NZ Super Claims Don’t Add Up

Our new Prime Minister Bill English has made a tentative nod towards the unaffordability of New Zealand Superannuation, raising the age of eligibility to 67 in 2040. It’s a timid step given the size of the issue, but that is typical of his Government’s incremental approach.

Meanwhile, Winston is defending NZ Super, saying it is affordable in its current form, as long as we grow our national income. His maths is horribly wrong, because NZ Super is tied to the level of our national income.

NZ Super

The bill for NZ Super is currently predicted to rise from around 5c in every dollar we earn to around 7c in 2040, and 8c by 2060. This increase is partly because of the large size of the baby boomer generation compared to other generations. As they move into retirement, we have fewer people working to pay their growing super bill. The other reason is that everyone is living longer, and without the age for claiming NZ Super rising commensurately, we will have more retired people as a portion of the population. Without reform and assuming tax rates don’t rise, this increasing bill is on current projections expected to blow government debt out to twice our national income by 2060.

It is a pretty bleak picture, which is why reform of NZ Superannuation has been talked about for some time. Labour ran with the idea of raising the age to 67 for two elections, and now after 8 years of stalling under John Key the current Prime Minister Bill English is also proposing reform.

National’s Reform

Mr English’s proposal is to increase the age of eligibility to 67, starting in 2037. This tentative move is typical of his Government’s incremental approach; quiet reform that doesn’t startle the horses. By the time reform happens in 2040 the cost of NZ Super is predicted to drive government debt to 100% of our income, so further reform will still be needed. And according to Treasury, increasing the age of eligibility simply pushes out the doomsday scenario of a debt blowout by around a decade. As the Morgan Foundation has pointed out, lifting the retirement age is also unfair to Maori and manual workers. Like his Government’s policies on swimmable rivers, English’s reform is too little, too late.

Winston’s reaction of course is to defend the unaffordable scheme as it currently stands. He will be eager to take the opportunity to shore up the support of his elderly voters. More surprisingly, Labour are also taking the opportunity to score some political points by opposing the Government for stealing their former policy – the one they chickened out on.

Why Winston is wrong

To defend his position, Winston made the claim that NZ Super is affordable if we grow national income (Gross Domestic Product or GDP). His exact words were:

In addition, if New Zealand was pursuing sound economic development strategies then we could look forward to doubling our GDP by 2050, which would mean that the ratio of affordability of NZ Super would be the same as it is today.

This claim is laughable, firstly because after three terms in Government (including one as Treasurer), Winston hasn’t achieved anything for our economy other than giving more election bribes to the elderly (e.g. the Gold Card). But more importantly, Winston is wrong because of some simple maths.

In its current form, the level of NZ Super for married couples is tied to 66% of the average wage. As wages rise, so will NZ Super payments, and so will the NZ Super bill. This is what makes the prediction of NZ Super’s unaffordability so robust; there is no way to grow our way out of it because if we earn more we have to pay retired people more. NZS is indexed to our GDP in effect Winston – GDP is largely wages – making it tricky to double GDP and not double NZS.

In theory there are two ways that our national income could rise without wages being the driver. But neither is consistent with Peters’ other policies; firstly, if profits rise but workers don’t get paid more, secondly, if we have more younger people working to pay for the elderly.

Winston is always on about the downtrodden so it’s difficult to imagine him arguing that us profiteers should become even more rapacious and screw the wage share of national income of GDP even lower. Secondly, a baby boom is unlikely given current fertility rates, so this second scenario could only happen through the mass immigration of young people. Even then, we will need to keep letting young people migrate here in order to pay for the last generation that has retired. Can you imagine that – Peters suddenly changing his tune and arguing that National should open the spigot and let even more immigrants in?

So which is it going to be Winston? Mass immigration or more profits for big business? We look forward to seeing your policy showing how you will make NZ Super more affordable. Or more likely - you continuing to make stuff up to suit your pork barreling political ways.

More urgent and comprehensive reform of NZ Superannuation is needed than any other political party is willing to propose. Watch this space.