Today’s mañana strategy will lead to a crisis for the oldest elderly.

It is said that the only certainties are death and taxes, but a lack of each causes uncertainties. As longevity increases, the pressures on state spending increase. A reluctance to increase taxation means the pressures on the elderly increase.

The dilemma is usually presented by the rising ratio of those over 65 years of age, who are net consumers, compared to those in the 15-to-65 age bracket, who are net producers. Sometimes called the dependency ratio, it is currently about one to four but is expected to rise to about one in two by 2074. (It was one to seven in 1974, although there was also a higher proportion of children, and women’s participation in the paid workforce was not as great.)

In some respects the ratio is misleading. Many people over the age 65 are still in the paid labour force. Others retire before they are 65. Many in the working age groups do not work full-time. Patterns change over time. Moreover many of the (especially younger) retired participate in the unpaid voluntary labour force making a positive contribution to their communities, if not to GDP.

A further complication is that the over 65s are far from homogeneous. At the very least, it is useful to distinguish the young-elderlies from the old-elderlies. The over-80s get almost treble the healthcare and social support that the 65-to-69-year-olds get from the public purse. For a 90-year-old it amounts to about as much as they get from New Zealand Superannuation (NZS). Increasing longevity means the number of (more expensive) old-elderlies are growing faster than the young-elderlies.

While selecting an age such as 65 is a mechanical attempt to portray a complicated situation, the actual age is a key one in fiscal management. At 65 almost everyone is entitled to NZS, which gives them a minimum after-tax income of around 40% of that average wage for a single person (currently about $27,000 a year), irrespective of their other income. It is taxed, but because our income tax system is not very progressive, it remains valuable to those on high private incomes.

The Treasury has recently, and once more, pointed out that with the expected increasing numbers of the elderly the current regime is going to put increasing pressure on the fiscal regime. It is hard not to conclude that current arrangements are fiscally unsustainable unless tax rates are substantially raised in the long run. (There are other great pressures for more government spending which also demand higher tax rates. Borrowing is a short-term measure which defers raising taxes to a later date.)

If you think there is a fiscal sustainability problem which cannot be resolved by higher tax rates – I do – then there are two major ways to the resolution, aside from mañana, which I also discuss.

The first is to raise the age of eligibility for NZS. The National Party campaigned on raising it from 65 years to 67 years. (The coalition agreement with NZF abandoned this proposal.) I leave you to judge whether the proposal to raise the age from 65 to 67 was courageous or timid; I think it is the wrong strategy.

What we should be doing is setting a formula for the age of eligibility based upon life expectation, not a numerical age. When in 1993 the age was last raised to 65 (by agreement between the unlikely pair of Ruth Richardson and Michael Cullen), a person of that age had a life expectancy of another 25 years. Today a 67-year-old has a life expectancy of about the same 25 years. In the twenty-odd years since 1993, people’s life expectation has gone up about two years. (These figures are based upon the Statistics New Zealand life table, and yes, the data really shows that one has about a quarter of century more life at 67 on average.)

I suggest that we should set the age of eligibility for NZS at where there is an average life expectation of, say, 25 years. As life expectancy rises (or falls), then the age of eligibility should automatically rise (or fall).

Two important caveats. The eligibility age should not be jumped up but rise incrementally, as it did under the Richardson-Cullen scheme. And second, there has to be an incomes-tested benefit for those who are unable to provide for themselves below the age of eligibility either by working or having insufficient savings. Again that was a feature of the Richardson-Cullen scheme. (Cullen’s personal contribution was the introduction of Kiwisaver, which boosts private retirement incomes.)

A second strategy is to abate more strongly the NZS of those on higher incomes. An easy way would to be to put all superannuants on a separate tax code with higher income tax rates which reduce the state contribution as private incomes rise. The bleed-out rate should be high enough so that the very well-off would opt back to the standard tax rate and forgo NZS completely. (This regime is not very different from what I suggested for a universal family benefit.)

The alternative strategy to these two might be called ‘mañana’, where we put off decisions until later, perhaps in the hope that we shant have to make them in our lifetime. But something will happen in most people’s lifetimes. It may be an ‘overnight’ crisis, as has happened in a number of countries when a fiscal collapse forced a sharp rise in the state retirement provision – none of this planned incremental increase stuff with a good warning it was going to happen.

Or it may be a creeping crisis, in which the government struggles with its fiscal position which it resolves in regard to the elderly by cutting back their provision for healthcare and state support. So they – the old-elderly especially – find themselves either paying for more of it themselves or going without. (Yes, it may be already happening; we practise mañana a lot in this country.)

That would mean that many of the young elderly would remain reasonably well-off, but as they age and their frailties increase, they will find themselves living in increasingly difficult circumstances.

Actually, that is not quite right. Under mañana, an increasing number of the young elderly are going to find themselves coping financially with their parents in their nineties. Those parents will be lucky to have their children’s support; others will not.

In making the case for the strategies of raising the age of eligibility for NZS and bleeding-out the payment at a higher rate (yes, I’d probably go for both), I am not so much arguing for cutting back funding on the elderly but allocating the funding to deploy it more effectively. I remain of the view that tax rates are going to have to rise in the future.

As for the individual reader, I don’t give financial advice but commonsense may well conclude that if you are young, you are unlikely to get your NZS at 65; if you are older, you are likely to have a difficult old age if we continue with mañana. In both cases, prudence suggests that private provision for retirement remains a personal priority.

(A recent Treasury view on these issues is Longevity and the Public Purse Fiscal and Economic Impacts of Increasing Longevity by Dominick Stephens who is Treasury’s Chief Economic Advisor.)