New Zealanders are often told of the looming fiscal pressures the country faces, due to the rising future costs of superannuation and healthcare. These pressures are real and will be a significant challenge for future governments.
Aspects of this debate remind me of what the eminent United States economist Paul Krugman used to refer to as “Very Serious People” (VSPs).
VSPs were those who thought that debt and deficits were always the most pressing issue, regardless of the state of the economy. The prime measure of one’s seriousness was the willingness to present cuts to the social safety net as necessary and inevitable.
Much of the debate around New Zealand’s financial future is informed by Treasury’s Long-term Fiscal Model, which takes population projections and a few rough assumptions on Government spending to plot out the trajectory of the Government accounts over a 40-year period.
No projection over such a long period has ever turned out to be right, and such exercises can still be informative regardless. It is worth understanding exactly how this model is wrong and where it is an unreliable guide to future conditions.
The 2025 Long-term Fiscal Statement shows future Government expenditure consistently outstripping revenue, resulting in persistent and widening deficits. Government debt then reaches 200% of gross domestic product (GDP) by 2065 (excluding the New Zealand Superannuation Fund).
A more informative number is found on page 78 of the statement (which happens to be the last page of text in the document). The “primary balance” is the difference between revenue and expenditure, setting aside interest payments.
In other words, this measure tells us what the underlying difference is in the additional cost of New Zealand Super and healthcare versus expected tax revenue. This gap is 1.8% of GDP by 2045, eventually reaching 5.5% of GDP by 2065.
Roughly half of the projected deficit, and therefore half of the accumulated debt by 2065, is due to this imbalance. The other half is due to compounding debt repayments that reach 8.8% of GDP by 2065, based on the assumption that no Government will do anything about this situation for 40 straight years.
An unpaid credit card bill left for 40 years will look similarly dramatic, but this does not tell you anything about what the size of the bill was in the first place.
On the tax side of the equation, the model assumes that tax revenue remains anchored around its current level of 30% of GDP. This might sound reasonable, but in practice it is comically implausible.
Wage growth pushes people into higher tax brackets. Those brackets are occasionally adjusted to the effects of inflation – most recently in 2024 and prior to that in 2010.
KiwiSaver was the brainchild of Sir Michael Cullen. Photo / Ross Setford
Keeping revenue at 30% of GDP means adjusting income tax brackets for the effects of inflation and real wage growth every single year. No Government has come close to this level of ongoing tax cuts, which sits behind the alarming fiscal numbers that we are often told we are ‘on track” for.
Put simply, these long-range projections assume recurring rounds of tax cuts that are unlikely to occur.
Anything short of this will mean taxation slowly increases as a result of some level of bracket creep.
The rising cost of superannuation and health, as outlined in these long-range forecasts, will probably blunt calls for tax cuts to hold revenue at the 30% of GDP level.
The pressures of future New Zealand Superannuation costs have led a number of parties to focus on large increases to KiwiSaver contribution rates.
National committed to raise employer and employee contributions to 6% each, “to match Australia by 2032”. New Zealand First had gone further, suggesting that these rates should ultimately reach 10% each.
But higher private savings via KiwiSaver do not address the affordability of New Zealand Super itself, unless changes are made to what the Government pays towards that entitlement.
Australia has compulsory employer contributions that many New Zealanders envy. They also have something that we do not, which is a means-tested pension.
Research in 2024 by NZIER suggested that the combination of Australian Superannuation and their means-tested pension delivers broadly similar outcomes in retirement to New Zealand Super plus KiwiSaver.
In particular, a flat, universal NZ Super entitlement delivers much better outcomes for lower income households.
An Australian system that relies much more on employer contributions will also deliver higher levels of inequality, as any income disparities during people’s working lives are replicated in retirement.
Both systems have their strengths and shortcomings.
What does not make any sense is pairing Australian levels of employment contributions with our well-established, universal NZ Super scheme.
Instead, when New Zealanders are told that their KiwiSaver will look like Australia’s system, the question they should be asking is: Does that mean that our pensions will as well?
The financial challenges that New Zealand faces are real. But the recurring alarmism around scary-looking debt charts should not push us to accept that fundamental overhauls of our social security system are non-negotiable, in the way that our own Very Serious People might suggest.
A truly serious debate on this issue needs to consider the shape of KiwiSaver and NZ Super at the same time – not corner us into a form of KiwiSaver that opens the door to cuts that New Zealanders would not support.