5  Summary and conclusions

This paper has attempted to explain changes in the labour force participation rate of older people over the past 30 years and in particular to estimate the impact of changing the age of eligibility of NZS. A relatively simple model that includes the general unemployment rate, age group, whether that age group is currently eligible for NZS, gender and a secular rising trend in female participation can explain a high proportion of the variation in participation rates. This model suggests that being eligible for NZS drops the participation rate of males by around 21 percentage points and of females by around 7 percentage points. The model suggests that female participation rates are also influenced by the age of eligibility a few years before that age is actually reached, a drop of a further 11 percentage points.

There is considerable research and policy interest in many countries on initiatives to reduce the fiscal burden of public pension schemes, to avert the prospect of a shrinking workforce and to create greater growth potential. Much of this interest has centred on understanding how the financial incentives created by public pension rules impact on individual retirement decisions. The results of that research suggest that three mechanisms are important: the age at which people become eligible for retirement benefits (both the ‘standard’ and the minimum early retirement age); a person’s current pension/earnings replacement rate; and the net present value of a person’s future stream of pension entitlements (compared with their future earnings stream) when this varies with age and contributions.

5.1  New Zealand incentives to stay in the labour market

This paper has examined how these three mechanisms operate in New Zealand’s case. It appears that public pension design contains several features that create stronger incentives on older workers to remain in the labour force than exist in most other countries. These features work both to avoid penalising those who choose to work beyond NZS eligibility age and to discourage early retirement, i.e. prior to NZS eligibility age.

First, there is no legal impediment to continuing to be employed beyond the NZS eligibility age; New Zealand does not have a legislated compulsory retirement age, nor are individual employers permitted to specify a mandatory retirement age in contracts of employment.

Second, because NZS is neither work-tested nor income-tested, it is possible to continue earning and receiving NZS with no financial penalty. One implication is that it offers greater timing choice and flexibility for people wishing to manage their transition from full-time work to complete retirement or to arrange to take spells in and out of the labour market. It also offers an alternative means to accumulate savings in order to top-up their income later on for those who have not done this earlier in their working lives.

A third feature, the absence of an early eligibility option for NZS, increases the likelihood that people adopt the standard age as the ‘normal’ age to retire and will remain in the labour market at least until they become eligible for NZS. This may be seen in the low exit work hazard rates prior to NZS eligibility age, shown in Figure 6.

The fourth feature is that, no doubt inadvertently, public pension policy has tended to crowd out private provision. The option for workers to accumulate private savings to finance early retirement or to top-up their public pension was not particularly attractive for the generation of New Zealanders who were approaching retirement during the period 1977 – 1991. The public pension was available at the relatively early age of 60 and it was set at a historically generous level (see Table 2).

Furthermore, savings attracted few tax concessions and, for some of this period, the returns from private saving faced the prospect of a tax surcharge.[29] Faced with these signals and employed at a time of inflation, economic restructuring and considerable labour market uncertainty, it is hardly surprising that that generation approached age 60 with generally low levels of non-housing wealth.

This meant that when the age of eligibility for NZS started to be raised in 1991 many of those immediately affected did not have a cushion of private savings sufficient to allow them to retire any earlier. The Transitional Retirement Benefit described in Section 3.4 provided an element of choice and probably helped to achieve public acceptance of the policy change. Nevertheless, a high proportion of potential retirees remained in the labour market and the result was the strong participation response reported in Section 4.1.

5.2  Changing prospects for baby boomers

Some of the factors that discouraged private saving and early retirement, and that contributed to the rise in labour force participation among older age groups, are likely to be much less relevant to the upcoming generation of potential retirees. In particular, the first wave of the baby-boom generation, currently aged 55-59, may observe that public pension policy rules can and have been changed at quite short notice. They may note that, while they are probably guaranteed a reasonable basic income from age 65, their earnings replacement rate is lower than would have been the case for those retiring 25 years earlier. Furthermore, because of the much larger size of their own cohort, there is little prospect of earnings replacement rates being raised without placing a heavy strain on other taxpayers and the long-term sustainability of the public pension system.

At the same time, growing skill levels and some widening in the distribution of earnings over the past 20 years suggests that a growing proportion of older workers have earnings that are high relative to the average weekly earnings measure that is used to benchmark NZS. It is this high earning group that is most likely to seek to top-up their NZS with private income in order to maintain their standard of living in retirement.

As a result we might expect to see a higher rate of private wealth accumulation among the baby boom generation than their parent’s generation. If this is the case, there are two possible consequences of relevance to this paper.

First, higher levels of voluntary private wealth accumulation might be drawn on by a greater proportion of this cohort to finance early retirement or periods out of the workforce for lifestyle reasons. This would start to show up as a new downturn in labour force participation rates among the 60-64 year age group, or at least as a decline in their rates of full-time employment.[30]

The second consequence of higher savings among the baby boom generation is that, in the event of a future increase in the age of NZS eligibility, the positive labour market participation response might be much weaker than was observed in the 1991-2001 period. Many people would be better placed to choose whether to fund retirement at the age they had planned to or to stay working until the new age of eligibility. In this circumstance, therefore, the rates of labour force participation among those aged 65+ could turn out to be lower than those projected for the hypothetical policy change in Figure 10 and Figure 11.

Finally, I suggest that, in conjunction with evidence on the living standards of older people[31], these results paint a generally encouraging picture of New Zealand’s public pension system from the point of view of positive aging and continuing active engagement. Whether the system will remain fiscally sustainable at its current settings remains an open question, but rising rates of labour force participation among older people gives cause for some optimism.