The retirement tsunami

BY TRACY WATKINS

As the baby boomers bound towards retirement, experts agree this country can no longer afford to keep paying superannuation from the age of 65. But the Government, nervous about upsetting greying voters, does not want to engage. So will the next generation all end up working till age 70?

Suzanne Snively's children have a pet name for her. Pop. It stands for "Pilates, omega-3 and the fact that I'm always wearing my pedometer."

The 61-year-old uses the story to illustrate the new reality of the over-60s in a speech to a retirement income seminar in Wellington this week.

The PricewaterhouseCoopers partner recently announced her decision to stand down and pursue other interests. Still fit, youthful and attractive, she defies the traditional perception of retirees.

Retirement Commissioner Diana Crossan says the word retirement is becoming a misnomer for many over-60s.

"In the past, way back, my father had to retire at 60. Then there was a bit of a change and the transition was a couple of years ... people would stop their career job, do a small job, then stop again.

"But now people are making major changes. You hear of all sorts of people wanting to go into horticulture, run a hotel, or do something completely different. It's another whole career. So it's not just a transition any more."

Figures from Berl chief economist Ganesh Nana support the view that there is a quiet revolution under way among older New Zealanders.

About a third of Kiwis aged 65 to 70 are still in the labour force – compared with about 11 per cent 20 years ago.

Amid warnings of a looming "silver tsunami" as the baby boomers hit retirement age from next year, Dr Nana refuses to buy into the armageddon scenario that the cost of their pensions and healthcare will place an impossible burden on future generations.

"The projections all depend on your assumptions. Everything depends on how you think we are going to change our behaviour, and we have already changed our behaviour. We've had 20 years of very significant changes in behaviour in terms of participation in the labour force."

What worries him is that current retirement policy and debate is based on the belief that people stop contributing to the economy and the workforce once they hit the age of 65.

"That's just so incorrect. We've got to get that out of the window."

But even with that comparatively rosy outlook, he agrees that the current pension entitlements cannot be maintained.

"The fiscal outlook is not nice, so clearly there has got to be some change in policy ... but a lot of it is around expectations. New Zealanders rightly or wrongly expect superannuation from the state at 65. The question is why?

"Where has that expectation come from? And is it valid for someone who's going to turn 65 in 30 years' time?"

While others are equally reluctant to buy into the disaster rhetoric, they take a bleaker view of the future than Dr Nana.

Treasury deputy chief executive Gabriel Makhlouf agrees that there will be more over-65s in the workforce in the future – it just won't be enough to arrest the decline in numbers in labour force participation overall.

His assessment is blunt: "The rise in the ratio of elderly to the working age population will act as a drag on the economy's potential growth rate."

Put simply, the Crown's finances are simply not sustainable over the long haul on current projections – and that means making some difficult choices and tradeoffs in the next few decades if we expect to maintain current retirement incomes, Dr Makhlouf says.

As a nation, we have clearly made some of those choices already. A vocal grey vote, political point-scoring over superannuation and the dominance of NZ First for the decade up until the last election have seen retirement incomes grow.

So while our child poverty rates are worse than the OECD average, New Zealand ranks highest in the OECD in terms of combating poverty among the elderly.

We are not alone among developed countries in confronting a baby boomer crisis, of course: Dr Makhlouf makes the point that several governments around the world are reducing the generosity of pension entitlements for public sector workers, while high-performing OECD countries are already raising the pension age.

But if there was an elephant in the room during his speech and others during the day-and-a-half-long gathering of academics, economists and others, it was the Government's refusal to engage in the retirement debate.

While it has tasked many other thorny debates to private sector working groups to thrash out since coming to office 20 months ago – think Tax Working Group, welfare and capital markets reform – retirement policy is a no-go zone.

The seminar was instead organised under the banner of the Institute of Policy Studies, and the only government minister in sight was Senior Citizens Minister John Carter, for some brief opening remarks.

Battered by the electorate over previous broken pension promises, National made a decision on the 2008 campaign trail to live or die by its commitment to the current pension rate and age of eligibility.

Prime Minister John Key put his seal on the deal with voters by promising to resign if there were any changes under his leadership.

It is a promise that has, in effect, locked future governments into the same course, though Finance Minister Bill English disputes that.

He insists there is no reason why future governments would rule out revisiting the issue, even if his government has. But in practice, no party will risk electoral armageddon by breaking the uneasy accord.

It leaves policymakers and others in a quandary; they are debating responses to a looming crisis in a vacuum.

FROM afar, New Zealand's superannuation debate does not look so different to debates going on elsewhere. The baby boomers, a product of two world wars, are a global phenomenon.

American academic Kent Weaver, a keynote speaker at this week's retirement seminar, says New Zealand Superannuation does well at some things and is lousy at others.

"It does reasonably well at providing an income for all New Zealand seniors and, actually by international poverty measures ... it does a good job at that. But it does not do a very good job at allowing people who are at average incomes or above to replace their current salaries."

The New Zealand system is particularly lousy, however, at changing behaviour, he suggests. "Since people are living longer they are going to have to work longer and it doesn't provide much in the way of rewards for people to [do that]."

Till KiwiSaver, New Zealand had also dragged its heels over encouraging individuals to save for their own retirement.

But with KiwiSaver there was an opportunity to turn things around by making it mandatory, Professor Weaver says.

Returning contributions to the so-called Cullen Super Fund should also be on the Government's list.

The fund was set up under Labour to smooth the cost of future pensions but contributions were frozen by National last year.

