Universal pension: universally fair?

What the Retirement Income Policy and Intergenerational Equity conference told us about selfish generations, and raising the age of pension entitlement

I missed the conference's closing remarks, but here are a few of my own.

The context for the conference was Treasury's long term fiscal statement. The assumptions in this were challenged. I think probably everybody's assumptions were challenged yesterday, in one way or another: the hallmark of a good conference.

Michael Cullen famously accused the Treasury of having an 'ideological burp'; and hints of their nostalgia for Roger-economic Nirvana aren't hard to spot. Add to that the perennial problem with their forecasts (the PM reportedly said last week he might be better off with an octopus). Why should their 'projections' be regarded as any more reliable? BERL's Ganesh Nana told us you could work out they were wrong, even on the back of an envelope.

And yet, I just don't buy the argument that this is a Trojan horse, for antique treasures. This is not just an NZ thing; other OECD countries are recognising the problem and responding to it. Maybe Treasuries, worldwide, suffer the same fiscal delusions, but nobody in the room yesterday denied that the problem existed, or the need to react to it. It was a question of how to act right. (Yes, the pun was intentional -- just a little joke.)

And that may be why, when asked for a show of hands, you could have counted on the fingers of one of them the number of people who thought that the age of pension entitlement would remain at 65; 75 was mentioned, in passing.

If nothing else, this is an issue on the minds of the Wellington beltway. I'd like to be reassured, as no doubt would Bill English et al, that it's an issue on the minds of middle NZ, too.

Change to super policy will come, sooner or later, but it will come in the form of a little of everything we don't much fancy, after working through some stuff that is hard: accurately sizing the problem, having some mutual respect and good will, a bit of a rise in the age of eligibility, maybe a bit of means testing, better use of capital assets in retirement, longer working lives.

We didn't talk enough about so-called 'selfish generations'. We need to be brave enough to talk more, and frankly, about intragenerational differences, and intergenerational inequity.

By contrast, there was lots of brave talk about 65+ not being 'dependent'. Does it follow that we will hear an equal amount of brave talk -- and action -- about consequent changes to super entitlements? Otherwise, it's just another example of the baby boomers wanting and having it all.

This is not their fault. Yet I truly believe, and I know some acknowledge, that they have had the best of it: no war, a good welfare safety net, (relatively) cheap houses and land and oil, no climate change consequences, the joys of massive economic growth in the prime of their lives, and, I'm sure, you could go on and on. It will be tougher for their kids and grandkids, in every way.


Update 5: July 22, 5 pm: More on intergenerational equity (raising eligibility age, and Gen Y perspective)

Geoff Rashbrooke on “reducing the number of pensioners” (murmurs around the room) – ie, raising the age of eligibility.

His conclusion is that the status quo is intergenerationally unfair. The cost per worker rises from $3,000 currently (on average?) to $6,000, or $4,000 if smoothed by the Cullen fund.

Equity can be addressed by holding the amount available for pensions to a fixed proportion of labour income. You can do it, on an assumption of no increase in taxes, at this cost: pension eligibility age of 66 by 2012, 67 by 2014, 70 by 2024, and longer term 75.

Nigel Pinkerton (Infometrics) on behalf of Gen Y. Anecdotes about the level of animosity felt by that generation towards the baby boomer demographic are true. It comes up surprisingly often in conversation, about house hunting, for example.

Three particular causes of resentment: housing cost relative to the average wage; tertiary education funding; and expectation of longer working lives.

But he asks them: would you want to swap places?

Gen Y’s lifetime incomes will be significantly higher than the baby boomers. He got stats from Stats NZ, and had them checked several times, in response to disbelief. In the 1970s, median income was $2,300, which in spending power terms, is $28,000 today. His generation already enjoys 50% more spending power than their baby boomer equivalent young person in 1971.

Therefore, it doesn’t bother him that (as had been discussed at the conference) baby boomers will indeed be net beneficiaries from the welfare state. He regards it as a form of equity; he wouldn’t trade the loss of spending power. The pension should be a priority for Gen Y if they are interested in equity.


Update 4: July 22, 3.30 pm: Intergenerational selfishness? (+ asset use in retirement)

Bob Stephens (Institute of Policy Studies): Have all generations been treated fairly (equally) by the welfare state and pensions?

He suggested ways of looking at the welfare state and responding to the question, for example:

Static income redistribution, and poverty relief -- redistribution from the current rich to the current poor, by pensions, benefits, taxes. Postulated we will see a reduced willingness (and ability?) of younger generations, with small asset bases and large claims on them, to support people 65+ staying in work as being proposed today, with relatively substantial assets.

