Pondering the future
The debate on the fairest way to pay for our silver tsunami
‘‘We need to be aware that any spending is at the expense of something else.’’
‘‘Today’s taxpayers are paying twice.’’
New Zealand’s population is ageing, and living longer. Over recent years, everyone from politicians to statisticians and bankers has weighed in on the extent to which New Zealand’s superannuation obligation is expected to grow.
Government forecasts are that the cost of the pension in its current form – that’s $450 a week before tax for single people living alone from age 65 – will rise from 3.8 per cent of GDP in 2011 to 6.6 per cent of GDP by 2060.
Commentators such as economist Cameron Bagrie say it’s unaffordable, and something needs to be done.
One of the methods set up to help tackle the increasing cost was the New Zealand Superannuation Fund. Contributions to the fund started again at the end of last year. But some believe that not only was the Government remiss in doing that, but that it should scrap the fund altogether.
What is the NZ Super Fund?
The fund started investing in 2003, with the aim of pre-funding some of the cost of national superannuation.
At the moment, it’s not being used to pay for anything – all pensions are paid out of current taxes. The Government will start to tap into the fund from about 2035. It will start taking significant amounts of money in the 2060s.
Treasury expects withdrawals from the fund will cover 10 per cent of the cost of Super by 2073, peaking at 11.8 per cent by 2080.
The fund also pays tax and by the 2070s, it’s expected that withdrawals and tax payments will equal 20 per cent of the total net cost of pensions.
At the moment, the fund holds just under $40 billion.
An issue of fairness
There are two ways to fund pensions: Save as you go (SAYG), or pay as you go (PAYG).
Under the pay-as-you-go model, tax paid now is transferred to pensioners and nothing is saved.
Under a save-as-you-go scheme, tax paid now is invested and used to pay for pensions when the people who paid in get older.
Andrew Coleman, principal analyst at the Treasury and a lecturer at the Department of Economics at the University of Otago, said the returns to the people who paid tax were quite different.
With a PAYG scheme, the return is the growth rate of the economy.
If the number of people working is growing, or productivity lifts and people earn more, retirees get more back than they put in.
If you pay 1 per cent of your income in tax towards pensions when you are young, and then get 1 per cent of someone else’s income when you’re old, the difference comes down to how much the economy has changed over that period,
With a SAYG scheme, you invest money and get paid out later, earning the rate of return to capital.
‘‘The question is, for young people, which system they prefer,’’ Coleman said.
‘‘If the rate of return on capital is more than the growth rate of the economy, then you’d prefer to be SAYG. You get a lot more money for every dollar spent.’’
Historically, SAYG had been a better deal for current taxpayers than PAYG by a measure of two to one.
‘‘We’re currently paying $13b a year [for pensions]. If we had a system of SAYG for the last 40 years, the current taxpayers would be paying in $6.55b for exactly the same pensions. That’s really big numbers.’’
Coleman said a PAYG scheme was a one-off gift to the first generation of pensioners, who did not pay anything for others’ pensions.
‘‘The net cost to society is zero, but there’s a big gain for the first generation and a big cost on all subsequent generations.’’
With people living longer and a big cohort of Baby Boomers hitting retirement age, the burden on future taxpayers would increase, Coleman said.
‘‘I don’t think it’s fair on kids to be paying a lot more for us. We could undo some of the PAYG by paying more taxes now and putting money into the Super Fund, so future generations would not have to pay so much.’’
Some people argued that future generations would earn more, so they would not mind paying more taxes. ‘‘If we leave a gift and they don’t accept it, that’s okay. But if we leave a big debt, it seems pretty obnoxious.’’
Over its lifetime, the New Zealand Super Fund has returned more than 10 per cent a year. Over the past year, it returned 21.55 per cent. A spokeswoman said no one would be interviewed for this story.
Paying twice
However, others say the fund won’t
actually help at all.
Former University of Auckland Retirement Policy and Research Centre co-founder Michael Littlewood believes the public is being misled by claims that the fund will reduce the cost of future pensions.
‘‘It may very partially smooth the incidence of that cost, but it doesn’t change it.’’
He said that over the period that contributions were made to the fund – predicted to be from now until 2035 – taxes would have to be higher than they would otherwise need to be.
‘‘Instead of asking tomorrow’s taxpayers to foot the full bill, today’s taxpayers are paying twice – once for today’s Super and then extra to put in the Super Fund,’’ he said.
‘‘When the fund starts paying out, the Government will say ‘This is free money we don’t have to get from taxpayers’ but the cost of the pension stays the same. That free money could have been used on something else.’’
He said the fundamental issue was who should decide what level was appropriate for the pension.
‘‘My argument is that taxpayers of the day should be the ones who decide.
‘‘If in 20 years, it looks like it’s costing too much, it will be taxpayers in 20 years who cut it down ... just as we decide each year how much money the police get, or roads. It depends on the strength of the economy.’’
Investing in the presence of government debt was the same as borrowing, he said, and the fund was in a risky, 100 per cent leveraged position.
‘‘At any time, it could sell those assets and repay debt. The Government has effectively raised a mortgage on New Zealand’s total assets to invest in financial markets.
‘‘The return on the fund’s assets must at least equal the most expensive of the Government’s borrowings, plus the costs of running the fund, before there is any net gain to holding those assets rather than repaying the debt.’’
Littlewood said the country should consider why it wanted to pre-fund pensions as opposed to any other government spending, such as healthcare or infrastructure.
‘‘What particularly is it about the age pension that deserves this special treatment?’’
His former colleague, Susan St John, agreed there were problems with the fund.
There was psychological value in having it available, she said.
‘‘The logic of it is something else. My concern would be that we’re putting money into the fund at the moment that’s coming from taxpayers who are in the currently working age population – that is the generation that is suffering the pain of social deficits that have built up.’’
She said the opportunity cost of tying that money up was not being discussed. If it was left with working people, they might prefer to use it to pay their mortgages more quickly.
‘‘We need to be aware that any spending is at the expense of something else.
‘‘I do believe it’s a good thing for the Government to have a strong balance sheet.
‘‘I don’t see the logic in putting a ring around an asset that is not trying to fully fund
something.’’