Bill English has made a brave call on super, but is it mere penance for years of bad calls, will New Zealanders face the facts and has he just started a new inter-generational war?

I was talking with a colleague today about Bill English's plan to raise the age of eligibilty for super from 65 to 67 – in 20 years. "What are you," he asked, and I knew immediately what he meant. "Gen X," I replied. "But just old enough to sneak out at 65". He said he'd get caught, I said my wife would too. Then it struck me: This conversation was meaningless.

I'm sure plenty of New Zealanders today have been figuring out who would have to work longer before getting their pension, according to English's big new idea. In short, he's designed a super scheme where the age of eligibility for super will increase by six months each year from 2037 until 2040, just about in time for his 81st birthday. So no skin off his nose.

It's a long way off, but quite a rapid increase when it starts.

Plenty of people glancing at the policy will have been getting vexed, especially about the inter-generational unfairness of it all. But the fact is, I'd rate the chance of National's new policy still being intact by 2037 at about the same as its previous policy still being intact that year: Next to zero.

Look at those countries we typically compare ourselves to: Australia's pension age will rise to 67 by 2023, Britain's by 2028 and the US by 2027. Will any New Zealand government be able – or want – to hold out for a decade or more? It's unlikey. As I wrote back in 2009, my best bet is that some poor PM in the 2020s will be forced to deal with this issue properly, and quite possibly at some political cost.

So is Bill English's announcement completely facile and irrelevant then? Well, no. For several reasons.

To start, credit where credit's due. This puts Bill English's National Party on the right side of history. It's a brave and principled decision to engage with a looming and significant cost facing this country. At least, it would be if it wasn't for English's track record. But more of that later.

The point is that by announcing that the age must rise whilst in government, English has put a marker in the ground. It's actually a braver and stronger statement to make than Labour did in Opposition under Phil Goff, because of the power that comes with a government statement, so English has in this way at least drawn a line of statesmanship between him and John Key. (Something I've raised questions about).

So while it's not a plan that will ever likely be enacted – be it because the numbers in parliament will never be there or because, as I've said, some future government will be required to take a shortcut – it's still a clear and corageous signal to New Zealanders that things must change.

When New Zealand first introduced old age pensions in 1898, they started at age 65, sure, but only around three percent of the population were that old. Now it's over 14 percent and climbing. If you alive at 65 back then, you might have another 12 or 13 years left in you. Now, the average is more like 20.

So good on English. Because this move is a good, brave start, just as Labour's rejection of it after 2014 was, while perhaps useful politics, was cowardly.

But here's the problem. As Finance Minister English has spent years insisting this move wasn't necessary, saying the best he could do was grow the economy and delaying the hard choice. He's actively campaigned against Labour's attempt to move much sooner (in the 2020s), thus ensuring at least some baby-boomers contribute to the whopping cost of their collective retirements. And perhaps worst of all, he's flushed away an estimated $20 billion worth of savings in the NZ Superannuation Fund by stopping and then continually refusing to restart government contributions. The man who has lectured us for years about the importance of "savings and growth" has done sod all to save for New Zealanders' retirements and grow those savings.

New Zealanders have seldom heard an honest conversation just how much super costs us. Ironically, one of the most memorable for me was back on TVNZ's Q+A in 2012 when Bill English was describing raising the age as "a bit of a distraction". It was back when Labour was on the right side of history on this issue and its Finance spokesman at the time, David Parker said:

"Within the forecast period of this Budget, we spend more on superannuation than the total of eduction - that's more than pre-school, primary, secondary, tertiary combined... We are actually getting to the point that, through not addressing that issue, we're actually having intergenerational conflicts being set up.''

I've always been struck each budget when I play with the Maxim Institute's Tax Tracker. Type in your income to see where your tax is spent, and I bet most New Zealanders would be astounded to learn how much goes to super.

Put in the median New Zealand income of around $48,000, and you'll see that the median Kiwi paid $7420 in tax in 2015. Of that $152 goes to police, $171 on the dole, $545 to schools, and, the biggest part, $1304 on DHBs (ie hospitals and the like). But easily the second biggest budget line is super, at $1239.

Yet English has spent the best part of a decade saying 'nothing to see here'.

So, not so good on English after all. Perhaps, as a good Catholic, taking the political risk of raising this issue now is a form of penance for those past sins. But I'm not sure future New Zealand voters will be as forgiving of him and Key as his God.  

Yet those numbers remind me of one of my favourite lines when you're debating economics, and the economics of government most of all: "You can only spend a dollar once". 

