November 17, 2014 10:00am by David Farrar

Easton on superannuation age of eligibility

I support raising the age of eligibility for NZS but not, primarily, for reasons of fiscal sustainability. Rather it needs to be increased for equity reasons. Longevity is increasing. When the Old Aged Pension was introduced in 1898, life expectancy at the age of 65 was 13 years; today it is 20 years, and it will continue to rise. It is a matter of equity that as the age of longevity rises, the age of eligibility for NZS should rise too. Here is how I would do it with five integrated steps.

1. We should set out a target age of eligibility based on life expectation. I suggest we choose the age as that where life expectancy is 17 years (similar to the 1938 level for 65). In current terms that would set an age of eligibility of 69.That target age would rise with increased longevity.

I like the idea of having a method to change the age over time, as life expectancy increases, without needing to change the law every few years.

However life expectancy seems to be growing at the rate of three years per decade. Or in other words life expectancy has increased by six years in the last 20 years. That would mean that the age of eligibility would constantly be increasing at three to four months per year.

2. However, the actual age of eligibility would be raised by only 3 months every year until it reached the target age. So it would take 12 years to reach 69, and the full adjustment would only affect those born after 1958 if we started next March (2015).

A sensible way to do it, but by the time we got to 2027, then life expectancy would have increased another four years and the age would need to keep increasing until age 73. Is there a limit at which we stop?

3. We need to recognise that there are people who cannot be expected to work in the years before the current age of eligibility, and who will have insufficient savings. They should get an early retirement benefit. Except for its name – reflecting a different status – it would be very similar to the Invalids Benefit.

That’s an excellent idea.

4. We need to strengthen private provision for retirement by making KiwiSaver compulsory and increasing its contributions. A compulsory contribution is much like a tax; but the beneficiary is solely the individual taxpayer. (This sort of approach may be a way we can get around – to some extent – the deadlock over raising income tax rates for structural macroeconomic purposes.)

I’m not convinced compulsion is a good idea, as it may force some people into a particular form of savinsg, which is not ideal for them. Paying the mortgage off or investing in a business can be the best decision for some people.

5. Any fiscal savings we gain from the raising the age of eligibility should be channelled into better provision for residential and domiciliary care for the very old. If we dont, we may under-provide for them or cost-shift provision onto their children – privatise it.

If KiwiSaver was made compulsory, I think the level of NZ superannuation (specifically the link to the average wage) needs to be looked at. When KiwiSaver was first introduced the calculations were that someone on the average wage would end up with a higher level of income in retirement from KiwiSaver and NZ Superannuation, then while working. That implies to me a level of over-taxation as people should have higher incomes while working (with associated costs of working) than while retired.

We should have a first principles approach to defining what level of retirement income is desirable, and then if KiwiSaver is compulsory, have NZ Superannuation set at the level between the desired level of retirement income, and what people will get from KiwiSaver.

I’d do that be ringfencing the current NZ Super scheme for those currently retired or near retirement, and designing a new scheme for future retirees.