Raising the retirement age to 67 not enough to support ageing population
OPINION: The very idea of changing the age of eligibility for NZ Superannuation from 65 to 67 has certainly caused all sorts of reactions, from support for a bold action, to complaints it didn't go far enough, to criticisms that it is unfair and inequitable. But we think these reactions miss the point.
The official news release states the change is to "ensure the scheme remains affordable into the future." The implication is that if something doesn't change then there won't be any superannuation in the future, or at least not enough to support a person.
Judging the change in eligibility should really come down to this: is the current scheme affordable, and if not, will this change make it so?
The problem is that the share of the population that is elderly and needs supporting is forecast to grow. And grow a lot. Each working person will have to support more retired people as, quite simply, we are living longer.
But our research finds that a consequence of our living ever longer is that the superannuation burden facing future working people will keep increasing. Eventually the current scheme becomes unaffordable.
But even before that point, those working in the future will be devoting increasingly more of their income to supporting the elderly while experiencing decreases in what they themselves have to enjoy, compared to those working now. You can judge for yourself whether or not you think this fair, but many New Zealanders would probably say it is not.
The elephant in the room that no-one is mentioning is future health and residential care costs of the elderly. These too will rise substantially. Not only will the superannuation burden rise and eventually become unaffordable, but it will be in combination with increased health and residential care costs.
So what can be done? The problem, remember, is that each working person will have to support more retired people. So either the number of elderly being supported by a working person must not be allowed to increase much, or the standard of living of the elderly must not be allowed to increase much.
The aim of the current proposal is to increase the number working in the future by delaying their retirement while at the same time having fewer retired. But this only works at reducing the future superannuation burden if the lifespan of people stops increasing. If people's lifespans keep on increasing, which science seems to suggest they could, this would mean the age of eligibility would need to keep increasing too.
The change to 67 won't be nearly enough. The current scheme will still eventually become unaffordable.
The solution is to directly link the age of eligibility for NZ Super to our lifespans, as some countries have done. If our lifespans increase, then the age of eligibility automatically increases too. But since even a small increase in the age of eligibility 20 years from now seems to be a bridge too far, getting more increases seems difficult.
Another option is to remove the link between NZ Super and wages (currently NZ Super is indexed to wage rises). Suppose instead we linked the pension to the cost of living of the elderly. Any increases in wages caused by increased productivity would only feed through to those working. The incomes of those working would increase faster than the elderly.
Each future working person would have to support more elderly than is the case now. But the income of working people would rise faster than the superannuation income each retired person received. A working person would pay higher taxes to pay for the increased superannuation burden, but the amount would be more bearable because the increased taxes they pay would not go up too fast compared to increases in their income. And the living standards of the elderly would be preserved – they just wouldn't increase.
Another possibility is to have more working age people in the future. There are only two ways of doing this. One is an increased number of births per child-bearing age woman. However this is unlikely – fertility rates are typically declining even in countries which offer inducements to have children, such as Singapore.
The other option is an increase in the number of young immigrants each year, but only young immigrants. But immigration is another political hot potato, not to mention the possible outcry over limiting immigration by age. Furthermore, any increases in the lifespans of people would need to be met by corresponding increases in the fertility rate or the numbers of young immigrants. These are clearly unsustainable.
So that's it. If we want to maintain universality of the standard of living of the current superannuation scheme into the future then we face some hard choices.
But if we don't do anything, just remember, young people in the future could be very sought-after and have the pick of countries in which to live.
Just pray they love you enough to want to stay here, bear the increasingly onerous superannuation burden, and will feed you when you are 67.
Acknowledgement: This article is based on research done by Jordan Bowler when he was a Masters of Commerce student in the Department of Economics and Finance at the University of Canterbury. We thank Penrich Capital for their support and for data they provided.
Philip Gunby is Senior Lecturer in the Department of Economics and Finance at the University of Canterbury.
Kelly Tonkin is Chief Investment Officer of Penrich Capital.