The case for raising the age of eligibility for NZS; and how we can do it. 

I support raising the age of eligibility for NZS but not, primarily, for reasons of fiscal sustainability. Rather it needs to be increased for equity reasons. Longevity is increasing. When the Old Aged Pension was introduced in 1898, life expectancy at the age of 65 was 13 years; today it is 20 years, and it will continue to rise. It is a matter of equity that as the age of longevity rises, the age of eligibility for NZS should rise too. Here is how I would do it with five integrated steps.

1. We should set out a target age of eligibility based on life expectation. I suggest we choose the age as that where life expectancy is 17 years (similar to the 1938 level for 65). In current terms that would set an age of eligibility of 69.That target age would rise with increased longevity.

2. However, the actual age of eligibility would be raised by only 3 months every year until it reached the target age. So it would take 12 years to reach 69, and the full adjustment would only affect those born after 1958 if we started next March (2015).

3. We need to recognise that there are people who cannot be expected to work in the years before the current age of eligibility, and who will have insufficient savings. They should get an early retirement benefit. Except for its name – reflecting a different status – it would be very similar to the Invalids Benefit.

4. We need to strengthen private provision for retirement by making KiwiSaver compulsory and increasing its contributions. A compulsory contribution is much like a tax; but the beneficiary is solely the individual taxpayer. (This sort of approach may be a way we can get around – to some extent – the deadlock over raising income tax rates for structural macroeconomic purposes.)

5. Any fiscal savings we gain from the raising the age of eligibility should be channelled into better provision for residential and domiciliary care for the very old. If we dont, we may under-provide for them or cost-shift provision onto their children – privatise it.

Because this is an equity-driven package, there is much in it for everyone. If you are born in the 1950s and later, you have some guarantee that there will not be an abrupt change to your retirement plans from unexpected changes in government policy and you will not find yourself financially supporting your aging parents – although they will continue to need your personal support. Nor will you be suffering impoverished care when you really need it. .

Some will argue that Labour lost votes in this election from their promise to raise the age of eligibility to 67. But Labour’s policy was badly explained, and was not presented as a part of a comprehensive package such as this one.

A side consequence of the package would be it would contribute to fiscal sustainability although, as I said at the outset, for me the prime issue is equity arising from increased longevity. Until about 2011 New Zealand was benefiting from a demographic dividend as the working population increased relative to the dependent population. Now the reverse is occurring. As a result the cost of NZS is expected to rise from 4.3 percent of GDP in 2010 to 7.8 percent in 2060. Over three-fifths of that increase occurs in the first two decades to 2030 with the remaining increase spread out more slowly over three decades. That is because of the baby boomers born immediately after the war are now retiring.

The demographics suggest we should have started the phasing in of a higher age of eligibility sooner, But we didn’t. That is not an excuse for further delay, especially as owe younger generations a strong and steady signal to of what will happen to their retirement. If we do not do something soon, fiscal pressures may require a sudden lifting the age of eligibility, as has happened in Europe.

This is based on the second part of a presentation to the Fabian Society, 10 November.

Comments (14)

by Kyle Matthews on November 13, 2014
Kyle Matthews

This is an excellent policy. I'd possibly increase it slightly slower, but other than that detail, 100%

by David Crosswell on November 14, 2014
David Crosswell

Why is it, now that we live longer, are we not permitted to enjoy a longer retirement in our old age?

Myself, I will be happy working till I'm 100 years of age, because I work at what I want, when I want, but few are that fortunate.

I think 45 years of hard time is enough for most crimes.

by Lesley Ford on November 14, 2014
Lesley Ford

As one who has 4 more years to go until eligible for super, I find it hard to be enthusiastic  about increasing the age. I'm fit and healthy, but tired of working and can't wait to retire. I agree with David C that if you have a job/career/calling that you love, it is a different matter, but for those of us who sit in from of a computer all day doing stultifying/boring routine stuff, or for those who do hard physics work, the thought of having to go on to 69 is awful.

