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Saving for the silver tsunami

Tuesday 4th November 2014

They say nothing in life is certain but death and taxes – and both must be taken into account when it comes to preparing for an ageing population. The New Zealand of the future will be older, with pensioners predicted to outnumber children in the late 2020s. By 2030, the last of the baby boomer generation will have turned 65; the pakeha population in particular will be disproportionately elderly. When a full fifth of the population is over the age of 65, what does that mean for the rest of us?

An ageing population is not in and of itself a bad thing, and in fact the good news is that people will be living longer, thanks to better quality of life and advances in healthcare. But superannuation and healthcare are already two of the biggest areas of government spending, and the increases forecast for the next 15 years are expected to put pressure on a small workforce that will likely be facing increasingly unstable employment.

Entitlement to the pension – who can claim it, and how much they get – is an especially contentious issue because it seems, at face value at least, to encapsulate the gap between older and younger generations. Certainly, it seems unlikely that young people will receive a pension as generous as that on offer today, which is tied to the 66 per cent of the average wage (not inflation, as is the case with most other benefits). That amounts to a net payment of up to about $340 a week for any resident over 65, regardless of income or assets.

The cost of the scheme is expected to balloon to $20 billion a year by 2031, as more people drawing on the pension for longer periods. As Nick Cross commented on The Wireless’ panel discussion with Sunday Morning, “I don’t even expect to receive New Zealand Super by the time I reach the age of 65. I think it’s a very unsustainable model.”

People are increasingly working past retirement age, meaning they contribute to the cost of the scheme through their taxes, but Treasury [pdf], the Commission for Financial Literacy and Retirement Income, and the New Zealand Institute of Economic Research are in broad agreement that the current system is unsustainable. So what can be done to make it affordable – and how big a hit are we open to taking today for the benefit of tomorrow?

LISTEN: Harvard professor David Bloom shares how an ageing population need not be an economic burden.


In 1952, 255 Commonwealth citizens were sent messages from the Queen for their 100th birthdays; in 2011, there were 9736 messages sent

The same debate is being had over much of the developed world, especially by those countries, like Japan and Germany, with ageing populations. The Australian Government plans to raise the retirement age to 70 by the year 2035, but their pension is already means-tested, which remains a point of contention here.

Retirement Commissioner Diane Maxwell recommended gradually raising the age of eligibility to 68 by 2056 in her policy review last year. Targeting eligibility through means testing and limiting the growth in the amount paid have also been floated by Treasury and the NZIER as ways to rein in the cost of the scheme.

WATCH: Treasury senior analyst Becky Prebble, who led the statement on the long-term fiscal position last year, explains how Treasury approaches the challenge of an ageing population.

Despite general consensus that the current approach is unsustainable, there’s no agreement on how it might be improved – no one approach is without its flaws, as business commentator Bernard Hickey points out.

WATCH: Business commentator Bernard Hickey explains the pressures on the New Zealand Superannuation scheme.

But not everyone agrees it’s an issue. Unitec economics lecturer Keith Rankin says not only can we afford to keep the age of entitlement at 65 but that the cost of the scheme is beside the point. We’ve overcome generation gaps in the past and we’ll do so again.

The best thing we can do today to improve the capacity of our economy in the future, says Rankin, is invest in employment and education opportunities for young people. Even as people continue to work past 65, being eligible to receive the pension sends a signal that they should move on from full-time work to make room for younger generations.

LISTEN: Economics lecturer Keith Rankin warns that raising the age of entitlement could result in shortened career ladders and fewer employment options for younger people.

Bernard Hickey also believes that investing in tomorrow’s workforce – that’s today’s teenagers and twenty-somethings – to ensure it’s at maximum capacity is a priority. But either way, it’s unlikely there will be any movement on the issue in the near future, as changes to the superannuation scheme tend to be resisted by older people, and by extension the politicians who cater to them.

WATCH: Business commentator Bernard Hickey explains how to improve the productive capacity of the economy.

National ruled out raising the age of entitlement from 65, or even breaking the tie between the amount paid and average wages, before the election. It’s been advised the cost of the scheme will be covered by growth in the economy in the medium term – and it wouldn’t have been lost on the party that voter turn-out is higher amongst older generations.

Labour campaigned on raising the age of entitlement from 65 to 67 over a six-year period from 2020. But that policy looks unlikely to survive the leadership challenge, with contender David Parker calling for a referendum to be held on the issue.

So it seems that changes to the super scheme are off the table, at least for this government, and a difficult decision has been successfully put off for at least another three years. But though older generations can afford to ignore the issue, younger generations can’t.

This content is brought to you with funding assistance from New Zealand On Air.

Cover image by Toby Morris.

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