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.

Suzanne:

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.

Ganesh:

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.

Andrew:

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.

Susan:

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.

Comments (17)

by stuart munro on July 22, 2010
stuart munro

If Treasury had to target growth as well as restrict inflation, as they do in first world countries, we might expect a level of economic growth that would reduce the long term threat of such data.

As it stands, we must ignore the threat - it has been created by bad policy, and the policy must be amended.

by Claire Browning on July 22, 2010
Claire Browning

Stuart. They tested growth projections, also immigration, etc. They say that neither can fix it.

by Tim Watkin on July 22, 2010
Tim Watkin

And to think I got hammered for even daring to talk in generational terms... Sigh. The intergenerational equity arguments are complicated on a number of levels – you could achieve fairness by one measure but miss it by several others. But great they're being wrestled with.

Pinkerton's figures are astounding.

by stuart munro on July 23, 2010
stuart munro

Claire- these are the same people that ignore a 7% unemployment rate. If you behave that irresponsibly, yes, nothing can fix it. Reduce unemployment by 2%however, & you get about 6% growth. Of course, you'll get some inflation - bad for financiers, good for manufacturers & primary producers. (which does NZ have more of?)

We must force Treasury to behave responsibly, because they are too ideologically  compromised to behave responsibly on their own.

Once you let Treasury cut pensions they will destroy them - they have no commitment to the principles that brought them in.

What do I mean by responsibly? Instead of a cyclopean focus on inflation they MUST consider growth and unemployment too, just like real countries do. Until they are prepared to do so, we should really be looking at disbanding them and returning monetary policy to government - flaky, yes - but that's how bad they are for the NZ economy. Even that dictatorial dwarf Muldoon did less damage.

by Carolyn on July 23, 2010
Carolyn

Tim, as far as I was concerned, the problem was not that you spoke in inter-generational terms, but the WAY you did it - ie writing of babyboomers in very negative terms as kinds of parasites who had "gorged" themselves and now, unfairly, expected others to support them; as people who needed to learn to live far more frugally.

The problem with us of the "boomer" generation, is that we are a much larger group than other generations.  It is indeed a problem that needs to be addressed, but it is not a problem of "boomer" making; eg because we selfishly over-indulged ourselves.

I'm not in the least surprised by Pinkerton's figures on the compartative spending power of Gen Y and boomers, having lived through the changes in income and consumerism. I was well aware that in my youth, most of the people I knew had little disposable income (and we didn't have mortgages).  And even if we had had a lot of money to spend on more than a vinyl record, or movie and a drink or two, there wasn't the choice of consumer goods & services on offer that younger people now take for granted.

I have seen reports of surveys that show there are widespread misunderstandings of NZ boomers, as a result of  people's knowledge of "boomers" coming from the US.  IMO one of the big differences is that consumer society escalated in the US immediately after WWII, whereas in NZ this didn't really take off until the 80s.

One of my other criticisms of Tim's piece was that he over-generalised about each generation, and did this in a negative way. Were any figures presented at the conference on the socio-economic diferences within boomer and other generations?  My perception is that there is the same spread of socio-economic inequalities amongst all the generations, and just as much within the boomer generation.  Sure, some of our richest people are boomers, but that doesn't mean they are very representative of all boomers.  I have seen news articles, for instance, that show there are a higher proportion of boomers renting in comparison with older generations.

I also understand that Maori and Pacific boomers are amongst the least well-off of their generation.  Furthermore, many of this group will have age-related health issues earlier than Pakehas of their generation.

So, while the size of the boomer generation means funding our retirement is a major problem, there will also be a problem of a sizeable proportion of elderly boomers who have always had limited financial resources.

I also favour solutions that enable us to keep working as long as possible.  Working longer, and possibly eventually working part time all seem good options for me.  But for this, the wider issue of an increase in available jobs needs to be addressed.  And also I am concerned about issues of agism - both for older and younger workers.  I wouldn't like to see this groups played off against each other.

by Chris Trotter on July 23, 2010
Chris Trotter

Fear not, Claire, you're in no danger of being heffalumped - on the contrary, you're to be congratulated for reporting comprehensively on an important conference.

Just two comments.

1) The Boomers may not have had as much money to spend as Gen Y - but, believe me, we were much richer.

2) What emerges from your reportage is how dangerously politicised Treasury remains - even after 9 years of Labour rule. It would seem that what was once dismissed as "ideological burp[ing]" is again being received as the rumblings of deep economic wisdom. Not good.

That's all. Keep up the good work.

by stuart munro on July 23, 2010
stuart munro

Boomer generation political leadership wasn't very sensible in New Zealand - you might recall a time when our politicians were so stupid they wouldn't tell each other how much money they had to play with until the govt changed. Another trick was to spend everything as they left power. The generation as a whole often bears the blame for the actions of these disasterously irresponsible leaders.

by Claire Browning on July 23, 2010
Claire Browning

[Tim] Pinkerton's figures are astounding ...

They were consistent, though, with the gist of what Carolyn had said (as she's pointed out above) and also similar protests from my Dad, on an earlier thread. (I was bit grumpy with him -- for uploading a dorky photo, not the comments -- and he hasn't dared to come back since.)

The end of Pinkerton's session was funny. You could feel the mood in the room change. "Oh, what a nice young man."

[Carolyn] Were any figures presented at the conference on the socio-economic diferences within boomer and other generations? ... I also understand that Maori and Pacific boomers are amongst the least well-off of their generation.  Furthermore, many of this group will have age-related health issues earlier than Pakehas of their generation ...

