Heads in sand over pensions

BY TRACY WATKINS

OPINION: There must be a patch of beach somewhere with Bill English's and John Key's names on it.

In fact, they could probably claim customary title, they've been back there so often to bury their heads in the sand whenever the ticklish issue of pensions is raised.

The Treasury may be the latest to sound the bells of doom over the refusal of successive governments to face up to the problem of our ageing population, but it certainly isn't the first and it won't be the last.

Mr Key's "no ifs, no buts, no maybes" promise on the campaign trail to enshrine current pension entitlements for as long as he remains prime minister not only slung a giant millstone around the neck of his finance minister, but effectively killed any debate before it starts.

The promise may have been politically savvy – some would argue crucial to National shaking off the twin bogeys of past broken promises and the secret agenda label – but it is also, in the eyes of even some of its staunchest supporters, akin to economic hooliganism.

Admittedly, the Treasury is the official Eeyore of the public service. And its long-term fiscal statement is not intended to make cheery night-time reading. But its view of our prospects over the next 20 years or so is maudlin enough to paint the last couple of years as positively halcyon.

It includes the sobering reminder of what sort of havoc a prolonged recession, worldwide economic turbulence, and Labour's use of the gains during the good years to put government spending on a higher trajectory are set to wreak on us for the next 20 years or so.

The last long-term fiscal outlook, prepared in 2006 against the backdrop of a "benign" environment and the healthy glow of sustained economic growth, confidently predicted government surpluses for roughly another 25 years. Against those sorts of predictions, it's no wonder that warnings about the sustainability of pensions fell on deaf ears and the notion that a bit of nip and tuck was in order became politically unsaleable.

Oh how times change. Now we're staring down the barrel of 40 years of deficits and the unthinkable may have suddenly become thinkable.

Compared with Treasury's other solutions – chucking low-level offenders out of jail to slash the prison bill, making people pay more for public education, curbing the demands on the health system and cutting Working for Families entitlements – tinkering with pensions by pushing the retirement age out a few years looks like a comparatively pain-free option.

It's certainly the coming thing in those places we like to compare ourselves with – Australia, Germany, Britain, Denmark, Norway and others, which have all lifted the pension age.

In Australia, Kevin Rudd unceremoniously tackled the sacred cow by raising the pension age to 67 – and with barely a whimper from the electorate, judging by his approval ratings, which remain in the stratosphere.

But if Mr Key's promise – one in which he deliberately left neither himself nor his finance minister any wriggle room – was delivered in different times, it was also delivered in the knowledge that the floors of our Parliament are still stained by the blood of past battles over pensions.

It is precisely because it has been such a bitterly fought war in the past that we have ended up with what, by international standards, is a relatively generous, and almost unique, pension scheme.

AS THE Treasury points out, it differs from public pension schemes in almost all other countries by its universality, its lack of asset and income testing, the fact that it is neither contributory nor related to past earnings history and – crucially – by the fact that there is no requirement to retire from paid work.

Yet at the same time, we are not only living longer, but working longer. The number of people who remain in the workforce after they hit the pension age of 65 rose through the 1990s and continued moving upwards to place us among the highest in the OECD.

Compare that with 1898 when pensions were introduced: with life expectancy at around 60 and the retirement age set at 65, the pension was clearly more aspirational than bankable.

Nowadays, we can expect to live 15 years or more after 65. So one scenario looked at by the Treasury is to follow the Australian model. That would move the pension age from 65 to 67 between 2017 and 2023, giving future superannuitants at least eight years to adjust to the change.

But the Treasury is also proposing to index future pension-age rises to rising life expectancy. By the late 2040s, that could make the pension age 69.

As the Treasury points out, that would give future governments the luxury of some choice when it comes to other spending decisions.

Because on current projections, few choices present themselves. And that's even based on the premise that the economy will grow again. As Treasury Secretary John Whitehead points out, economic growth will help – but it won't solve the problem.

If the Treasury's scenario is adopted, the sharp end of the debate would be the effect on those who are only eight years away from retirement. Given our low-wage economy, the effect would be to leave most workers with no option but to remain in employment. Some are bound to feel aggrieved.

Yet the argument is that, by pushing the decision out to future governments, National is lumping its successor with no easy option except to force more rapid change on workers.

At which point, of course, the thinkable becomes unthinkable again. Because the demographic bulge that is set to push the number of pensioners up from 522,000 now to 1.3 million by 2050 also represents an increasingly powerful voting bloc.

Which is precisely why Mr Key left himself no wriggle room – and looks likely in the process to have left his successor with little wriggle room either.

- © Fairfax NZ News