Rather than that, I do think there should be some consideration about the universality of super and whether the very wealthy or those who have more than sufficient alternative income should be entitled.

by Simon Connell on November 14, 2014
Simon Connell

Going just on someone's age gives us a fairly general figure for life expectancy. Adding in other factors like sex, socio-eonomic status, ethnicity, the nature of work, health and so on give us a more individualised life expectancy figure.

If we're serious about taking an equitable approach to superannuation eligibility age, shouldn't we seriously consider a more individualised approach?

by Richard on November 14, 2014
Richard

Why is it "equitable" that people have to work for a constant "17 years prior to death"?

Are you seriously claiming that we need to raise the superannuation age because otherwise the ghosts of our great-grandparents will begrudge the fact that they had shorter life expectancies than we do now?

Have we not yet advanced beyond making policy on the basis of appeasing vengeful ancestral spirits? This is utter nonsense.

by Anne on November 14, 2014
Anne

Have you considered the followings scenario - one that is likely to become even more widespread in the future? The availability of jobs for the 55 + years bracket?  

As a former public servant (not based in Wellington), I had the reasonable expectation of employment through to 65 years. I reckoned without the effects of the 1980s/Rogernomics followed by the 1990s/Ruthanasia. The result was a serious deficit of income for the last ten years of my working life. It was a great relief (a light at the end of the tunnel) to know that at 65 I would be eligible for a pension. My experience has been repeated by many thousands of "hard working" citizens over the past 20 years, and will continue to be the experience of many thousands more...

Any future superannuation package will have to be extremely flexible and need to take into account both the foreseen and unforeseen variables that will arise - for example, the effects of Climate Change on lifestyles.

Having said that, Labour has been courageous picking up the Super stick. Unfortunately it ended up beating itself with it by adopting the wrong strategy. By all means open the conversation prior to an election - and announce the proposal to set up of a Commission of Inquiry running alongside that conversation - but leave out the specifics until you have succeeded in gaining the Treasury benches.

In other words, there's no need to prematurely frighten the horses - a truism National adopted years ago.  

 

by Eliza on November 14, 2014
Eliza

Presumably the "equity" issue here is intergenerational, though you don't use that term? Our social welfare system is wildly unbalanced. Already it's common for young families to have less disposable income than retired couples (i.e. after housing, student loan repayments and childcare). That's not even poor families, who are doing it really tough, that's middle income families, who pay the taxes that fund superannuation. It doesn't make sense for these families to be forced to contribute to KiwiSaver at a high rate when they might be better off saving for a home deposit or paying down a mortgage. And it's certainly not a given that any savings from raising the eligibility age should be earmarked for old-age support; super is already 12.46% of government spending, it's the elephant in the budget (by comparison, paid parental leave is 0.2% and a bill to extend it received a financial veto). 

by Fentex on November 14, 2014
Fentex

Why is it "equitable" that people have to work for a constant "17 years prior to death"?

I imagine the thought is, if all other things are equal, that if pensions are paid by taxation on workers then the acceptable proportionate burden on those workers should remain consistent.

If the age to receive pension does not increase while life expectancy does then, unless something else changes, subsequent generations will be taxed more heavily. Thus the thought of keeping the demand between generations equitable.

by BeShakey on November 14, 2014
BeShakey

I'm fit and healthy, but tired of working and can't wait to retire

I'm sure there are lots of people who are fit and healthy but nonetheless like the idea of the taxpayer giving them money so they don't have to work. The point is a) is it financially sustainable to keep the age at 65 and b) is it fair on working age people who pay the taxes to enable older people to retire? Having said all that, although it's difficult, I agree with your point that if we're worried about fairness we need to consider if its fair for super to be universal, or whether there should be some cutoff. This might be easier to achieve in 10 or 20 years when people approaching retirement (whenever that might be) have very substantial kiwisaver accounts to support themselves.

by Charlie on November 14, 2014
Charlie

Brian: It is a matter of equity that as the age of longevity rises, the age of eligibility for NZS should rise too.

