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After the boom, comes the pinch

Thursday 15th May 2014

It’s tough to picture the future if you’re a New Zealander under 30. Your first home has never been more out of reach, if you want to live in one of the main centres – not that we have much of a choice, because high rates of unemployment and thousands of dollars of student debt mean we go where the jobs are. Even then, we’re faced with increasing costs of living and slow wage growth.

In short, our prospects are bleak, and especially so in comparison to the rosy route enjoyed by members of our parents’ generation. And economist Bernard Hickey can’t figure out why we’re not more angry about it.

We face a political contest between the people who have to pay the bill, and the people who receive the benefits, and that is building into a clash of the generations

He calls us the “baby bust” generation: burdened by debt, held apart from home ownership, the losers of sweeping changes imposed by Roger Douglas’ Labour government in the mid-1980s. The baby boomers, meanwhile, continue to benefit from the free education and cheap property they had access to as young people.

Hickey predicts this gap between the older and younger generations will get bigger in the coming decades, before eventually coming to a head when the last of the boomers retire, and their children are left to foot the bill for their healthcare and superannuation.

“Ten, 20 years from now, the younger generation will realise they face a future of not … being as wealthy as their parents’,” he says. “We face a political contest between the people who have to pay the bill, and the people who receive the benefits, and that is building into a clash of the generations.”

Inequality has been a hot-button issue in the world of economics ever since the French economist Thomas Piketty published Capital in the Twenty-First Century. His thesis is that the rate of return on existing wealth is greater than the rate of growth in the economy as a whole, meaning the rich get rich faster than everybody else, and their wealth doesn’t trickle down. Without tax policy reform, Piketty warns that this inequality could result in a global revolution.

Hickey believes the United States and Europe are closer to that reality than New Zealand is, in part because we buffered the Global Financial Crisis better than those larger economies. We’ve got a lot to be grateful for, he points out: our tertiary education system receives more public funding than a lot of other countries’; student loans are still interest-free; and our levels of youth unemployment are at around 25 per cent, as opposed to 50 per cent in some other countries.

The sheer mathematics of an aging population mean that the young – just like any minority, especially one that’s poorly organised and not engaged – are on a hiding to nothing

Hickey sees young people as being most disadvantaged by barriers to home ownership. In the main centres, the cost of housing can be as much as ten to 15 times the disposable income of a single young person – much higher than in other parts of the developed world. It’s “incredibly difficult” for twenty-somethings to buy their first home without help from their parents, and that’s a barrier to their accumulating wealth, putting down roots, and creating the kind of strong, stable communities that economies benefit from.

The “crunch point” will be when it dawns on the younger generation that they have paid for benefits and support that they themselves won’t receive, he says. “The sheer mathematics of an aging population mean that the young – just like any minority, especially one that’s poorly organised and not engaged – are on a hiding to nothing. I don’t understand why people in their 20s and 30s aren’t organising and becoming politically engaged to protect their own financial interests.”

A case in point is New Zealand Superannuation. It seems unlikely that “baby busters” will receive a pension as generous as that on offer today, which is tied to 66 per cent of the average wage, amounting to a net payment of up to about $340 a week for any resident over 65, regardless of income or assets. More than 26,000 people with total annual income of more than $70,000 claimed superannuation last year; “even millionaires can sign up when they turn 65”.

Young New Zealanders shared their aspirations for retirement with the Commission for Financial Literacy and Retirement Income:

Along with education and health, superannuation is already one of the biggest areas of government spending, and the cost of the scheme is expected to balloon to $20 billion a year by 2031, when the last of the baby boomers will have turned 65.

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 agreed that the current system is unsustainable.

“We’re entering a period of unprecedented demographic change, with around one in four New Zealanders aged 65 and over by mid-century,” said the Retirement Commissioner, Diane Maxwell, at the release of her policy review late last year. One of her 17 recommendations on how to mitigate the effects of an aging population was to gradually raise the age of eligibility to 68 by 2056. 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.

The same questions are being asked over much of the developed world, says Hickey, especially by those countries with aging populations. The Australian government recently announced plans to raise the retirement age to 70 by the year 2035. But, he points out, Australia has a “more problematic budget outlook” to deal with, and a “right-leaning view of the world, that people should pay their own way”; their pension is already means-tested, which remains a “hot-button issue” here.

The National-led Government is understandably reluctant to raise a potential reform in an election year, and has already ruled out raising the retirement age if it wins the September election. “It’s not on the table because the Prime Minister says it’s not on the table,” says Hickey. “In the medium term, he’s been advised growth will solve the problem, but he hasn’t addressed the long term.”

If Labour is elected, it will lift the minimum age from 65 to 67 over a six-year period from 2020, but Hickey expects to see the policy used against the party; unions have already called for manual labourers to be exempt from any raise to the age of eligibility. “We’re going to see an election campaign where the Government attacks the Opposition by saying they’re going to penalise some people by forcing them to work longer – particularly poorer, less educated, manual workers, who are the natural constituency of the left.”

Despite general agreement that the current superannuation scheme is unsustainable, there’s no consensus on how it might be improved – meaning, to a certain extent, the issue is out of sight, and out of mind.

Hickey agrees that the older generation are ignoring the extent of the problem – “because they can, because they’re in charge and culturally dominant”.

But appealing to them as parents might be the way forward: if they don’t put their children’s financial futures first, they’ll either be supporting them financially – or from afar, after they’ve left New Zealand to put down roots elsewhere. Hickey has two daughters, and says he fully expects to “have to follow them around the world” when they’re older.

“The boomers have a choice … if they want to be grandparents, they need to relent and change the rules. Or they’ll be watching their grandkids grow up on Skype. At the moment, they think they can have it all.”

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