"I know the argument others use, that it would be better to lower debt. Well, yeah, but if governments were rational actors rather than political actors, if they weren't myopic, then I'd say `yes, you're right, that's the economically sensible thing to do'.

"But governments are myopic, they aren't willing to exercise that fiscal discipline and [the Cullen fund] is actually a mechanism that says: `You have to restrain other spending now'."

Like Professor Weaver, 2025 taskforce chairman and former National leader Don Brash agrees the current scheme has its good points. The cost of the scheme is relatively low by international standards – at 4.4 per cent of GDP, it compares with an OECD average of 7.2 per cent.

And once taxpayer subsidies for private sector pensions are taken into account New Zealand's scheme is even better value – "probably a lower fiscal cost than in any other developed country", Dr Brash says.

"Given that we probably have less poverty among those over 65 than any other developed country, this is an achievement to be proud of."

But we are in a "demographic sweet spot" and the costs are to soar once the baby boomers start retiring next year, he says.

The answer, Dr Brash believes, is a flexible retirement age.

He insists there should be nothing controversial about raising the age of eligibility for the pension – last year Australia announced it was moving to 67 over time, Germany and the United States are raising the age to 67 and Britain is aiming for a retirement age of 68.

Denmark is raising it to 67 then indexing it to improvements in life expectancy.

One way to sweeten the pill, Dr Brash suggests, is to give people a greater degree of choice on when to retire.

"If the age of eligibility were 67, for example, under a policy allowing flexibility regarding the age at which it could be drawn somebody might choose to take the pension at 65."

The rate would be adjusted downward to reflect the fact that it had been drawn down early, while there would be an incentive for those who chose to stay in the workforce longer by adjusting the rate upwards.

The change would not do much about the cost of New Zealand Super but it would mean more people in the workforce paying taxes and – probably – spinoff effects in terms of lower health costs, Dr Brash says.

"There is evidence that people who remain employed are often healthier, physically and mentally, than those who have left the workforce."

His suggestion of a flexible pension age would answer those critics who argue that many workers, particularly manual labourers, are not reaping the benefits of longer life expectancy and a healthier old age. Work for them is hard graft and remaining in the workforce till 67 unlikely.

But the Government's response to Dr Brash's call is the same as for all other invitations to enter into the retirement debate: There will be no change.

"We've taken a position on it," Mr English stresses. "Of course we are concerned about the longer term sustainability of the Government's fiscal position. But superannuation is only a part of that and we've taken a position that we're not going to change it."

In other words, the choices have already been made – and public services, public sector wages and government spending in other areas will bear the brunt.

It is no wonder that today's generation Y has coined the phrase the "greedy generation", to describe the boomers and their call on government resources. But generation Y economist Nigel Pinkerton doesn't buy it. He recently wrote a provocative article debunking the theory of a "generation money gap".

He admits he was largely playing the role of devil's advocate to the popular view that gen-Y had been shafted on every front – the perceived injustices being that while the boomers got free education, their children didn't; that wealthy, property investing boomers have shut generation Y out of the housing market and – the final insult – that generations X and Y will be left funding their pensions through taxes, now the boomers are about to retire.

But what Mr Pinkerton found once he dug beneath the numbers was that gen-Y "aren't doing too bad".

When the boomers were first entering the workforce in the early 1970s, the median income for an employed person was about $2280 a year, which would buy the same as about $28,000 today.

The average annual income for an employed person last year was about $40,500 – 45 per cent higher than in 1971.

"So being born 50 years later than my grandparents, that actually makes a pretty big difference. Even if I was the same person, with the same set of skills, the same drive and ambition, I'd be worse off."

Convincing the rest of his generation may be a taller order as crunch time looms.

BY THE NUMBERS

Deaths will outnumber births in a third of New Zealand regions by 2031. Two-fifths, or 29, of New Zealand's 73 territorial authority areas will have fewer residents in 2031 than they do now.

Life expectancy is forecast to increase on average from 78 for men to 82.1 by 2031. Women will also live longer, although the gap seems to be closing – their life expectancy rises from 82.2 to 85.2.

But even that may depend on where you live – expect to knock around five years off that if you live in Kawerau, while living in Queenstown-Lakes gives you an extra five years to squander the kids' inheritance.

Sixty per cent of our population growth between 2006 and 2031 will be in the Auckland region. The North Island will grow faster than the South Island, although the Queenstown-Lakes district is expected to have the highest projected population growth between now and 2031.

Over-65s will account for more than a third of all residents in Waitaki, Hauraki, south Wairarapa, Horowhenua and Thames-Coromandel. But Wellington will stay young, with just 14 per cent of its population 65 and over.

The average kiwi household is expected to number 2.4 people by 2021 because of large rises in the number of "couple without children" families, one-person households and people living in group dwellings.

The median age of the labour force is projected to reach 42 by 2012, compared with 36 in 1991. This is because of the number of people aged 65 in the labour force trebling from an estimated 38,000 in 2001 to 118,000 in 2026.

By 2060, there will be four people aged 65 and over for every 10 New Zealanders of working age. That compares with two to 10 today.Sources: Statistics NZ and Treasury.

The number of 65s and over is projected to double between 2006 and 2031, with the fastest increase happening after next year.

About a quarter of the government's operating budget goes to over-65s.

That is expected to rise to as much as 40 per cent by 2050.

Over-65s are expected to make up more than a quarter of our population from the late 2030s – compared with 12 per cent in 2005.

By the 2050s, 1.33 million of us are likely to be over 65.

Government spending on superannuation currently stands at about 4.4 per cent of the national income.

By 2050 that will have nearly doubled to 8 per cent.

- © Fairfax NZ News