Lifetime (intra-generational) transference -- UK study, showing 3/4 of welfare spending is a redistribution of people’s own income over their own lifetimes, only 1/4 of the spending is lifetime rich supporting lifetime poor. Welfare is the government acting as a sort of risk insurer.

[Which might show a few things? ... “bludging,” so-called, is a small part of the picture; not much room to be too self-congratulatory about paying taxes; and it might tend to reinforce our love of state handouts. ‘Cos it’s ours. Gizzus it back.]

Intergenerational wealth redistribution -- Thompson’s so-called Selfish Generation, which if I understood correctly was the pre-baby boomers, born pre-war, 1930s and 40s, that allegedly dominated the welfare state and set things up to suit themselves. [Sounded familiar: does every generation whinge about this?]

Time ran out. Luckily perhaps -- it would have been a brave man who tackled the subject directly, in a room full of, well, baby boomers.

So in the end, the interesting question didn’t get answered.

Judith Davey (Institute of Policy Studies): Talked about mobilising assets to produce income, as opposed to preserving for inheritance (intergenerational) purposes -- reverse mortgages, for example, and local bodies securing rates against future death and sale of home. She had half a dozen ideas about how the same or similar concept could be extended. Longterm care insurance (a reason why some may be reluctant to mobilise, keeping wealth base for a rainy day). Using home to secure medical costs thus avoiding waiting lists. Age appropriate renovation of housing stock, to support staying independent longer.

Predicted future need for more active efforts of this sort, to reduce fiscal pressure at state level, and on a personal level, improve quality of life.

[Although the quid pro quo is, no inheritance. Which won’t always matter.]


Update 3: July 22, 1 pm: More from the Treasury (+ challenge to assumptions)

New Treasury Dep CE Gabs Makhlouf outlined demographic change -- similar to picture already described, with some differences that don't matter in presentation of the numbers.

Economic growth rate easing back to around 2%, as a result of shrinking labour force participation rate. By 2050, NZS cost rising to 22% of government spending and 8% of GDP, health cost rising from 7% to more than 10% of GDP, 40% of the government’s annual operating spend directed to supporting 25% of the population.

If the 2010 Budget was taken as basis for Treasury’s projections (as opposed to what they knew in 2009), the net debt result would be well below the 2009 projection of 223% of GDP -- a result instead of 100%. Like Greece, ie, unsustainable.

Discussants Suzanne Snively and Ganesh Nana.


Components of sound retirement policy-making include 65+ wellbeing and employment. She dismissed “Armageddon-type analysis” as too easy. People in the 65+ age bracket want to contribute, and the wellbeing of our economy is bound up in their wellbeing.

Treasury’s projections are predicated on “dependency”, a wrong assumption, and the sole focus of fiscal strategy on rationing services is wrong.

In health, for example, rising projections don’t take into account the influence of non-fiscal factors and strategies to help manage the need to spend, and the need for policy development to promote those strategies: sleep, diet and activity, for example, and their influence on health and wellbeing.


These numbers of Treasury’s are projections, not forecasts. It’s a sort of thought experiment [my way of paraphrasing it, not his], based on the idea behaviour does not change.

Secondly, assumptions matter. Not hard to come up with back-of-the-envelope, but equally plausible, alternative assumptions.

For example, there’s already a trend of rising labour force participation rate among the 65+. Since 1991, the participation rate of those aged 65-70 has risen from 11% in 1991 to 33% today. The trend is the same across all 65+ age brackets (with, obviously, lower levels with rising age). If Treasury’s assumptions were adjusted along these lines, labour force growth comes back into line with population growth.

Similarly, their assumptions about the dependency ratio: not all those aged 15-64 are working, and not all 65+ are dependent. If you calcuate the ratio of actual numbers earning, to how many dependents they’re carrying, trend doesn’t worsen considerably at all.

Why is retirement income policy being developed based on wrong assumptions?


Update 2: July 22, 11 am: International perspective

Professor Peter Whiteford keynote speech on equity issues in pension design and reform, based on OECD comparisons. He considered different ways of assessing equity, for example: proportion of GDP, % of average earnings, pension progressivity, 65+ poverty rates, and so on.

