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.