3.3 Policy changes in 1977
The post-war period saw a gradual rise in the proportion of men and women aged 60-64 remaining in the labour force. In that period old age income support could take one of two possible forms: a universal pension from age 65 and an income-tested age benefit available from age 60. A weakening in New Zealand’s economic performance in the 1970s, together with a rise in the generosity of the income-tested age benefit for this age group, saw this trend reversed and the start of an accelerating decline in participation, as shown in Figure 2.
- Figure 2 - Proportion of people aged 60–64 working 20+ hours per week, 1951 - 1981
- Source: Department of Statistics (1990), Table 14.
| Old system (pre-1977) | New system (from 1977) | |
|---|---|---|
| Non income tested component | Universal superannuation | National superannuation |
| Age of eligibility | From age 65 | From age 60 |
| Rate of payment – equivalent to a net of tax pension/avg wage ratio of: | 32.7% for a married person (July 1976) | 39.1% for a married person (August 1977); rising to 44.7% a year later, before settling at 40% from 1980. |
| Income tested option | Age benefit | None |
| Age of eligibility | From age 60 | |
| Rate of payment – equivalent to a net of tax pension/wage ratio of: | 36.3% for a married person (July 1976) | |
| Number of payments in force | In 1976: 300,000 Total, of which:(112,000 universal super)(188,000 age benefit) | In 1980: 405,000 Total |
| Annual Expenditure (In 1980 dollars) | In 1976: $814 million | In 1980: $1,134 million |
Source: Preston (2001) and Department of Social Welfare annual report 1976.
The post-1977 system is hypothesised to have affected the retirement behaviour of three groups:
Group A. People aged 60-64 who had been planning to remain in employment until age 65, when they would become eligible for universal superannuation. These people could now choose to retire on national superannuation without being affected by the income test for age benefit.
Group B. People aged 65+ who had chosen to stay in employment in order to supplement the income they were receiving from universal superannuation. The higher rate of national superannuation would encourage a proportion of these to leave the labour force.
Group C. People approaching the age of 60, with modest savings, who might choose to retire on these savings before age 60 in anticipation of receiving national superannuation from age 60.
We might hypothesise that the strongest impact would be on Group A, which offered the largest (static) financial gain (from zero pension to national superannuation). Figure 3 tends to confirm this hypothesis. It shows how the proportion of men in full-time employment for the age group most affected by this policy change (Group A) fell much more than those of slightly younger age groups (Group C). It also shows a sizeable response to the income effect of the increase in pension rates among those over 65 (Group B). In the case of females the trend towards higher rates of full-time employment evident amongst those aged in their 50’s becomes reversed from age 60 in response to eligibility for national superannuation.
- Figure 3 - Changes in the proportion of males and females in full-time work, 1976-1981
- Source: Data reported in Rochford (1985).
During the 1980’s the fiscal burden of paying a higher rate of national superannuation to a steadily increasing number of older people became a matter of growing concern and a number of policy steps were taken to trim back this cost.[16] At the same time governments were facing the prospect of acceleration in public pension costs further in the future once the post-war ‘baby boom’ generation started to retire from 2006 onwards.
In 1989 the government announced that this prospective rise in pension costs would be addressed by gradually raising the age of eligibility from 60 to 65 between the years 2006 and 2025. This timing was chosen to coincide with the period of rapid growth in the number of older New Zealanders (Caygill, 1989). However, following the change of government in 1991, the incoming administration decided to compress and bring forward the timing of this change as part of a comprehensive package of social policy changes aimed at fiscal consolidation.[17]
The age of eligibility for NZS was to be raised progressively from 60 to 65 over the relatively brief timeframe of nine years, 1992 to 2001. The schedule involved delaying payment to age 61 for those born in the period 1 April 1932 to 30 June 1932 and then raising the eligibility age by an additional 3 months for each successive 3-month birth cohort. This formula resulted in the age of eligibility reaching 65 for people born after 31 March 1936 and the transition was completed on 1 April 2001.
- Figure 4 - Public pension age transitions in New Zealand
- Source: Statistics New Zealand population projections.
Figure 4 shows the difference between the originally proposed age transition and the one that was finally implemented, labelled NZS actual (1991). It illustrates how the change in policy focus, from expenditure smoothing to fiscal consolidation, resulted in a very large reduction in the number of people receiving the pension over the period of the transition. Also shown is the earlier 1976 policy change that lowered the eligibility age to 60.[18]
The new transition started almost immediately after it was announced and was rapid. People who had been planning to retire at age 60 and who had little savings of their own were suddenly faced with having to delay their retirement. To deal with this issue, a transitional assistance programme, known as the Transitional Retirement Benefit (TRB) was introduced for those who had been close to retirement at the time of the announcement. This took the form of an income-tested benefit that did not require recipients to be medically assessed or to make themselves available for work. The TRB was available to eligible cohorts for up to three years prior to the new eligibility age for NZS and phased out completely by April 2004.
In its review of the framework of retirement income provision, carried out halfway through the transition, the Periodic Report Group (1997) noted the extent of the emerging change in employment rates among those most directly affected by the rising age of eligibility for NZS. This change has continued and can be seen in the pattern of employment rates at single years of age over the complete transition period. This is illustrated in Figure 5 which shows, for the case of males, how the maximum rate of exit from full-time employment has shifted, from age 60 in 1991 to age 65 in 2001.[19]
- Figure 5 - Changing full-time employment rates of males by single year of age during the transition, 1991, 1996 and 2001
- Source: Census documents.
Another way of illustrating this phenomenon is by calculating ‘exit work hazard rates’, that is the probability that someone of a particular age will not be employed in a year’s time, given that they were employed in the current year. These estimates have several shortcomings[20] but follow the general approach of Gruber and Wise (1999) in examining empirical regularities between retirement hazard rates and pension eligibility ages across countries.
Figure 6 contrasts the exit work hazard rate patterns for males in 1991, 1996 and 2001. The peak hazard rate shifted from 60 to 65, reflecting the shift in NZS eligibility age. At the same time the peak has become somewhat less pronounced, indicating a lessening of the tendency towards a ‘standard’ retirement age[21] and perhaps also easier access to other income-tested support for those approaching age 65 under the TRB.
Notes
- [16]The main measures were to reduce the ratio of the pension to national average weekly earnings and to introduce an element of income-testing via a tax surcharge on the other income of superannuitants.
- [17]The 1991 package also included a temporary suspension of the normal indexation of pension rates and a tightening of the income testing regime that was in place at the time.
- [18]The 1976 arrow starts between ages 60 and 65 because a proportion of people aged 60 - 64 were already receiving an income tested Age Benefit.
- [19]It is important to locate the census dates within the age transition schedule. The 1991 census was held when the NZS eligibility age was 60 and the new policy had not been announced. At the time of the March 1996 census, the eligibility age for NZS had moved from 62 years 3 months to 62 years 6 months; in other words it was half way through its transition. By the time of the 2001 census the transition was complete and the age of eligibility was fixed at 65.
- [20]They are based on cross-sectional census data, rather than longitudinal sample data and make no adjustment for mortality, so cannot strictly be interpreted as the probability of retirement by somebody who is currently employed.
- [21]As noted in Section 3.1, New Zealand has anti-age discrimination legislation that does not allow employment contracts to specify a mandatory retirement age.
