The 'why' of superannuation more important than the 'what'

BY CHRIS TROTTER

OPINION: No-one can fairly accuse Don Brash of shying away from the difficult and the divisive.

In stark contrast to his successor, the former National Party leader's preference has always been to confront contentious issues head on; to offer solutions, not evasions. It's the quality I most admire in him.

Last week, Brash did it again. In a speech to the Asset Allocation Summit in Auckland, he offered a solution to the fiscal problems posed by the imminent retirement of the baby boomers (the first of whom turn 65 next year).

What Brash is proposing is disarmingly simple. The longer you put off retirement, the bigger your pension.

Or, in his own, rather dry, econo-speak: "In my own view, raising the age of eligibility could be made more politically acceptable if we were to allow a degree of flexibility regarding when the pension is actually taken. 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, say, 65. At that younger age, the amount received would be actuarially adjusted downwards, and would remain at that lower level (with regular upward adjustments with wages, of course) until death. Conversely, if somebody chose to defer drawing the pension until, say 69 or 70, the amount received would be actuarially adjusted upwards."

This is by no means a silly idea - especially if one accepts the demographic and fiscal assumptions it seeks to address.

To hear both the National and Labour party leaders dismiss Brash's proposal out of hand was, therefore, extremely disappointing. Only a fool would suggest that the vast expansion of our over-65 population will require no adjustments whatsoever to the current delivery mechanisms. But, given the knee-jerk reaction of the two main parties, it is difficult to conclude that they are led by anything else.

Change of some sort to the way we manage and/or pay for New Zealand Superannuation is - as Brash rightly asserts - inevitable, and political leaders who refuse to face the inevitable are fools indeed.

Brash is similarly right on the money when he urges us to deal with this problem sooner rather than later. Young New Zealanders - the so-called generations X and Y - should not be expected to wait until the brute facts of fiscal reality force some future government to implement an equally brutal series of last-minute solutions.

As a trained economist, Brash is, of course, basing his ideas on some important assumptions. This assumption thing is one of the least understood aspects of economics, and if more people realised on what a truly heroic scale the profession assumes all manner of things about the world, I suspect it would be taken a lot less seriously.

For example, Brash is assuming that the Treasury's projections about the shape of New Zealand society in 2050 are correct. But, of course, a projection assumes that everything that is happening now will go on happening in exactly the same way for (in this case) the next 40 years.

Just think about that for a moment. If you are a baby boomer, cast your mind back to the New Zealand of 40 years ago. Who, in the year 1970, would have accurately predicted where New Zealand would end up? Who could have foreseen Rogernomics? The fall of the Berlin Wall? China transforming itself into a capitalist powerhouse? A black American president?

How close would the picture of New Zealand 40 years in the future, projected by Treasury in 1970, have come to the reality of 2010?

Attempting to predict the future is like trying to freeze your own shadow. With every decision we take in the here and now, the shape of the future changes. That is why it is always safer for a government to base its policies on solid and enduring principles. Heroic assumptions are best left to economists.

NZ Superannuation works because it embodies its beneficiaries' clear expectations about what the state should provide and what the citizen should contribute. Its universal availability acknowledges the right of every person to be supported in their old age. It is financed out of general tax revenues, because every citizen has a duty to be his brother's - and his sister's - keeper.

Be guided by those principles, and Treasury's doom-laden projections can be dismissed for what they nearly always are - ideological burps.

A society dedicated to the support of its most vulnerable members - be they the very old or the very young - will do what it takes to meet its commitments. That might mean higher taxes. It might mean increased immigration. It might even mean adopting Brash's suggestion.

Ultimately, what we decide to do matters much less than why we decide to do it.

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