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Challenges and Choices: Modelling New Zealand’s Long-term Fiscal Position

8  New Zealand Superannuation

New Zealand Superannuation (NZS) is a publicly-funded universal pension. Spending on NZS is determined by several parameters relating to the age of eligibility and the payment amounts. Current policy settings are that people are eligible from the age of 65 years, and that a couple receives a combined pension of at least 66%, and not more than 72.5%, of the net (after tax) average wage.[22]

Figure 8.1 shows that the lower limit or “floor” of this band has been adjusted several times over the past two decades - from 65% in 1989, to 60% in 1999, and to 66% in 2006. Figure 8.1 also shows that the ratio of NZS to the net average wage has been moving towards the floor. This is because NZS payments are adjusted with CPI inflation as long as the NZS-wage ratio is within the band, whereas the net average wage tends to grow faster than inflation over the long run. Despite this trend, the annual CPI adjustments mean that the NZS payments have maintained their purchasing power.

In 2009, the ratio is just above 66% of the net average wage, but is forecast to reach 66% in 2010. After the NZS-wage ratio reaches this floor, NZS payments grow with the net average wage, which means increases in purchasing power. Changes to tax rates can affect the average wage and NZS payments differently, and can account for upward movement of the NZS-wage ratio.

Figure 8.1 - Ratio of the NZS couple payment to the net average wage
Figure 8.1 - Ratio of the NZS couple payment to the net average wage.
Source: The Treasury

8.1  Projecting NZS spending

Using current parameters for eligibility and the payment amount, it is possible to project the level of expenditure on this programme.

8.1.1  Modelling NZS

NZS is modelled in the LTFM as follows:

where:

Bt = the average NZS payment in year t, and

nt = nominal (net) wage growth (3.53% per annum after 2013, assuming that tax rates do not change).

If personal tax rates change, then the growth of the net wage will change its relationship with growth of the gross wage and the model takes this into account in calculating nt.

If Et is spending on public pensions, then:

where:

bt = the growth of B (equal to nt), and

rt = the growth of population aged 65 and over.

Spending on public pensions in the last forecast year of the 2009 Budget, E2013, contains information about the mix of different levels of payment according to living arrangements of people aged 65 and older. This method of projection implicitly assumes that the mix does not change through time (which it would if the rate of partnership formation, for example, changed).

As the number of people aged 65 and older in the population more than doubles between 2009 and 2050, it is not surprising that spending on NZS relative to GDP grows by 2 1/4 times. Figure 8.2 shows how expenditure on public pensions would grow, as a percentage of GDP, if current policy settings were to be retained. This figure also shows the large rise in 1977 and the following years when the age of eligibility was moved from 65 down to 60 and the size of the married payment moved to about 80% of the net average wage. Low birth rates in the 1930s, the raising of the age of eligibility from 60 to 65 between 1992 and 2001 and changes to the relationship of pension payments with the net wage caused the cost of NZS to move down from 6%-7% of GDP to around 4% recently.

Figure 8.2 - NZS spending under current policy
Figure 8.2 - NZS spending under current policy.
Source: The Treasury

Note: Before 1999, the name and structure of the public pension were different. This figure uses NZS as a convenient name for all public pensions over this period.

8.1.2  Sensitivity of NZS costs to demographic changes

The demography section outlines the assumptions behind the central population scenario (Series 5) and two “central alternative” population projections: Series 1 with low growth and Series 9, the high growth scenario.

These population projections produce only small changes to the old dependency ratio in 2050. Figure 8.3 shows that these flow through to only small changes in the NZS costs as a share of national income

Figure 8.3 - Effects of changes to population scenarios on NZS cost
Figure 8.3 - Effects of changes to population scenarios on NZS cost.
Source: The Treasury

Notes

  • [22]People in other living arrangements, such as a single person living alone, are paid set proportions of the “couple” rate.
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