They have been shouting into the void about this for years and in pages 51 of this week’s paper from Treasury on New Zealand’s Long Term Fiscal Sustainability (actually, unsustainability), they do so again.
Politicians run a mile because solving the problem will involve pain in terms of reduced benefits, more tax – or most likely a bit of both.
But the nation has to have the conversation and unless it does so soonish, hedge funds will appear on the horizon and the outcome could be ugly.
Please help Treasury, and the nation.
Terry
A: Good call Terry! It was a crazy, busy week last week with Mood for the Boardroom, a new Reserve Bank Governor … and jetlag from my recent trip to China (write-up to come).
But you are right, it was a sobering report from Treasury and well worth giving some attention.
Treasury didn’t pull any punches: “New Zealand’s current policies are not sustainable for the long term,” the report said.
Treasury modelled what it looks like if we do nothing to address the rising cost of New Zealand Superannuation (NZS) until 2065.
“With unchanged policy, by 2065, government spending per person would nearly double – from $18,300 today to $35,900 (inflation adjusted),“ it said.
“Government revenue would rise much more slowly. These trends would result in government debt rising to around 200% of Gross Domestic Product (GDP).”
If we don’t want to borrow more, we can always cut Government spending in other areas.
“To fully offset the projected rise in the cost of NZS and [the] health spend, our modelling shows that other expenditure would need to fall from about 13% of GDP to only 5% of GDP by 2065 (and keep declining thereafter),” Treasury said.
Non-NZS welfare spending would need to fall to 2.2% of GDP by 2065, compared with an average of 5.7% between 2006 and 2025, it said.
“Governments could reduce other expenditure on non-health public services, like education and law and order.”
If we look at it the other way around, what would it cost us to maintain the current policy until 2065?
“Meeting expenditure pressures through tax increases alone would require the average tax rate on labour income to gradually increase from 21% in 2025 to 32% in 2065,” the report said.
“Alternatively, goods and services tax (GST) would need to increase to 32% by 2065.”
Treasury also very gently noted that while “income tax and GST are the most important sources of government revenue, broadening the tax base is another option”.
In other words, we could look at a Capital Gains Tax or a wealth tax.
Thankfully, there are other policy approaches that we could apply.
“The Treasury’s modelling suggests the cost of NZS could be kept stable as a percentage of GDP by increasing payment rates in line with inflation rather than wages,” the report said.
“Achieving the same by steadily increasing the age of eligibility would require it to rise to 72 by 2065.”
“Means-testing would need to kick in at relatively low levels of non-NZS income to generate similar levels of savings.”
Treasury concludes that we probably won’t end up doing nothing. It also makes the point that while none of the solutions look palatable on their own, a mix of all of them could do the job quite well.
A path forward
Treasury concludes with this wonderfully articulated advice (which will almost certainly prove too sensible for our politicians to listen to): “The good news is that New Zealand does not have to map the whole path forward; we just need to identify the path the country wants to start walking down.”
“Over time, Governments will choose to stride faster or slower down those paths. The important thing is to keep taking those steps and maintaining momentum in lifting our economic performance and keeping our fiscal [policies] on a sustainable footing.”
In other words, we don’t need to panic about what retirement policy looks like in 2065 (after all, most of us won’t even be here). We just have to start taking the first steps in the right direction.
The best time to start this journey was 30 years ago. But given that opportunity has passed, the best time is now.
Let’s keep up the pressure on politicians to listen to Treasury and get on with it – for the sake of our children and grandchildren.
Will the Super Fund come to our rescue?
Q: Kia ora Liam,
I really like your column, so I’m coming to you with my burning question.
There is much talk about how we are going to be stretched to fund superannuation into the future and how the retirement age needs to rise – I could refer you to your own column on April 25. I rarely see any mention of the Super Fund in those discussions. It was set up to help solve this exact problem. Can you explain why it doesn’t seem to feature in the commentary?
Regards,
Rose Nisbet
A: Thanks Rose,
That’s an interesting point. I decided to go straight to the source and asked the New Zealand Superannuation Fund for its take.
I think it might have been a little put out at the suggestion that it isn’t in the discussion.
But I take your point. While we all acknowledge the success of the Super Fund, its contribution to the retirement funding challenge tends to be something we take for granted.
The following is from NZ Super Fund spokesman John Redwood:
“What Rose might not realise is that the Super Fund was never intended to fully fund the future cost of a universal pension.
As the fund’s architect, then Finance Minister Sir Michael Cullen, stated in an October 2000 Cabinet paper: “By setting aside some Crown resources toward retirement income now, while we can afford it, we will be able to smooth out the cost over time.”
In other words, the fund was designed to act as a tax-smoothing vehicle, reducing the cost to future generations of taxpayers of providing superannuation.
On Treasury’s current modelling, withdrawals from the Super Fund will (at peak) meet about 12% of the forecast cost (withdrawals + tax paid = c.20%).”
So there you have it, despite being currently worth $87.5 billion and managing an average return of about 10% a year, the Super Fund will never be enough to cover the cost outright.
In nominal terms, Superannuation cost the New Zealand Government about $22 billion last year alone.
That’s about 5% of GDP, but it is rising fast. The Treasury report (see above) projects it will cost about 8% of GDP by 2065.
The Beatles’ 1967 album was their magnum opus.
Do we have to admit it’s getting better, better all the time?
“It’s getting better all the time,” sings an ever-optimistic Sir Paul McCartney on The Beatles track from 1967. “Can’t get no worse!” replies the ever-cynical John Lennon.
It seems an appropriate soundtrack for New Zealand’s current economic recovery … (Can we call it that yet?)
The ANZ Business Outlook for September didn’t get any worse. So that was nice. Topline confidence was static, but firms’ expectations of their own activity have lifted.
That’s despite a general downturn in the tone of responses ANZ received after the grim second-quarter GDP headlines.
We got the latest Centrix credit data yesterday. That showed improvements too.
Consumers’ arrears were down 1.8% year-on-year, with mortgage arrears improving to just 1.36% in August (from 1.58%).
Credit demand was strengthening, with consumer credit demand up 5.6% year-on-year, led by strong growth in personal loan applications, Centrix said.
Although company liquidations remained elevated (up 26% year-on-year), the rate of increase has eased in recent months and sectors such as agriculture, mining and information media were showing improving liquidation trends.
Credit defaults were also declining in construction, retail and transportation, reflecting early signs of economic recovery, Centrix said.
Here’s hoping next week’s cut to the Official Cash Rate and some nice spring weather add to the momentum.
Will the Reserve Banks (RBNZ) go for 50 basis points (bps) or 25bps? The popular vote (and the Government’s hope) will be for 50 to try to jumpstart things.
But let’s not forget that the RBNZ has just a single mandate – to keep inflation between 1-3% … and it was this Government that narrowed its focus.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics, send it to liam.dann@nzherald.co.nz or leave a message in the comments section.