Budget 2016: Can we afford the superannuation status quo?

Pension payments make up 16 per cent of Government spending - within two decades it could be 25 per cent.
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Pension payments make up 16 per cent of Government spending - within two decades it could be 25 per cent.

New Zealand's pension-age population and its superannuation bill will balloon over the next 20 years, but politicians are terrified of touching it. What's going to happen if we don't act soon?

THE SUPERANNUATION GUARANTEE

Every New Zealand citizen or resident aged 65 or older is entitled to superannuation, providing they have lived in the country for 10 years since the age of 20, including five years over the age of 50.

Superannuation payments are about 66 per cent of the average wage for a couple who both qualify and 40 per cent for an individual. That currently equates to a net weekly payment of $384.76 for an individual living alone and $591.94 for a couple.

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In last year's budget, the Government set aside $11.6 billion for superannuation payments. This accounts for 16 per cent of core Government expenses, more than is spent on all other benefits put together.

The retirement-age population is forecast to surpass 1 million by 2028.
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The retirement-age population is forecast to surpass 1 million by 2028.

That's 446 flag referendums - and that number is only going to grow.

A RAPIDLY AGING POPULATION

In 2014, there were 650,000 over-65s in New Zealand, equating to 14.4 per cent of the population.

By 2038, the number of over-65s is projected to almost double to 1.29 million and make up almost 23.3 per cent of the population. By 2068, over-65s are forecast to make up 27 per cent of the population.

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So what would the superannuation obligation have been in 2015 if 23.3 per cent of the population was aged 65 or older, as will be the case in 2038?

In 2015, New Zealand's superannuation bill equated to about $16,886 per person aged over 65. 

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How is this calculated?

How is this calculated?

The calculator adjusts your total income to enable comparisons between different households. (By looking solely at income, it leaves out other components of wealth, such as property.)

The calculator applies an OECD scale that recognises larger households need higher incomes than smaller households to have the same standard of living.

It also acknowledges economies of scale. For instance, a couple renting a two-bedroom flat will usually spend less than they would have as two individuals, each renting a one-bedroom flat. Children also require less than adults.

To do this, household income is divided by 1 for the first adult, plus 0.5 for each additional person aged 15 or older, plus 0.3 for each child under 15.

For example, a family of two adults and two children needs 2.1 times more income than a lone- person household to have the same standard of living. (1 + 0.5 + 0.3 + 0.3 = 2.1) .

The chart shows percentiles of the income distribution. A percentile of, say, 55 means 55 per cent of people have an adjusted household income below yours.

Income data used to calculate the percentile comes from Statistics NZ

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If the population were 23.3 per cent over-65s - as it's forecast to be in 2038 - with all other things held equal, the superannuation bill would have been more like $18.3 billion and account for 25 per cent of core Government expenses. 

Looking further forwards, things could get even worse. There's currently around five working age people paying for every one pensioner. With demographics heading the way they are, by 2060 there is expected to be just two working age people for every one pensioner.

THE SUPER FUND

To safeguard against a scenario like the one above, the Government set up the NZ Super Fund in 2001. The fund will begin being used to supplement superannuation payments in about 2033/34.

Between 2001 and 2010 the Government contributed $14.77 billion to the fund.

However, contributions were suspended in 2010 with a partial contribution made in 2009/2010 of $250 million. No contributions have been made to the fund since then but the fund has still doubled in value since the contributions were suspended.

SO WHAT DO WE DO?

If you ask a politician, the answer is probably "nothing". If you ask an economist, they have a lot of ideas.

Morgan Foundation general manager Geoff Simmons thinks a variety of changes are needed, including raising the age and slowing the increase in payouts.

Unlike all other benefits, Super is tied to the average wage, rather than inflation.

"If we take indexation away from wages and put it into inflation, the rate of increase would slow," Simmons says.

Simmons favours actually widening the group of people who receive a super-like benefit - bringing in a universal income that all New Zealanders receive, with a means-tested top up for the elderly.

"That would be a fundamental reform of our tax and welfare system. You couldn't afford it at the super rates."

Such radical change is unlikely, but Simmons insists we must change the conversation completely.

"People say 'I've been contributing my whole life, I've paid for it.' That's completely incorrect. If people had been contributing their whole lives then we would have a nice juicy superfund.

"The fact is, governments have for years been telling people that they are contributing to their Super, but this has not been the case.

"This is going to be an unsustainable tax burden for younger generations to finance."

IT'S COMPLICATED

Auckland University retirement researcher Susan St John agrees that the conversation needs to change, but thinks the issue is too complex for simple election promise solutions.

"I think both political parties have got themselves into trouble by making promises," St John says.

"National by saying they would do nothing and Labour by locking themselves into a simple solution, when things are far too different for one solution."

In other words, this isn't as simple as bumping the age up to 67 and leaving it at that.

"One of the critical things missing from the conversation is an appreciation of the variability of experiences. It's all very well to say one's average lifespan is X years and plan for that, but there is a risk of outliving capital resources. There is a risk of extremely expensive long term care."

St John favours a royal commission on aging, with the backing of both major parties. Getting to that point could be rough.

WHY WON'T OUR LEADERS DO ANYTHING?

With a three-year election cycle, politicians have little to gain by attempting to tackle a seemingly far off problem. This is only exacerbated when you look at turnout by demographic - older people are much more likely to vote than younger people.

Hence, Prime Minister John Key has said he would rather retire than touch Super. Labour campaigned on raising the age to 67, but lost badly, and have now backed down. But if they don't touch this, who will?

ACT Party leader David Seymour is generally supportive of the National government, but thinks they are making a "huge mistake" by taking Super changes off the table.

"You can see in the budget forecasts that from now through the 2020s a new billion dollars of spending on super will be needed every year. It going to compound like that for about 15 years - I don't think anyone believes that is sustainable," Seymour says.

Change needs to be signalled soon so younger Kiwis can plan out their retirement before its too late.

"The issue is that if we are going to change things later we need to know about it now. People are planning their lives, making decisions about how much to save, whether to buy a house, how much to spend, whether to invest.

"This is a 40-year project - you've got maintain the expectations of the people who are 25 now, who will be 65 in 2056."

WHEN IS D-DAY?

So when is that change going to come? In fifteen years when the baby boomers turn 85 and start really straining the health budget?

Seymour thinks the issue could come back in the next election, while Simmons believes the next economic crisis will bring it on.

"When we hit our next crunch, other government services will have to be so far cut back, or taxes raised so high, that the population wouldn't take it," Simmons says.

But he wishes we would move sooner.

"We have much higher rates of child poverty than elderly poverty," Simmons notes.

"All of the evidence suggests that you get a much higher return investing in younger people rather than older people."

 - Stuff

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