Raise the pension age regardless of future Super affordability

Jenesa Jeram
The Dominion Post
22 November, 2018

In 1898, the first publicly funded pension was introduced in New Zealand.

Back then, those aged over 65 comprised only 1.3 per cent of the population, with the average life expectancy for males being 54.

New Zealand's demographics have changed quite a bit since then. Those aged over 65 now comprise about 15 per cent of the population. NZ Super covers a greater proportion of the population, and eligibility has widened too.  

Oh, and your pension is no longer endangered if your neighbour dobs you in for failing the "good character" test.

But one thing has endured: the pension age today is the same as it was in 1898.

Lest there be any confusion, there is no scientific or evidential basis for keeping the pension age at 65. Times have changed, and the pension age should rise.

In a recent opinion piece, Rob Stock recommended linking the pension age to health expectancy. The idea has merit. In fact, The New Zealand Initiative has reached the same conclusion in an upcoming report on the future of NZ Super.

Health expectancy refers to the years lived in good health. Linking the pension age to health expectancy gives a more accurate impression of the years people are capable of work, and should see the NZ Super age of eligibility rise from 65.

Both main political parties have avoided raising the age of pension eligibility on the grounds that the future costs of NZ Super are likely to be affordable – and they may be right. Anything can technically be affordable if the economy continues to grow and/or other sacrifices are made.

But raising the age of eligibility should not just be an issue of future affordability. The pension age should be raised regardless, based on a case for efficiency and equity.

Linking the pension age to health expectancy maintains a relevant link between retirement and receipt of the pension. Universal NZ Super is better-targeted if a majority of those eligible are retired.

NZ Super policy should be flexible and responsive to changes in workforce trends and longevity.

Remember, the previous National government announced a policy (overturned by this Government) to raise the pension age by six months annually up to 67, starting in 2037.

Breaking the political deadlock to raise the pension age is commendable, but a one-off rise is still too little, too late. And raising the age to 67 is just as arbitrary as keeping it at 65.

Pension policy changes do need to be signalled well in advance, to give people time to prepare and make other arrangements. However, a 20-year lead-in time to raise the pension age annually by six months is probably too much time.

The question should not be whether we can afford to keep the pension at 65, but whether it is the best use of taxpayers' money. In general, the elderly are a relatively well-off group. The material hardship rate for superannuitants is 3 per cent, compared with 11 per cent for the whole population and 18 per cent for households with children.

If a majority of people are still working when they start receiving NZ Super, they are probably not the population most in need. Paying NZ Super to relatively well-off groups comes at the opportunity cost of supporting those in real material hardship.

That is not to say no-one will struggle if the pension age is raised. Some people, such as those in labour-intensive industries, are simply incapable of working the extra years. But the current pension age does not adjust for this challenge either – there will be people in their early 60s already struggling to work until 65. That is why other welfare support and entitlements are necessary.

Another concern might be that people age at different rates, and life expectancy differs by gender, ethnicity and a range of other factors. A truly efficient system would be responsive to such heterogeneity.

But such a system ruins the administrative simplicity of a universal system, and is likely to face greater political resistance. One can imagine most politicians wincing at Stock's recommendation to legislate different pension ages for men and women.

Perhaps, if there is no better use of taxpayers' money, keeping the pension age at 65 would be more palatable. But at a time when there is child poverty and families working hard just to make ends meet, transferring taxpayers' money from the working poor to relatively wealthy seems rather imprudent – and distasteful.

Jenesa Jeram upcoming report on the future of NZ Superannuation will be released in early December.

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