 While I heard a Grey Power spokesman chastising Guyon Espiner on Morning Report for setting the young against the old, the fact is that National as been doing exactly that for eight years by delaying preparation for change. (And, as Parker indicated, Labour is doing the same now). The fact is that you can only spend a taxpayer's dollar once. So what are you going to spend it on?

Because every dollar you don't save now is a dollar you will have to spend on super later, denying future generations the choices we enjoy now. Every dollar you spend now on super, is a dollar you're not spending on earlychildhood, on infrastructure, on emergency houses and healthcare.

So, no, not every baby boomer had it easy. But as a generation, governments have asked less of them than the generations following behind (or most of the ones that went before, of that matter). And as much as they huff and puff now, given they are still not being asked to contribute more for their retirement even when their life expectancy is growing and their healthcare costs are rising, it's no wonder the following generations are getting angry and disrespectful.

Again, while New Zealanders are being rightly asked to wrestle with the costs of super, they are getting a pass. They are getting that dollar spent on them, which means it can't be spent on others. That's another reason English's decision is far from irrelevant. And why it may yet play a significant part in this year's election.

 

Comments (26)

by Ross on March 08, 2017
Ross

some poor PM in the 2020s will be forced to deal with this issue properly

Or there could be a multi-party discussion, as suggested by Jonathan Boston earlier this week.

Meanwhile, the health system seems to be creaking.

http://www.stuff.co.nz/national/health/90131559/health-workers-patients-...

There's a connection between Super and other welfare expenditure including health. As an economist pointed out in 2012:

If there are no changes to superannuation, the Treasury has estimated that growth in healthcare spending would need to be limited to 7 billion dollars by 2031 if government spending is to remain about 45% of GDP. The health budget would need to grow at half the pace it has in the past. This obviously has implications for access to healthcare services. We must ask ourselves if this is a trade-off we are willing to make. Relying on finding savings from healthcare is a risky strategy. International experience shows that making lasting changes to the growth in spending on healthcare is extremely difficult. The changes would need to be radical.

A far easier and more certain way would be to control the cost of superannuation. One approach would be to target eligibility, based on some form of means testing. While New Zealand is lauded for the simplicity of its universal system, it may need to be looked at. But if that is too radical or complex a change, there are two other, even simpler, options that ought to be considered. One of these options is to increase the age of eligibility to New Zealand Superannuation from 65 to, say, 67. Other countries have gone down this track, recognising ever-increasing healthy life expectancy.
....
The discussion will not be easy, as there are some major questions of intergenerational fairness to be resolved. But New Zealand Superannuation cannot be treated as a holy cow. If we choose not to touch it, we are choosing to touch healthcare, education and other areas of government spending that are possibly more important for our long term wellbeing and prosperity. There is no free lunch.

http://nzier.org.nz/publication/superannuation-dilemma

by Ross on March 08, 2017
Ross

"You can only spend a dollar once". 

You've obviously never lived in a little Greek village.

The rain is beating down and the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit. On this particular day a rich German tourist is driving through the village, stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night. The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher.  The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer. The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel. The guy at the Farmers' Co-op takes the €100 note and runs to pay his drinks bill at the taverna. The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him "services" on credit. The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note. The hotel proprietor then places the €100 note back on the counter so the rich traveler will not suspect anything. At that moment the traveler comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money, and leaves town.

No one produced anything. No one earned anything. However, the whole village is now out of debt and looking to the future with a lot more optimism. :)

by Wayne Mapp on March 08, 2017
Wayne Mapp

Ross,

The cost was borne by the hotel keeper. The prostitute has paid for her room, but he does not have the money. In effect the hotel keeper has given her a free room, since he never gained ownership to the 100 euro that the German visitor gave him as a "bond" to hold the room. He never had the right to use it to pay his debt to the butcher.

However it probably explains why the Greeks ran up such an enormous debt to Germany. They thought they had money that they did not need to pay back.

by Tim Watkin on March 08, 2017
Tim Watkin

Ross, great story. Though I'm not sure what to learn from it. And great chunk from NZIER. It would have been goo to have that sort of context in some of the news reports this week.

The one number that leapt out at me is govt spending remaining at 45% of GDP. I thought National wanted that lower. Or had even gotten it lower. Hmmmm.

But the economist makes exactly my point about only spending a dollar once. To not act on super is to implicitly act on health, education, or something else. Or we increase taxes.

