Hiding not an effective pension policy

MARIA SLADE
Last updated 05:00 19/07/2013

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OPINION: When I was young my grandmother used to keep the winter overcoats on a row of hooks in her hallway.

My little sister thought the hanging coats provided excellent camouflage in a game of hide-and-seek, not realising of course that her feet stuck out from underneath them and gave her away every time.

It was quite cute so we would indulge her until she giggled, and could be rightly declared discovered.

It's not dissimilar to the National Party's approach to raising the pension age. The Key administration seems firmly of the opinion that as long as it keeps hiding behind the coats, its exposed pieds won't matter.

It wasn't giggling last week, despite Treasury's latest warning over the fiscal consequences of not raising the National Superannuation entitlement age.

The Government is sticking doggedly to its "not on our watch" stance, clearly banking on the fact that more than half of voters are aged 45-plus and are likely to indulge it through to the next election and beyond.

The trouble is its feet are increasingly sticking out.

Treasury tells us that in just one year, from February 2012 to February 2013, the number of superannuitants grew by 27,000. That's the population of Pukekohe.

Fifty years from now, one in four New Zealanders will be over 65, compared with 14 per cent of the population today. A woman born in 1961 can expect to live to 85, but a girl born in 2011 is looking at living well into her 90s. Ninety is the new 80.

As a result, spending on NZ Super will grow from 4.3 per cent of GDP to 7.9 per cent by 2060, while the healthcare bill will balloon from 6.8 per cent of GDP to 10.8 per cent.

Compare this with vote education, set to shrink from 6.1 per cent to 5.2 per cent, the law and order bill which will fall from 1.7 per cent to 1.4 per cent, and other welfare spending which will reduce from 6.7 per cent to just 3.8 per cent - presumably because old people are already educated, aren't prevalent in the crime statistics and don't collect the dole or the DPB.

National has set itself the target of reducing net government debt to 20 per cent of GDP by 2020, and Treasury says this is a prudent level to try and maintain.

The Key government has exercised impressive restraint on the purse strings since the financial crisis, and if it continues in this manner the target is within reach.

But if current policy settings remain unchanged public debt is projected to increase from the late 2020s onward, as the effects of population ageing and rising health costs bite.

All developed countries are facing the same problem. Twenty-eight out of 34 OECD countries are either in the process of or planning to increase their retirement ages. One of the most extreme is debt-ravaged Italy, where the age will rise to as high as 69 by 2050 in a tiered system tied to life expectancy.

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The Commission for Financial Literacy and Retirement Income says in a sense it's not an issue of affordability, but of priorities.

New Zealand could afford an aircraft carrier if it really wanted one, but this would come at the expense of a lot of other things. Likewise we could afford to pay for any level of NZ Super if we were prepared to raise taxes, take on more debt, and redirect government spending from other areas.

But this would be a kind of Ponzi scheme, taking funds from one sector of the economy to pay for another, and we all know how well Ponzi schemes work out.

Adding a town's worth of pensioners to the welfare bill every year requires a serious long-term fiscal strategy. Hiding your face in a pile of musty coats is not a strategy.

* Maria Slade is morning editor at the Fairfax Business Bureau. maria.slade@fairfaxmedia.co.nz

- BusinessDay.co.nz

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