So you're expecting future generations won't see a similar or even longer lifespan? I'm scratching my head to understand exactly what inequity you're trying to remedy.

What I particularly dislike is that a bureaucrat of some kind would decide when people are eligible for your proposed 'invalid benefit'. No doubt they would have the same caring nature as the current ACC management... Yet again NZ would be punishing people for looking after themselves whilst the smokers the drinkers and the sedentary get a free pass.

 

 

 

by Katharine Moody on November 15, 2014
Katharine Moody

Increased longevity is the real issue that requires further examination. In suggesting we raise the age of eligibility because folks are living longer misses the most fundamental question - are we actually more 'fit' in mind and body than a 65 year old was back in 1898? I suspect the reason life expectancy has increased has little to do with more healthy natural aging since the turn of the millennium. Instead I'm guessing we get those additional 4 years of life as a result of significant medical intervention, much of it in those last few years of life.

by Rae on November 16, 2014
Rae

No point in even discussing this as long as we have rampant ageism in the workforce, and without taking into account that some people will simply not be able to continue physically after 65, and some will struggle to actually make it. 

by BeShakey on November 17, 2014
BeShakey

I'm scratching my head to understand exactly what inequity you're trying to remedy

One way of thinking about NZS is that each generation pays a portion of their taxes to the government with the expectation of a certain level of support in retirement. There are multiple types inequity at risk. One is that the current generation of retirees is getting a substantially greater level of support than previous generations. That might be ok, except it means that the current generation of taxpayers has to pay substantially more than previous generations to provide this support. There's a further inequity in that, while the current generation of taxpayers is paying substantially more than previous generations to provide NZS, all the experts agree that they won't get the same level of support being provided to the currention generation of NZS recipients.

misses the most fundamental question - are we actually more 'fit' in mind and body than a 65 year old was back in 1898

From the point of view of the tax system this isn't the fundamental question at all. The issue is whether its reasonably possible to raise sufficient taxes to continue paying NZS at the current rate. If anything, poor health in old age makes the situation even worse, because those people receive significant other support from the state (as they should), which places an additional burden on the tax system.

No point in even discussing this as long as we have rampant ageism in the workforce, and without taking into account that some people will simply not be able to continue physically after 65, and some will struggle to actually make it.

Chicken and egg. Discussing what the appropriate retirement age is might help to change thinking on employing older people. And even if it doesn't, it's perfectly possible to have both discussions at once. The longer we put off making changes to NZS the greater the likelihood that the changes will have to be sudden and dramatic, which will be bad for those in/near retirement.

 

by Brian Easton on November 20, 2014
Brian Easton

There are a number of threads here. Let me comment on some of the most prominent.

 

Some asked whether I meant ‘inter-generational’ equity. Yes, I fudged the details. Mea culpa but it is a very difficult notion to discuss briefly. The equity is about what we owe to future generations not to past ones. It is so easy to exploit them, lumbering them debt and destroying the environment in order to pay for our over-consumption. An alternative way of thinking about the issue, is that if everyone lived to 100 would an age for eligibility of New Zealand Superannuation of 65 still make sense? One person argued for NZS after 45 years of work. My Dad did 50.

 

There was some confusion between the age of entitlement for New Zealand Superannuation and the age of retirement from the workforce. There is no official age of retirement. You may choose your own (many choose a phasing out rather than an all-or-nothing day). If you retire before the age of entitlement (whatever it is) you have to provide from yourself. Perhaps you will have an occupational pension, perhaps you can live on your savings. The proposal makes it easier to retire early because you will have more Kiwisaver and there would be an Early Retirement Benefit for those for whom it is unreasonable to expect to continue working and have insufficient private provision.

 

There was some discussion of the ageing process. We could not find an authoritative assessment but the indications are that on average we are capable of more activity at each age than the previous generation. Women’s magazines talk about ‘sixty is the new fifty’. Probably not quite true, but it captures some of the shift.

 

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