Perhaps the most telling point, however, is that he/she writes that before doing what English has done we will need to resolve some intergenerational fairness issues. Except nothing has been done. They've just ploughed on. Fact is, just as Rogernomics and Richardson's reforms should have been leavened by assistance to those hit hardest, this change should have been accompanied by something for younger generations.

by Rich on March 08, 2017
Rich

Real world economics: the working part of the population has to produce the goods and services used by the working, retired (and school age) part. Whether we purport to pay for pensions through tax, saving schemes or property inflation, this doesn't change.

But the positive thing is that we are continually producing advanced technologies that allow us to produce more goods and services with less labour input. So why is an ageing population even a problem? Much of the answer is that we have invented unproductive jobs to compensate for the "loss" of productive ones. Selling "electricity" door to door, for instance. If we stopped doing that work, more of the workforce would be producing useful goods and services and we would have no problem with an increasing retired sector.

See Graeber: https://en.wikipedia.org/wiki/The_Utopia_of_Rules for discussion of this.

by mikesh on March 08, 2017
mikesh

@ Wayne Mapp

The hotelier no longer owes the butcher anything, which offsets the fact that the prostitute owes him nothing.

by Wayne Mapp on March 08, 2017
Wayne Mapp

mikem,

Hmm, yes you are right. While he has given the room the prostitute for free, he has paid his debt to the butcher. It all rests on his initial theft of the German's money by the hotelier, which he was fortunate to get back. And provided no-one else knew of the theft, they could all legitamately pay their debts.

by Ross on March 08, 2017
Ross

Wayne,

The prositute is indebted to the hotelier and she pays that debt by giving him €100. Income is important in that parable, although it seems none of the participants pay tax. Tax revenue is important! Without it we wouldn't have Super.

by Lee Churchman on March 08, 2017
Lee Churchman

I only know that whatever happens, the feckless boomers will force me to pay for it... again.  

by Ross on March 08, 2017
Ross

before doing what English has done we will need to resolve some intergenerational fairness issues

I'm not sure that's possible. Previous generations had releatively cheap or free education, something not available to the current generation. Previous generations were able to buy relatively cheap houses, which aren't so readily available today. On the other hand, mortgage rates were about 20% in the mid and late 80s, much higher than they are today. Previous generations didn't enjoy Mondayisation of public holidays and only received three weeks' annual leave. Many of us get more time off than we used to.

I don't know how you make life fairer.

by Alan Johnstone on March 08, 2017
Alan Johnstone

The village had no external debt, everyone starts and finishes at the same level, with a net balance of zero, with liabilitys and debts perfectly in sync.

The problem occurs when the debt is external

by Lee Churchman on March 08, 2017
Lee Churchman

I'm not sure that's possible. Previous generations had releatively cheap or free education, something not available to the current generation. Previous generations were able to buy relatively cheap houses, which aren't so readily available today. On the other hand, mortgage rates were about 20% in the mid and late 80s, much higher than they are today.

This old claim gets trotted out every time. Mortgage rates were higher, for a time. But that doesn't make much difference, because houses were so much cheaper relative to income that those mortgages were very affordable even for people on modest incomes. 

The Treasury website allows you to check housing costs over time indexed to inflation. I checked my parents old house, a nice house in a nice area of New Zealand in 1986, but nothing special. In terms of affordability, it compares today with a brand new build in one of the newest and trendiest suburbs near where I live. My wife and I couldn't quite afford that, and we earn far more than my parents ever did.

Add to that the Muldoon government essentially giving my parents their first house (well, not literally giving, but offering their state house to them at a price that even an unemployed donkey could get a mortgage for it), and you can see why people in their 20s and 30s now are annoyed at the comparison. 

Previous generations didn't enjoy Mondayisation of public holidays and only received three weeks' annual leave. Many of us get more time off than we used to.

Many of us work longer hours with employment that is far less secure. There are other differences as well. The price of education at New Zealand's increasingly substandard universities is another.

The correct way to compare generations is to think in terms of opportunities. The kind of bread and butter opportunities for the average person are much worse than they were for the boomers. That would be fine, except much of this is the consequences of policies created and voted for by boomers to pass their costs onto their children and grandchildren. Everyone under 45 knows this. 

by Tim Watkin on March 08, 2017
Tim Watkin

Ross, I'm afraid I agree with Lee. Part of good government is to make life fairer. That's why we all contribute to pay for hospitals, schools, roads and environmental protections; to make life fairer for as many as possible.

What you'd do in this case is, if you're on one hand reforming super so that anyone over a certain age is advantaged, then you'd create some other policy to compensate at least some at the other end of the age spectrum. Maybe a baby bonus, more hours free ECE or tax credits for childcare... Or, if you don't just want it to be for families, wipe off some student loans or... something. A free bike for everyone under 40?! I don't know specifically, but you get the drift. If you're actively giving a certain part of society a free pass, then spread the load or benefit in other ways. 

by Ross on March 09, 2017
Ross

<em>Part of good government is to make life fairer.</em>

Well, I wasn't suggesting that governments should try to make life as hard as possible!

