Should the age of eligibility for New Zealand Superannuation be raised?

elocal Magazine, ed. 171. 29 May 2015

Last year, I published a book called “Incredible Luck”.   The book covered a lot of issues, but at one point I criticised the present Government for its unwillingness to forewarn the public of the inevitable need to increase the age of eligibility for NZ Super.   Mr Mike Groves wrote to me explaining why he didn’t agree with me.  For some reason, I didn’t get the letter, so he wrote to “elocal” suggesting that they forward his letter to me.  I’m delighted to take this opportunity to explain why I still favour an increase in the age of eligibility.

MG: If the age of entitlement is raised to (say) 70, it is likely that most if not all workers will carry on working until they reach that age.  This will consequently reduce the opportunities for school leavers, university graduates, mothers returning to the workforce, immigrants and any others aged under 65 who are seeking work.  Surely it’s better to let these people get jobs and start contributing through the tax system rather than paying at least some of them the unemployment benefit, or seeing them emigrate in search of work because older workers are staying in the workforce for longer.

DB: While it may appear in some individual circumstances that an older person staying on in the workforce blocks the employment or promotion opportunities for a younger person, the overall level of employment in the community depends largely on the level of aggregate demand.  As women entered the workforce in very large numbers in recent decades, that didn’t lead to an increase in the unemployment of men, although of course it may have deprived men of some particular employment opportunities.  If having older people stay on in the workforce really did deprive younger people of employment opportunities, full employment could be guaranteed by obliging people to retire at, say, 55!

MG: People who work at physically demanding jobs (e.g. coal miners, freezing workers, building construction workers, farm labourers) often have difficulty continuing to work until age 65 as things stand.  If they are forced to work on until 70, this will put them under immense and unfair physical strain.  I accept that it would be possible to create exemptions for certain categories of workers, but I know that once you start down the exemption path you are likely to create more problems than solutions.

DB: You are right about the “exemption path”.  But the reality is that most of us are living much longer, and are much healthier in our older years, than was true of our forebears.  When the forerunner of NZ Super was introduced in 1898, few people lived to 65.  Today, life expectancy at birth in New Zealand is 81 – over 83 for baby girls and 80 for baby boys.  And that life expectancy is rising by about two years every decade.  By, say, 2035 life expectancy at birth could well be upwards of 85, implying that NZ Super would be needed to provide support for an average of 20 years if the age of eligibility remains at 65.  You are also right that some people find they can’t physically work to 65 now, and for this reason there are various income support schemes to assist.  But even those in the industries you list are increasingly able to use machinery to do the “heavy lifting”, and thereby continue to work long past what was possible a decade or two ago.

MG: Money paid out to superannuitants is not lost to the economy.  Rather, it is recycled almost immediately to the advantage of all.  Firstly, it is taxed before payment, so this tax money reverts immediately to the state.  Then, much if not most of the money is spent and so attracts 15% GST, which also reverts to the state.  Therefore, at last 25% of the money goes straight back to the state.  Then, by spending money, superannuitants help create jobs in retail and in factories producing goods and in organisations providing services.  Then, the organisations providing goods and services and their employees all pay tax – a virtuous circle!

DB: But you forget that the money spent on NZ Super by the government has to be first taken from other taxpayers!  So what the superannuitants pay in tax, and spend on goods and services, is money not spent by the taxpayers who fund the payments to superannuitants.

MG: Intergenerational fairness.  I think a case can be made that in the interest of fairness to future generations, we should continue to provide NZ Super at age 65.  Anybody who has attended university in recent years has had to pay for the privilege, even allowing for the interest-free nature of student loans – something you and I did not have to do in the 1950s and 1960s.  This generation has also faced a tougher job market than we did, and has paid more to buy a house than we did.  By the time they reach 65, I would like to see them still being eligible for NZ Super.

DB: I certainly understand this point.  Even though today’s students carry only a relatively small part of the total cost of their university education, you and I both benefited from almost entirely free tertiary education.  And the price of housing, relative to incomes, is certainly outrageous at the present time, as I argued in the last edition of “elocal”.  But the price of housing should be, and can be, substantially reduced.   Retaining 65 as the age at which people become eligible for NZ Super means that those below 65 carry an ever heavier burden of taxation to support those over 65.  You don’t help young adults, already saddled with student loans and very high housing costs, by obliging them to spend four decades paying an ever increasing amount of tax to support people who are for the most part able to support themselves.

MG: I argue that we can afford to continue paying at age 65.  In your book you note that if we carry on as we are, NZ Super as a percentage of GDP will rise from 4.3% currently to 7.9% by 2060.  I believe this is sustainable.  Savings in public sector spending could help fund NZ Super.  In addition, the “we can’t afford it” argument assumes no improvement in output and productivity.  If we can find ways to increase productivity, NZ Super as a percentage of GDP need not increase as predicted and may remain quite sustainable.

DB: The reality is that, with our population ageing, government spending is increasing on both NZ Super and on healthcare.  In 2013, the Treasury did a long-term projection for the country’s fiscal position, and they noted that, under present policies, NZ Super and healthcare are together costing about 11% of GDP, but that that cost will increase to almost 19% of GDP by 2060.   That increase, of almost 8% of GDP, is roughly equivalent to everything the government now spends on education – primary, secondary and tertiary – and on law and order.  Covering that very large increase in spending on NZ Super and healthcare by cutting back on other government spending would therefore be a herculean task.  Yes, we will hopefully see an increase in output and productivity but unfortunately that doesn’t help the government find the funding for NZ Super because NZ Super increases with inflation or wages, whichever is the higher.  So increases in output and productivity result in increases in the NZ Super payable.

Between 1980 and 2013, the number of those aged 65 and over doubled to 635,000.  That number is projected to double again to 1,270,000 by 2040, just 25 years from now.  It is simply unfair to expect tomorrow’s workers to carry that burden, and many other developed countries are recognising this and gradually raising the age of eligibility for their taxpayer-funded pension.  New Zealand does not need to change the age of eligibility today or tomorrow, or indeed for some years, but we do need to make it clear that there will be, over the next 10 or 15 years, a need to gradually increase the age of eligibility.  Australia is doing it.  The UK is doing it.  The US is doing it.  We need to announce our intention to do it also.

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