I. Option: Government responds to demographic change

The ageing of our population is driving many - although not all - of the future financial costs that governments will face. One area of spending where this impact is particularly stark is NZ Super. Almost all New Zealanders are eligible for NZ Super payments once they turn 65. The changing structure of our population means that in the future there will be an increasing proportion of the population aged 65 and over relative to the rest of the population.

Over time, NZ Super payments will consume an increasing share of government spending if current legislative settings are retained. This leads many to question whether the legislative settings are the right ones for the future. The environment is also changing - in future more over-65s will be better placed to support themselves, both through better health and as a result of accumulating wealth through KiwiSaver and other voluntary saving. Over-65s are also more likely to be still working than they were in the past.[78]

This section examines two ways we could alter settings for NZ Super to make its fiscal impact more manageable in the future:

• raising the age of eligibility, on the grounds that people are living longer so they will still receive retirement income support from the Government for a long period, and
• slowing the rate of growth of NZ Super payments, on the grounds that since people will be receiving NZ Super for longer than their predecessors, the value of each individual payment should be reduced.

These are not the only ways NZ Super settings could be changed to manage long-term fiscal pressures, of course. For example, we could directly offset some NZ Super payments against accumulated KiwiSaver balances (although KiwiSaver would need to be compulsory, because otherwise people would be discouraged from contributing to KiwiSaver). Annex 1 of this Statement - "Supplementary material on the future path of government spending and tax: NZ Super" - considers this option in more detail, as well as a wider range of options for managing future costs.

Nor is changing NZ Super settings the only way governments could respond to the fiscal implications of demographic change. For instance, as the elderly are heavy consumers of long-term care, this area of government spending is expected to increase sharply in the future, as discussed in Annex 1 of this Statement - "Supplementary material on the future path of government spending and tax: Healthcare". We could reconsider the model for funding long-term care, so that individuals pay more of the costs themselves.

What if we raised the age of eligibility for NZ Super to 67?

Many other countries that are experiencing population ageing (eg, Australia and the United Kingdom) have raised the age of entitlement for a state pension.[79] It makes sense to consider the fiscal impact if we did this in New Zealand.

Figure 14 shows how raising the age of eligibility to 67 would affect the long-term fiscal position. It assumes that we gradually increase the age by six months each year, starting in the 2019/20 fiscal year.[80] So after four years 67 would be the age of eligibility for everyone. Figure 14 has three lines:

• Our standard blue "Spending path that maintains 20% net debt" line, which tracks the average spending path that would allow us to keep net government debt at an average of 20% of GDP from 2020, assuming our tax take remains constant at 29% of GDP.
• Our standard orange "Spending path under 'Resume Historic Cost Growth' scenario" line, which tracks the average spending path that we would see if expense areas grow at the rates we have seen historically, also taking into account current legislative settings and demographic changes.
• The dashed orange "Spending path under 'Resume Historic Cost Growth' scenario but with NZ Super age at 67" line, which shows how far raising the age of eligibility for NZ Super to 67 would bend the "Spending path under 'Resume Historic Cost Growth' scenario" line down.

The difference between the solid orange line and the dashed orange line represents the amount we save by increasing the age of eligibility for NZ Super from 65 to 67. Raising the age of eligibility reduces future expected costs to some extent, but not by nearly enough to get us all the way to a sustainable long-term fiscal path.

Figure 14 Three government spending paths - the impact of raising the age of eligibility for NZ Super to 67

An increase in the age of eligibility for NZ Super would be felt differently by different people, raising equity considerations. Working past 65 would be difficult for some people, especially those in physically demanding jobs who are unable to find other work or who have insufficient savings to tide them over the extra years before they are eligible for NZ Super. These people are more likely to be on lower incomes, and Māori and Pasifika are over-represented. These people would be eligible for income-tested working-age welfare benefits, but the rate of those benefits is currently lower than NZ Super, and the rates are not expected to converge.

However, these issues already exist under our current NZ Super system. People die before and after any age of eligibility, and lower-income people are more likely to die earlier than those on higher incomes. Raising the age of eligibility would reflect that lives are getting longer across all groups in New Zealand, so that the distribution of outcomes would be broadly maintained rather than made worse.

The economic growth impacts of raising the NZ Super age are difficult to predict, but seem more likely to be positive than negative.

Retirement income policy settings can affect economic growth in several ways:

(1) By affecting people's incentives to save or not save. If people save more, it could:

• reduce our reliance on borrowing from overseas to fund our domestic investment needs, and
• put downward pressure on domestic interest rates, thus reducing upward pressure on the exchange rate and encouraging a rebalancing of economic activity towards the production of exports.

(2) By affecting people's incentives to work.

It is hard to say whether an increase in the age of eligibility for NZ Super would cause people to save more over the course of their lives. Our past experience of raising the age gradually from 60 to 65 suggests that it had little effect on saving behaviour.[81]

On the other hand, raising the NZ Super age probably would encourage people to work for longer than they would otherwise.[82] All else being equal, more people working for longer would be positive for New Zealand's economic growth and in many cases for people's own health and wellbeing.[83]