A baby bonus, more hours free ECE or tax credits for childcare wouldn't be fair for couples, or singles, that have no kids and have no intention of having them. And of course paying for this would have to be found from somewhere.

Bill English rightly points out that extending Super to 67 year olds is helping young people because they aren't paying higher taxes that they might otherwise pay to fund the current Super. Or that if Super was kept in its current form, there might need to be cuts to education, which would disproportionately affect younger people. So younger people are beneftting from extending Super to 67 year olds. You're suggesting they should be given an added bonus which doesn't make sense to me. Not to mention that there would be a cost involved in taking such action.

When taxes are cut, and they have been cut several times in recent memory, I'm not aware that pensioners have directly benefited from these cuts. Where has been the compensating measures for the retired?

 

by Lee Churchman on March 09, 2017
Lee Churchman

Bill English rightly points out that extending Super to 67 year olds is helping young people because they aren't paying higher taxes that they might otherwise pay to fund the current Super.

Except it doesn't help young people. What helps young people is social investment. My grandparents' generation paid very high taxes by today's standards to create broad opportunities for their children.  It worked. Social mobility was very high and the postwar period was one of rapid social and economic development.

Were the architects of that system still alive, they would be mystified by our housing crisis – after all they had no problem getting large numbers of houses built. We moan that it is too expensive and that it can't be done, but anyone old enough knows that to be a lie. The reason we can't get stuff done is purely political.

When taxes are cut, and they have been cut several times in recent memory, I'm not aware that pensioners have directly benefited from these cuts.

We all know who benefited from them. Like I said before, almost everyone under 45 knows this. When there are cuts made or burderns imposed, they miraculously seem to fall on people born after about 1971-2. My friends first noticed it when most of the apprenticeships disappeared just before they got old enough to be eligible.

by Fentex on March 10, 2017
Fentex

eal world economics: the working part of the population has to produce the goods and services used by the working, retired (and school age) part. 

In the real world there are investors, like the superannuation schemes people may pay into.

Labour has addressed this problem, even when playing obvious politics by objecting to raising entitlement through both creating Kiwisaver and the National Superannuation Fund, so don't pretend the politics of raising the age of entitlement is the only relevant thing to discuss.

by Fentex on March 10, 2017
Fentex

The village had no external debt, everyone starts and finishes at the same level, with a net balance of zero, with liabilitys and debts perfectly in sync.

Nope, it was as others said all paid for by the hotel keeper who is out 100 dollars. He stole 100 hundred dollars to pay his debt and eventually gave a hundred dollars back to settle the debt his theft created before being discovered. Others cancelled their debts and he paid for it.

Also given the hotelliers business (and I'm sure others, such as food, fuel suppliers and boat rentals et al) the community is exposed to external economies, it's a fantasy to pretend the vilage is a closed system.

by Katharine Moody on March 11, 2017
Katharine Moody

@Lee "The kind of bread and butter opportunities for the average person are much worse than they were for the boomers." 

I think that's likely true. And another thing that concerns me, but I haven't seen any empirical studies on it for NZ - is whether upwards job mobility is slower for subsequent generations as our large boomer cohort crowds-out other generations from coming up quickly through the ranks. As many boomers aren't retiring in a hurry - this makes things worse.

I've seen overseas studies on it (i.e., peak earnings year), but nothing NZ-specific yet;

http://www.telegraph.co.uk/finance/personalfinance/investing/11176684/Wh...

by mikesh on March 11, 2017
mikesh

@Fentex

"He stole 100 hundred dollars to pay his debt and eventually gave a hundred dollars back to settle the debt his theft created before being discovered."

Presumably when banks lend out the deposits of demand depositors we engage in a sort of Orwellian newspeak. Instead of calling it "theft" we call it "fractional reserve banking". 


by Tim Watkin on March 11, 2017
Tim Watkin

Ross, those born after 1974ish have just had an estimated $50,000 taken off them. 

To argue that taking some of the money out of super (super that they would have got) to put into other government spending becaue that might have been cut otherwise, seems like voodoo economics to me! 

Those born before 1974ish are in the same boat they were a week ago; those born after are worse off. That's a fact and so there's a fair argument those born after, who had certain expectations until last week, deserve some aid to transition to the new normal.

