The Government’s plan to recover from the Covid-19 crisis has essentially been about finding new ways to spend.
As a result, public debt is expected to increase from 19% of GDP in 2019 a whopping 54% by 2024 and remain elevated for decades after.
Borrowing from the future to pay for a recovery today will come with big risks if another crisis hits – and there are plenty of natural disaster possibilities in this wonderful country. A better way to go would include an instalment plan, a little belt tightening, reprioritisation and some financial common sense.
An obvious place to start is with New Zealand’s retirement income policy settings, the contributions to which are presently going on the countries credit card.
The Government spends about $1 billion each year on KiwiSaver subsidies, yet it turns out rigorous evaluations of the scheme’s performance found it to be a complete flop. KiwiSaver has no effect on wealth accumulation on average and does not improve the expected retirement income outcomes of its members. That makes it a luxury we can’t afford right now. KiwiSaver subsidies should stop.
New Zealand Superannuation (NZS) is an even bigger ticket item, at $14.6 billion in 2019 and costs for this scheme will rise as the population ages.
According to modelling for Treasury’s long-term fiscal statements, even modest changes to NZS would likely yield significant expenditure savings. Lifting the age of eligibility by just two years, for instance (or the equivalent rise in average life expectancy since NZS settings were last changed), would reduce spending by approximately 0.75% of GDP per year. Some modest changes to the indexation of NZS payments would also help.
So, ending subsidies to KiwiSaver, increasing the age of eligibility for NZS by two years and slightly slowing the growth of individual NZS payments would drop government debt to about 25% of GDP in 2034 rather than 42% as currently projected.
Of course, forcing people to rapidly plan for an additional two years of work before retirement would be a tough ask. But phasing in the increases to the age of eligibility over a longer period could help to get to a similar place with less friction.
The Government’s mattress is also storing $44 billion in the New Zealand Superannuation Fund (NZSF) put away for a rainy day 40 years from today. It plans to extend the overdraft further and borrow another $10.4 billion for contributions to the NZSF over the next five years.
Yet, the rain is here and thunder and lightning if flashing on the horizon. Contributions to the NZSF should be suspended and serious consideration given to winding up the fund early – that would just about pay for the recovery.
More details are available in the New Zealand Initiatives recent report “Borrowing to save: retirement income policy after Covid-19”.