Retirement income policies in New Zealand:- what really matters

Michael Littlewood forRetirement Policy and Research Centre

Wellington, 21 April 2015

Four main points

• The cost of New Zealand Superannuation is the pensions paid (pre-funding doesn’t change that)

• Private provision not materially different (economically) from public

• So, forcing New Zealanders (or the government) to save does not cut the cost of an ageing population

• What can (should) governments do?

Latest Treasury projections (2014)

• NZS is a claim on the economy• Ageing population will double so-called

‘age-dependency’ ratio• Not a doubling in cost when measured

against a growing GDP

NZS projections

How does NZ compare?Cost of public pensions

2010 2060

Austria 14.1% 16.1%

Canada 5.0% 6.2%

Germany 10.8% 13.4%

Greece 13.6% 14.6%

Ireland 7.5% 11.7%

Netherlands 6.8% 10.4%

New Zealand 4.7% (net 4.1%) 8.0% (net 6.6%)

Norway 9.3% 14.2%

Portugal 12.5% 12.7%

Spain 10.1% 13.7%

Sweden 9.6% 10.2%

United Kingdom 7.7% 9.2%

United States 4.6% 4.7%

Note: excludes the cost of tax breaks for private provision

Pre-funding doesn’t affect cost

• The cost of NZS is (and will be) the pensions paid• Pre-funding (the NZSF) doesn’t change cost, only

the incidence of cost• The NZSF is effectively 100% leveraged• Three key questions:

– Should the government borrow to invest?– Does ‘intergenerational equity’ matter?– What is it about pensions that justifies pre-funding?

• Economic growth is what really matters

What can only governments do?

…with specific regard to retirement incomes•Reduce (eliminate?) poverty in old age•Enforce codes of private (and public) conduct – levelling tax and regulatory playing fields•Gather and publish impeccable, accessible data•Provide information and education programmes so citizens can make appropriate decisions

What can’t governments do?• Force citizens to save more than they prefer• Encourage citizens to save more than they prefer• Both options tend to be:

– Very expensive– Regressive– Complex– Distortionary– Inflexible

• In addition, tax breaks:– Are inequitable– Increase deadweight costs of tax

• Worst of all: neither seem to ‘work’

In summary:

Governments should:•Do things that only governments can do•Stay away from the things that:

– Governments do not have to do– At the very least, seem not to work

We need to talk about:

• NZS: what do we think might be acceptable to 2060 taxpayers (benefits first; then costs)?

• Data: better, deeper data – longitudinal data the ‘gold standard’

• Regulation/tax: simple, comprehensive rules; levelling the playing fields

• Private provision: let employers and individuals make their own decisions

It’s really not that complicated

Talking about New Zealand Superannuation

• Key benefit design decisions:– Universal or means-tested?– State pension age– Residency test– Annual amount– How re-valued?– How paid for (PAYG vs SAYG)?– Single person’s pension– Couples’ living together– Overseas’ pensions and section 70 deductions– Transition arrangements if changes made

Talking about NZS - 2 • Minor benefit design decisions:

– Interface with ACC pensions– Favoured periods of absence overseas – Annual revaluation floor– Hospital rates– Payments overseas– Special position of ‘specified Pacific countries’

• None of these 10 major and 6 minor design elements has ever been the subject of a research-led national discussion

• Asking New Zealanders what they think first is a bad idea

The politics of change

• NZS the archetypal political football• National won’t talk about it• Labour now doesn’t know what to think• Other parties suggested different changes• Endless reports continue to suggest cost-

cutting changes• We need to break the cycle

What next?

• John Key’s threat to resign constrains debate until, probably, 2020

• The debate will happen• Much work to be done in the meantime• Gathering impeccable, deep data is the first

priority• …and perhaps, politically acceptable

Impeccable, deep data? – home ownership

Understanding pension claims

• All retirement incomes are claims on the economy (private and public)

• Forced private provision to replace public provision shifts costs but does not reduce them (and may increase them)

• Governments must balance competing claims of all sections of society

• Regardless of today’s decisions/process, tomorrow’s taxpayers can change things

What really matters

• Growth

Deck chair from Titanic

“Democracy is the theory that the common people know what they want and deserve to get it good and hard.” - H.L. Mencken