 

by Tim Watkin on March 11, 2017
Tim Watkin

For all the specific points of criticism in this post... and despite the fact that I think it's too far out to be noble and fair, I DO want to stress that English announcing this change is better than do nothing and so he deserves points for at least putting this on the table.

by Katharine Moody on March 11, 2017
Katharine Moody

LOL, Tim. Nope, Lisa Owen deserves points for forcing an answer (innocuous as it was) on a subject which Bill hadn't a clue on. Hence, a "policy" was pulled out of a hat around Monday lunchtime. Little wonder it's just plain useless - and stupid at that.

by Ross on March 12, 2017
Ross

Ross, those born after 1974ish have just had an estimated $50,000 taken off them

Tim, why do you look at things purely in financial terms and even when you do, you don't apply your own logic? Tax cuts to individuals earning over $100k amount to significant sums of money over the lifetime of the individual. Indeed, top tax rates for the rich in NZ are apparently the lowest in the world. When such huge financial gains are/were made to working individuals, how are/were superannuitants compensated? How have superannuitants been compensated for gains made by other groups? I haven't heard you champion the cause of superannuitants who seem to have been unfairly treated.

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10783837

Maori die younger than non-Maori. Therefore, many Maori don't get to vote as many times as non-Maori. Should Maori be compensated as a result? I don't think many people would think this was possible or practical, though it may well be fairer.

http://www.health.govt.nz/our-work/populations/maori-health/tatau-kahuku...

transition to the new normal.

Those born in 1975 are now aged 42. The change to Super won't occur until 2041. In other words, those born in in 1975 have 24 years to transition to the new normal. You don't think 24 years is long enough?

To argue that taking some of the money out of super (super that they would have got) to put into other government spending becaue that might have been cut otherwise, seems like voodoo economics to me! 

I quoted an economist in the first post, who said that health (and other welfare expenditure) could be cut, and cut drastically, to maintain Super. You agreed that "[t]o not act on super is to implicitly act on health, education, or something else. Or we increase taxes." By raising the age of eligibility for Super, there may not need to be cuts to welfare, or higher taxes. Will some people be worse off as a result? You bet. Just like the elderly are possibly worse off than others as a result of the underfunded health system.


 

by Ross on March 12, 2017
Ross

Faith Richards hit a national nerve when she said you needed to lie to get elective surgery in New Zealand.

On Tuesday the 70-year-old New Plymouth woman disclosed she had spent her $20,000 life savings to get her hip operated on, after being refused surgery through the public health system largely because she wouldn't lie about how much pain she was in.

http://www.stuff.co.nz/taranaki-daily-news/news/71432415/aging-populatio...

That doesn't strike me as particularly fair, that someone who may have worked most of her life (and of course paid taxes) has to pay for her own surgery because she isn't in enough pain. Sometimes life isn't fair.

by Tim Watkin on March 12, 2017
Tim Watkin

Two reasons, Ross. One is the scale and financial importance of super. It's neck and neck with education as the second biggest government line item, behind health. If you suddenly closed the polytechnies or stopped knee surgery for people born after a certain year, I'd argued for some balancing then as well. People count on this stuff to live on.

I think the big structural changes deserve something more than, 'meh'. At your age, you'll remember the huge structural changes of Rogernomics. Talk to most MPs from that time and the biggest regret they have is that they didn't do enough to help people transition into the new economy they were building. I reckon that's a lesson worth heeding.

Second, super is special, in that generations pay for another's payment. I'm currently paying well over $4000 a year to pay for someone retiring today. Because there are so many boomers, I'm going to have to pay more than other generations (in one way, or another) to keep them in their Werther's Originals. Now I'm happy to do that (more or less, but means-testing etc is a whole other argument). But given a lot is being asked of one generation by another and the whole scheme relies on inter-generational obligations, don't you think this is different and worthy of some quid pro quo?

PS Under-funding of health per capita is an entirely different issue and one that isn't inter-generational. If there was more money for elective surgery (or mental health or other areas where the stresses are greatest), me and my children would have the same access to that in our time of need as Faith. So it's apples and oranges. And you can't really be arguing that because 'life isn't fair', we shouldn't care about fairness, can you?

by Tim Watkin on March 12, 2017
Tim Watkin

Katharine, I don't know how much English meant to say on the Saturday, but there's no chance that policy was devised by lunchtime (Monday). Joyce has said it had been discussed at the last two cabinets and English says work had started late last year.

You can believe them or not and like the policy or not, but the depth of work, the visuals and online material, factsheets etc could not have been created in a few days. That was a policy that had been worked on for some time.

But yes, Lisa certainly deserves points for an excellent interview.

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