Sustainable Superannuation

I am of the view that the current superannuation scheme is not sustainable. In fact almost everyone who has studied the long-term demographics is of this view. Treasury, especially, has done some excellent work in this area.

The Government has ruled out changes while the PM is PM. I understand the politics of why that decision was made (to reduce the scare mongering from Labour) but regret it was made. However just because the Government is not going to change anything in the next few years, is no reasons why we can’t start a discussion on what sort of public superannuation system we want in our future. We know a future Government will confront this issue, so let’s start the discussion now.

Rather than focus on tinkering changes to the current system, I’m hoping over many posts we can have a first principles discussion on what our public (or first tier) superannuation should look like to be fair and sustainable. Second tier superannuation incidentally is workplace scheme such as KiwiSaver and third tier are other private superannuation schemes.

However the reasons changes to superannuation has been so politically lethal in NZ, is because the changes have been to the current scheme, and affecting those already retired. I understand the upset this can cause when changes are made that affect someone already retired. How would you like it if overnight your pension is means tested?

Therefore what I want to propose as a first principle is that the current superannuation scheme be preserved and locked off for the currently and soon to be retired. No more changes of any sort – including both upwards and downwards changes. This would give absolute certainty to those retired, and also prevent politicians such as he who must not be named as trying to make the current scheme even ore expensive for taxpayers.

The current scheme is:

1. eligibility age 65
2. NZ citizens and permanent residents who have spent both at least 10 years since aged of 20 and five years since age of 50 in NZ.
3. A floor so that the pension for a couple after tax is no less than 66% (and a ceiling of 72.5%) of the average ordinary time earnings after tax.
4. The single living alone rate is 65% of the couple rate
5. Inflation adjusted annually
6. No income test
7. No asset test

The above scheme is incidentally thought to be the most generous in the world, with no asset or income testing and a link to the average wage.

So to allow us to design a sustainable scheme for the future, I propose the current scheme be locked off, as per a certain date. The key question, is what date.

I would propose around 2025. In other words, those aged 50 or over in 2010 would still get the current scheme. The costs of the current scheme would remain high through the 2020s and 2030s, but from 2040 to 2050 fall significantly so by 2050 less than 10% of retired people would still be on it.

The population projections are:

• 2010 – 586,000 over 65s
• 2015 – 698,000 over 65s
• 2020 – 811,000 over 65s
• 2025 – 944,000 over 65s
• 2030 – 779,000 over 70s
• 2035 – 606,000 over 75s
• 2040 – 431,000 over 80s
• 2045 – 264,000 over 85s
• 2050- 130,000 over 90s

So a 2025 cut off date, would give those aged 50 or over at present certainty, but by 2050 only a small number of people would still be on the scheme.

I am specifically interested in feedback on two things:

1. The principle of preserving and locking the current scheme for the currently retired and near retired.
2. The desired date to cut off the current scheme, and have a new scheme come into force.

People may be interested in what the numbers would be like if one had a 2020 or a 2030 cut off. For 2020 they would be:

• 2010 – 586,000 over 65s
• 2015 – 698,000 over 65s
• 2020 – 811,000 over 65s
• 2025 – 667,000 over 70s
• 2030 – 517,000 over 75s
• 2035 – 366,000 over 80s
• 2040 – 224,000 over 85s
• 2045 – 107,000 over 90s

For 2030 they would be:

• 2010 – 586,000 over 65s
• 2015 – 698,000 over 65s
• 2020 – 811,000 over 65s
• 2025 – 944,000 over 65s
• 2030 – 1,071,000 over 65s
• 2035 – 884,000 over 70s
• 2040 – 686,000 over 75s
• 2045 – 489,000 over 80s
• 2050- 301,000 over 85s

The problem of waiting until 2030, is you will still have 300,000 people on the “old scheme” in 2050, plus the cost of one million on the “new scheme”.

Incidentally it is likely one might have some sort of transition between the two schemes, but until one has designed the new scheme, you can’t detail a transition.