News
16 July 2021

Retirement policies too costly, says Treasury

Treasury has warned that paying for NZ Superannuation (NZ Super) and health care for the elderly will bury the Government under a mountain of debt by 2060.

It said 26% of the population would be over 65 by then, compared with 16% in 2020.

NZ Super and health care would have to be paid for on borrowed money. The forecasts show net Crown debt would rise to almost six times its current level.

It would soar to 177% of GDP, up from about one third of GDP now.

And the money in the New Zealand Super Fund (NZSF), sometimes called the Cullen Fund, would do little to ease the burden.

This latest report follows decades of warnings that legions of retired baby boomers getting a pension will be unaffordable in the long-run.

This view though has not been universally accepted and some critics have contested the methodology behind these forebodings.

Politically, both John Key and Jacinda Ardern pledged to keep the NZ Super age at 65. But the Treasury report will go some way towards undermining the viability of those promises.

It shows gross NZ Super costs will rise from 5.0% of GDP in 2021 to 7.6% by 2061.

Health expenditure will rise from 6.9% of GDP in 2021 to 10.5% in 2061, and a quarter of that increase will be due to demographic changes.

Taken together, these will chew up about half the Government budget. Other obligations like education or the environment will be crowded into the other half, along with interest payments on the Government's growing debt.

Faced with warnings like these, politicians frequently cite the NZSF as the solution to their woes. But the Treasury Report gives the NZSF low marks as a potential Fairy Godmother, saying its real impact will be small.

“In 2060 the NZSF will cover 0.4 percentage points of the 6.3% of GDP net cost, the rest being covered by tax revenue,” the Treasury report said.

“In other words, in that year the NZSF will contribute around 6.6% of total net of tax NZ Super costs.”

Some people have called for the age of eligibility from 65 to 67, as some other countries have done. The Treasury report says that would reduce NZ Super costs by only about one tenth.

The Treasury report also stresses that its forecasts are not fixed in stone, as they are sensitive to changing interest rates, taxation and productivity levels.

The Treasury document is not completely negative. It comes up with some policies which could make a difference. Adjusting the age of eligibility for NZ Super is just one.

Another idea would be to reduce the growth rate of NZ Super payments, by indexing it to inflation, not wage rises, which are sometimes higher.

Another idea would be to add one percentage point to everyone's tax rate.

A third possibility would be to leave real tax rates unadjusted for ten years, so people drifted into higher tax brackets as they got payrises – this is the principle of so-called fiscal drag.

There could also be rises in GST or company tax, the imposition of land taxes and wealth taxes or a revival of the abandoned comprehensive capital gains tax.

But the report says all these proposals would have tradeoffs such as reducing real incomes for current taxpayers.

The Treasury report has already been batted away by the Government. The Prime Minister, Jacinda Ardern told reporters the age of eligibility would not change, and she repeated the view that paying into the NZSF would make the scheme work.

The National Party campaigned on raising the age of eligibility in the last two elections but the current leader Judith Collins says the party's present position is still being worked on.

Grey Power said it still believed NZ Super was affordable, but the matter would likely be debated in its next annual conference.

Photo of Eric Frykberg
Written by:

Eric Frykberg

Semi-Retired, Eric worked in journalism for 45 years across print, radio and television, in New Zealand, Australia and Britain. He has specialised in business, finance, energy, mining, transport and agriculture. He was also foreign correspondent for RNZ for many years. He can be reached on ericf25@hotmail.com.

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