Regrettably, the government’s recent announcements on the public provision for retirement have added to the uncertainty the young face.
The Government’s announced proposal to raise the age of eligibility for New Zealand Superannuation (NZS) is a real botch job. I’ll leave others to write about the political botch; here the focus is on the policy.
Focusing on affordability confuses matters. Certainly NZS is affordable at whatever age you choose if it is a higher priority than other government spending (such as on healthcare) and one is prepared to pay the tax to fund it. In my view the relevant issues are fairness and adapting to new circumstances, especially increasing longevity.
When 65 was introduced as the age of entitlement of the Old Age Pension in 1898, life expectancy at that age was about 13 years. The latest estimate (for 2012-4) was 20.1 years. The age has been rising quite quickly recently. When the current age of entitlement was set (by a consensus between the National and Labour parties) in 1992 the life expectation at 65 was 16.8 years. With that rise of 3.3 years in 11 years goes improved health and greater ability to work (although not every one of the extra years will be healthy ones).
Projecting this increase to 2040, the average life expectation at 65 may well be over 28 years. At 67 it may be over 26 years. What the government is proposing is that the average elderly will spend a quarter of their life on New Zealand Superannuation.
It may be not be a high-quality life because, inevitably, their healthcare will be squeezed. We are promised that 90 percent of our rivers will be swimmable in 2040 (providing you don’t put your head under water). However many of the elderly won’t be able to swim because they will be on waiting lists for hip and knee operations.
This rising life expectancy among the elderly is at the heart of the age of eligibility policy. Suppose we all lived to a hundred. Would it make sense to provide us with a retirement pension from the age of 65?
That suggests that we should set the age of eligibility in terms of the life expectation of retirees. As the elderly’s longevity increases the age should rise – probably at a rate of about three months every year starting NOW – not so far in the future that the decision is irrelevant. (I acknowledge, as I did earlier, that not all the additional years will be of good quality health and there might need to be a refinement taking this into account.)
More subtly, we are not thinking about the difference in the needs of the younger elderly and those of the older elderly. It is not a question of cash income but the latter typically need more social support. It is easy to claim that the healthcare system should look after them, but the evidence is that the public system is underfunded and struggling to do so. The struggle is likely to intensify as there are more older elderly (and they on average are older). Is adequate healthcare for the old elderly ‘affordable’? In my judgement it is far more important to support the older elderly with healthcare than the younger with income.
So the policy issue is not simply a matter of choosing an age of eligibility for the state-provided retirement pension. Whatever the age is, we need to think about social support for the elderly, we need to think about what happens to those in need below the set age and we also need to think about the private savings which top up the public pension – although currently, housing aside, the additional income is not a lot for most people. (There are also problems with the regime in relation to those with overseas entitlements.)
(I puzzle over whether we should have compulsory private retirement savings. Liberals like to leave people to make their own decisions; behavioural economics suggests that many will make poor-quality ones about the long term – as they will judge for themselves later in life.)
We did not get a comprehensive package in the recent proposal from the Government; all it did was change in the age of eligibility. Admittedly the Government cannot easily admit that it has been skimping healthcare funding, while it has shown little enthusiasm for Kiwisaver. The Retirement Commissioner’s report has some useful suggestions for improving Kiwisaver but it does not really address the big one of whether it should be made more compulsory.
(The announcement included the proposal to switch back to 20 years ‘residence for eligibility for the universal benefit. Ironically it was Muldoon’s National Government which shortened the period to ten years in the mid-1970s. It may be only a small saving but it is a sensible signal that NZS is an entitlement by citizenship. It was 25 years residence in 1898.)
What is most disturbing about the Government’s announcement is that while pretending to settle the question of the age of eligibility it has actually politically destabilised the issue. Passing a parliamentary bill – as it plans next year– does not mean that the scheme will be untouched for 23 years.
(A particular worry is that when we have some major financial crisis a part of the international bailout deal will be cutting the levels, conditions and eligibility of NZS; this is what happened in southern euro-zone countries after the 2008 Global Financial Crisis. The thought is too horrible to contemplate in detail, but I can say that a lot of public policy is driven by the need to make the economic and financial system robust to such a threat.)
The only way to settle that instability is by a political consensus (as there was in the early 1990s when the age was raised from 60 to 65years). But while each party knows in its heart what has to be done, the temptation will always be to undercut the other parties. It is not a coincidence that when Labour supported raising the age of eligibility, National opposed it and now it is the other way around. My guess is that the way to stability is a Royal Commission with (almost) everybody accepting its recommendations – while, of course, grumbling about them.
What we can be sure of is that the age of eligibility will remain on the political agenda and we can be pretty sure that anyone 50 or younger (i.e. born after 1968) will not get their New Zealand Superannuation at 65. Otherwise in the current political environment all else is uncertain.
Footnote: It is sometimes argued that there should be an earlier age of eligibility for Maori,given their shorter life expectancy – which, incidentally, is steadily catching up to the national average, but is still some way behind. However the same logic would lead to Maori being paid a lower rate since Maori wages are lower than average. In 1938 the Labour Government decided that there would be no racial discrimination in the public provision of state retirement support although there was fiscal advice to the contrary. They made the right decision.
A similar logic says that women should get their NZS later. Yeah right.