013 levels, instead of 2% in the sustainable debt scenario.
An argument against proposals for lifting the pension age is that it is unfair on people with lower life expectancy (for example, Maori, or males in general). This depends on views of what the universal pension is about – social insurance to prevent poverty in old age, an entitlement or income replacement. Life expectancy and other demographic indicators for males and Maori have been converging to those of non-Maori females over the long run. Despite the recent slowing of this convergence it is assumed that these long-run trends will continue.
Superannuation indexing
Any change to labour productivity growth (output for each hour worked) will typically feed through to GDP growth and wage growth and then to NZS payments. This is a feature of the current system - retired people receive rising NZS payments because of the link to wages. If NZS payments were instead indexed to inflation only, then recipients would be able to buy the same bundle of goods and services, but not an increasing one.
Inflation indexation from 2017 would reduce the fiscal cost of NZS to 5% of GDP in 2050 and the ratio of NZS to the average wage would fall to almost half of what it is now. The NZS payment in 2050 with CPI indexation would be around 23% of the average wage, down from around 40% now. This is about the same proportion of the average wage as universal pensions in a group of other OECD countries such as the United States, Denmark and Germany (some of these are means-tested). Again, these changes would free up significant resources to provide publicly-funded services across the entire population. CPI indexing would see the basket of services grow steadily from 2023, so that by 2050 it would be nearly 20% higher than the 2013 level. Indexation of CPI + 1% would see the basket of services grow 8% above the 2013 level by 2050.
- Figure 7.12 - What individuals receive from the Government - inflation-adjusted
- Source: The Treasury
Notes
- [48]Turner, John A (2009) "Social security financing: automatic adjustments to restore solvency." Washington DC, AARP Public Policy Institute, Research Report 2009-01, February 2009. http://www.aarp.org/research/ppi/econ-sec/ss/articles/2009_01_socsec.html.