In considering equity, need to take into account all components, direct and indirect, of the system structure:

  • NZ towards the lower end of %GDP spending on pensions, among OECD: 4.4% of GDP, a low cost scheme.
  • OECD gross pension benefit, on average, is around 27% of average earnings. NZ the highest gross benefit scheme, at 39% of average earnings.
  • But systemic pension “effort” by the state can differ significantly from pension spending. The key point for NZ here is the amount of tax claw back: NZ retirement funding is heavily taxed.
  • Two types of pension schemes. First, those that support a minimum standard of living for the elderly -- like the NZS. Second, social insurance to maintain the standard of living formerly enjoyed. Doubtful Kiwisaver counts as the second type, in terms of OECD definition. NZ and Ireland the only OECD countries that don’t have a second tier.
  • Typically OECD pension eligibility age is 65, with moves by a small minority of countries to 67 or 68.
  • NZ has one of the lowest OECD poverty rates among age 65+.

Discussants Andrew Coleman and Susan St John.


First, effect of tax on super. Most OECD governments design their tax systems to be favourable to retirement saving. NZ tax system is among the least favourable to supplementary retirement savings, despite us being among the countries most reliant on this (because it’s voluntary?). Tax concessions on saving, and tax paid on retirement, are important aspects of how the system functions overall.

Second, the Cullen -- "now culled" -- Fund.

Pre-funding is economically important for, for example, capital availability, which flows on into wage rates, which in turn affects intergenerational equity. Investment of young earners’ tax deductions in a broad-based retirement saving investment fund would produce better results for them than current reliance on a pay-go pension promise. Pre-funding is the way of the future. Young NZers are being forced by policy choices to participate in an inefficient system.


Highlighted inequities arising from migration-related super arrangements, eg, pension transferability between countries, offsetting of NZS against overseas super payments, and also the generosity of our residential requirement (must have lived here for 10 years only).

General discussion:

Wrong perceptions of “dependence” of 65+ -- no account taken of unpaid work many of them engage in, and its social benefits.

NZ child poverty rate among the worst in the OECD -- relevance of this to intergenerational equity objective. A well-fed, well-educated, compassionate younger generation is in older ones’ interests, but not going to get that on present child poverty stats.


Update 1: July 22, 8 am: Background

Last month, we bashed this around quite hard, so here goes: your intrepid not-quite-a-reporter, expecting any minute to be sat on by Chris Trotter.

The Retirement Commissioner reviews and reports on retirement income policy three-yearly. Mid-2010 review, and in the shadow of Treasury’s long-term fiscal outlook (October 2009), the Institute of Policy Studies and the Commissioner have jointly organised today’s Retirement Income Policy and Intergenerational Equity conference, to bash the same issues around again.

Launching Challenges and Choices: New Zealand’s Long-term Fiscal Statement, Treasury secretary John Whitehead summed up as follows: “the largest single driver of the fiscal position is the policy choices governments make”. And, “we simply can’t keep doing what we have done without significantly increasing taxes or debt”.

Whitehead assures us Treasury’s dire 40-year fiscal projections won’t come to fruition; governments are going to make decisions and change policies. The projections are to help us debate and make those choices.

They present two challenges. First, demographic change:

  • The 12% of the population 65+ presently accounts for 25% of government spending.
  • The next 40 years will see a 400% growth in the number of people aged 85+, because of longer life expectancy, and a 150% growth in those 65+.
  • By 2050, a quarter of the total population will be 65+, by contrast with a relatively steady 8-12% (approx) since 1950.
  • By 2050, there will be 42 people aged 65+ for every 100 people aged 15-64.

Baby boomers don’t cause this trend. They do accelerate it.

Second, government spending. Continuing historic spending patterns would, Treasury says, see growth in net public debt to 220% of GDP (with spiralling cost of debt, rising to $110 billion annually), by contrast with the 20% suggested as the long term desired level.

Unless there is an extraordinary improvement in New Zealand’s economic performance, difficult policy choices will have to be made to ensure a sustainable long-term fiscal position.

If current policy did not change, superannuitants would see a 66% growth in their spending power (a function of NZS wage-indexing). Beneficiaries would see 0% growth (benefits inflation-indexed). Under Treasury’s “sustainable debt” scenario, to make ends meet, all other publicly funded services — health, education, roads, and so on — would need to be, let’s say, “adjusted”: returning to 2% growth (down from a baseline of 34%) after an initial 10-year decline, and regaining the 2013 level in about 2048 [fig 6.3, p 31].

Therefore, “NZS continues to grow at the expense of other public services. This raises questions of intergenerational fairness”.

It’s the detail behind John Whitehead’s Q&A assertion:

you could afford to continue New Zealand superannuation, but what you can’t afford is that plus all the other things that we’re doing”.

It's the context, the organisers say, for the conference.