Super model needs a face-lift

Jenesa Jeram
Insights Newsletter
7 December, 2018

Like many young people, I have long been told that New Zealand Superannuation (NZS) is unaffordable, and to prepare for a future without it. Yet both major political parties have avoided touching the issue.

On Tuesday, The New Zealand Initiative released its latest report, Embracing a Super model: The superannuation sky is not falling, which explains why this is so.

Embracing a Super model finds many things to celebrate about the superannuation model. New Zealand is one of a handful of countries to offer a universal non-means-tested pension, payable from 65 until death.

Our generous pension is also more affordable than public pension schemes in many OECD countries. The projected future cost of NZS is still lower than what many countries pay today. NZS is universal and so simple to administer; it does not distort incentives (as much as means-tested systems) to save or continue working. New Zealand also has low elderly material hardship rates.

NZS is working well. But there is reason to be concerned.

The costs of NZS as a proportion of GDP will rise. As the population ages, there will be fewer working-age people and more people drawing on NZS. Productivity growth will be an important means of reducing those costs relative to incomes, though it is unlikely that productivity alone will be enough.

NZS may be affordable in the future, but it will come at a cost. Tax revenue will need to rise, and/or spending on other public services will need to reduce.

Embracing a Super model recommends small tweaks to preserve the most celebrated aspects of the model, while reducing future costs. Recommendations include raising the pension age, re-indexing NZS, and maintaining a strong focus on productivity. Policy changes need to be signalled well in advance to give people time to financially prepare.

Voting for small tweaks means we can keep the model, while ensuring people are able to thrive throughout their lives, rather than just in retirement.

So why are political parties not acting?

The problem is, younger generations are not being told the whole story.

A refusal to touch NZS could mean a tougher working life because of higher taxes paid, or less money to support those most in need. Or both.

We can be proud of the way the welfare system supports our elderly. But we need to be equally proud of the way children, the working poor, and the vulnerable are provided for.

The full report and a two-page summary are available here.

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