I hoped the differences within generations would be addressed in Bob Stephens 'differences' session, and I think it was supposed to be, but he just didn't have the time to do justice to any of it, which was really a shame -- the guts of the thing, in my view. But it was 10-min presentations by that stage.

There was a session on the issues for Maori, and both that, and other bits and pieces through the day, picked up on the bugbear of different life expectancies. Not just for Maori, there may be other groups as well. Diana Crossan mentioned that Ngai Tahu (I think?) has recently established their own super investment fund, that is a similar model to Kiwisaver, but pays out around 7 years (?) earlier; she thought that Maori would start to do more of that for themselves, as their Treaty wealth grows. At a govt policy level, the difficulty of how to define eligibility by anything other than age was noted (on the assumption, presumably, that race-based is politically unacceptable). And there were comments about the inequity for groups (espec Maori) who pay their tax and invest in super saving, then don't get to collect on it.

I didn't cover that session, because I missed half of it, along with some other bits -- I was out of the room, trying to get the posts up, and tearing out some handfuls of hair (the software wasn't behaving).

Others who were there may want to comment?

Working longer ... for this, the wider issue of an increase in available jobs needs to be addressed.

Yes.

[Chris] on the contrary, you're to be congratulated for reporting comprehensively on an important conference ... Keep up the good work.

Crikey. Thanks ...

Avoiding rude talk of 'locusts' probably helped, though if I had, the numbers might be ticking over better ...

It would seem that what was once dismissed as "ideological burp[ing]" is again being received as the rumblings of deep economic wisdom ...

I was thinking about the (in)famous 'ideological burp'. It's pretty self-evident in the long-term fiscal statement (2009): paraphrasing, perhaps unfairly, there's one bit where they say fiscal policy-making has all gone pear-shaped since the end of the 1980s, when we were on the road to redemption -- not a view, I imagine, that would be widely shared amongst voters.

by Carolyn on July 23, 2010
Carolyn

Thanks, Claire, for a very full report.  Clearly there is still much to be discussed, investigated and analysed in the moves towards further solutions or improvements in current systems. The stuff you mention on Maori initiatives is very informative.  It's good to se that there is much work already going on in this area.

by Andin on July 23, 2010
Andin

"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?"

Don't know if calling them selfish now is gunna do any good. Because mostly that generation were oblivious to how entitled they felt they were, to set things up for themselves. And mostly they just lived off all the good works of the Labour Govt pre WW2.

It was the brightest of their children(the first in the baby boom) who realised the way of life their parents expected them to carry on was toxic, not just to the people who lived it, but on a much bigger scale to the planet on which we all live. And in NZ there was a big "Back to the Land" feeling among many of the boom generation. It still echoes today, obscenely, with olive groves.

Anyway these "parents "gleefully ignored their kids, and just picked on their methods of relaxation. So that and 21 yrs of National Govts between 1960 and 1984. And then Roger Douglas after that. (Was that fucker a Boomer? I could look up his birth date but can't be arsed).

Hey Presto here we are!

"And to think I got hammered for even daring to talk in generational terms... Sigh. "

Poor Tim.... you'll get over it.

 

 

by Chris Trotter on July 23, 2010
Chris Trotter

To Andin:

In answer to your question re: Sir Roger Douglas.

No, he is not a Baby Boomer. (He was born in 1937.)

It's interesting, actually, very few of the "Rogernomes" were Baby Boomers. Most of them were born in either the late 1930s or early 1940s.

Sir Roger et al reached maturity in the late-50s early-60s - the era of "Mad Men" - unlike Helen Clark et al who emerged from her teens in the late 1960s.

Explains a lot, really.

by stuart munro on July 23, 2010
stuart munro

Yeah,

and Douglas was only a second-rate Chernomyrdin.

But people tend to miss the point about Cullen. For ten years or so, Cullen successfully outpredicted Treasury, and the economy was able to make modest progress - how was this possible?

Because Treasury were consistently let down by their Friedmanite ideological fixations. And Friedman was never more than a right-wing shill - the inevitable product of the Rockefeller bequest to the Chicago business school.

In pragmatic terms, Cullen was the only redeeming feature of the Clark Labour government. Now that he has retired, what have they got to offer, besides not being National? Nothing I'd want.

by Andin on July 25, 2010
Andin

Ta Chris

 

by Claire Browning on July 26, 2010
Claire Browning

The conference papers are online, here.

by Claire Browning on July 27, 2010
Claire Browning

Chris Trotter on generation games:

When did it begin – this war between the Baby-Boomers and Generations X & Y? ...

and getting angry and defensive:

"Who do these little bastards think they are?" we say. "We haven’t noticed them marching down the street for peace, justice and equality – like we did. We haven’t seen them taking part in strike action. Shut up in their rooms: with their PCs and iPods and cell-phones; downloading, texting, face-booking and tweeting their lives away; who the fuck are they to point their fingers at us!"

by danniel on July 23, 2013
danniel

"Selfish generations"? That's an intriguing word choice. I wonder if the naming is fit. I wonder if raising the retirement age is caused by them. I am somewhat familiar with the retirement communities Orlando. I see how they work and I realized that they are based on healthy economical and social principles, that's all I need to know.

by rickk on October 16, 2013
rickk

Now that we have the problems on the table we should also think further and try to find some solutions, at least in theory. Who knows? Someone with a higher power of decision could find them inspiring. I know that if an economy is developed then it will find the resources to care for the elderly. Senior living Chicago centers are a good example for that. If the economy is not developed then we shouldn't have much hope, regardless the level of generation’s selfishness.

Post new comment

You must be logged in to post a comment.