2 February 2022

Government told to raise the age of eligibility for the superannuation

The Government has been advised to raise the age of eligibility for superannuation to make it economically viable in the long run.

One way to do this might be to formally link the age of eligibility to life expectancy. This would mean that as people live longer, they would get the pension later.

The Government has also been advised of a novel way to avoid collateral damage on groups with a lower life expectancy, such as Maori and Pasifika.

The recommendations came in the latest report from the OECD on the New Zealand economy. This covered a raft of issues and gave the Government good marks for handling Covid, but bad marks on inflation and housing affordability.

In addressing pension affordability, the OECD said 25% of the population were forecast to be over 65 by 2060.

Their superannuation would cost a lot, so would their healthcare, as more effective but expensive treatments became available.

It quoted Treasury forecasts saying that to pay for all this, Government debt could move to around 140% of GDP in 2060 and continue rising rapidly thereafter.

This would push it close to the debt level of Greece at the height of the recent Euro debt crisis.

All this has been said before. But the OECD departed from tradition by resurrecting a little-discussed proposal from 2017. This idea suggested that the age of eligibility for of superannuation should be indexed to life expectancy. So, as people lived longer on average, they would qualify for the pension later.

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“This is essential for credibly ensuring pension sustainability,” the report said.

It said a change like this would mean that the number of years’ time spent in retirement would remain constant. And it said a scheme like this had been put into effect in Finland.

The OECD report also debated worries about the impact of such changes on sections of the community with lower life expectancy, such as Maori and Pasifika. This issue has been repeatedly brought up as an objection to raising the age of the pension.

But the OECD was not fazed by this and came up with a novel solution. It said it would be better to address the worries of Maori and Pasifika specifically rather than by freezing the pension age for everyone. And it suggested a two-tier system might work.

“One such measure could be to provide the pension on a means-tested basis from age 65 until the life expectancy-linked eligibility age, at which point the pension would no longer be means tested.”

In other words, healthy, working people would not get the pension at 65, but it would be available to people who are nearing the end of their life.

But the system would change at the new, adjusted pension age, for example, 67 or 68. At that point, everyone would get a universal, non means tested pension, as at present.

The actual age at which this kicked in would depend on the science of life expectancy.

The OECD says New Zealand has had dual systems like this earlier in its history.

The current Government has repeatedly refused to raise the pension age, but the National Party has campaigned in favour of it twice.

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