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A Long-Term Fiscal Statement (LTFS) is produced every four years and generally can be quite useful. The latest was a huge opportunity for our brightest minds in Treasury to open up the public debate on many issues, including whether we need to change NZ Super and if so, how we could do it. Unfortunately, it looks like a case of ‘fools rush in where angels fear to tread’ which has a long history in New Zealand. While government’s s true intent is to reduce the size of government to reach an arbitrary 30% of GDP, now Treasury has given it the ammunition to justify the next round of belt tightening, all in the ‘worthy’ name of protecting the next generation from financial ruin. This concept can be glorified as achieving ‘intergenerational equity.’ There are many nuances in superannuation policy, none of which is reflected in the report He Tirohanga Mokopuna – Long-term Fiscal Statement 2025. Instead, we are fed some outrageous proposals in a menu that focuses on cost saving, modelled under some untenable assumptions. The modelling goes 40 years into the future. It is interesting to think back 40 years ago. In 1985. most of us were just grateful to survive 1984 given the dire predictions of Orwell. That was the year the surcharge was brought in by Labour with various other changes to NZS set to follow. The year 2025 would have seemed an impossibly long way off to pontificate about. Under the heading Reducing the fiscal costs of pensions the LTFS begins: ..the cost of New Zealand Superannuation (NZS) NZS has already increased from 3.9% of GDP in 2006 to 5.1% now, and without policy changes would grow to 8% by 2065 in our OLG model (or 7.8% in the LTFM). Instead of accepting that as older people become an increasing share of the population, the ratio will rise, implying we need to be sure NZS is carefully designed, Treasury declares that we should be aiming to hold NZS expenditure as a percentage of ‘GDP’ constant. ….the modelling suggests the cost of NZS could be kept stable as a percentage of GDP by increasing payment rates in line with inflation rather than wages, or through steadily increasing the age of eligibility to 72 by 2065. Means testing would need to kick in at relatively low levels of non-NZS income to generate similar levels of savings. Obviously working out who is worst off and who gains is exceedingly complex but Treasury states confidently; The three scenarios all reduce the lifetime consumption of (some) earlier generations but make future generations better off, with lower future taxes and the cumulative impact of higher economic growth on incomes. Here are some gems in what passes for a distributional analysis: CPI indexation scenario has a negative impact for most people already born Raising the age of eligibility boosts consumption for those people already receiving NZS, such as those born in 1950. Treasury explains this is because NZS remains linked to after-tax wages in this scenario, which means existing NZS recipients benefit from the lower taxes feeding through to higher after-tax wages and higher NZS payments people closer to retirement, such as those born in the 1970s, would face lower lifetime consumption if the age of eligibility was to increase. People in the higher income bands of the earlier generations experience a smaller percent decline in their lifetime consumption under both scenarios. Because apparently, they are less reliant on NZS as a source of income. higher income people born later benefit most from the lower taxes and higher economic growth. people born in 2065 are better off, irrespective of their income level. Bully for the last 2 points—but what incredible assertions. There is little indication of any pain at all from lowering the relative pension level despite international evidence that shows elder poverty will accelerate as pensions become increasingly out of touch with real living standards. Likewise, to state the obvious, raising the age affects a large group who cannot maintain full time paid work until age 72. Many struggle now in their 60s, and draconian means testing which surely will destroy the incentive to stay employed and to save. Intergenerational equity is a very vague concept in this report. To share the transitional costs of change across generations, which presumably would be fairer than not sharing, the report says quite bizarrely; fully compensate ‘transition generations’, the amount of debt required would be quite large, equivalent to the implicit debt associated with current superannuation obligations, effectively shifting all the cost of change to future generations. In my opinion, the options are unhelpful, not costed properly, and will create confusion and accelerate ill thought-out decisions. The underlying assumptions such as that NZS spending as a % GDP must stay constant are unjustified, as is the theory that lower taxes as % GDP will raise GDP growth. Let’s take a closer look at means testing; The Treasury’s microsimulation model (TAWA) explores a narrow and broad scenario where NZS was abated by 40 cents per dollar earned over $60,000 or $10,000 respectively. So those earning over $60,000 would have a gross income with married gross rate of about $85,000- so marginal tax rate on everything over $60,000 would be 73%. Even worse in the broad scenario, all other income over $10,000, would be taxed 57.5%-73%. Yikes, can you imagine that? It makes the old surcharge smell of roses. And let’s look at reducing the relative level by price indexation. Today we know that for an increasingly large group of superannuitants poverty is a real issue. If the economy grows and CPI adjustments are used, we can expect the kinds of poverty levels we saw in the early 1970s to re-emerge. Sadly here is what a leading commentator said it was notable that NZ Super was the only form of benefit that was tied to wage inflation. That sort of inconsistency does lead to some pretty odd outcomes over time when you have one set of money being given out to a group in society that accelerates and grows at a much different, much faster rate than the support and money that you give to another group in society. It would seem to me more sensible that if the government is giving out money in general, that as long as it is maintaining its purchasing power, ie inflation adjusting it, that seems if it works for one group, it should sort of work for them all. The recent change to benefits from wage indexation to CPI under the Coalition government is extremely retrograde and poverty enhancing and cannot justify any change to the indexation of NZS.
