Reform and the future

Dr Patrick Nolan
Insights Newsletter
7 December, 2012

New Zealand’s government must always remember the line attributed to Lord Earnest Rutherford: “We don’t have the money, so we’ll have to think.”

Government accounts are already under pressure. And in the longer term it is hard to see this pressure letting up. As discussed at a conference at Victoria University last week, decreasing fertility rates, increasing longevity, and growing numbers of retiring baby boomers mean that without reform, spending in key areas such as pensions and health is going to reach potentially crippling levels.

The problem is that the post-war welfare state was designed for a young and growing population. Like a pyramid scheme, entitlements for retired people would be funded by younger workers, who would in turn receive benefits funded by the next generation of workers. Sixty years on, the situation is quite different. As the population ages, and the birth rate slows, there is an increasing share of the population receiving benefits and a decreasing share of people paying for them.

The pyramid is being turned on its head.

Yet Prime Minister John Key has ducked this issue of long-run affordability. Spending on health has increased quickly with little effort to ‘bend the cost curve’ downwards. Politicians are scared to reduce the cost of New Zealand Superannuation or the KiwiSaver subsidies, which are adding to the pension bill. Raising the retirement age has been ruled out even though life expectancy has risen.

The temptation for the Prime Minister will be to continue putting off dealing with these challenges, but this will make future reform harder. Not only is the number of people over 65 increasing, but the elderly are by far the most likely to vote at elections. This gives the grey lobby immense power that is only going to increase. Based on current turnout rates, the report Entitlement Reform estimates that voters aged over 55 will grow from 34% of the voting population in 2010, to 40% in 2020, and 46% in 2050.

There is no doubt entitlement reform is a politically difficult path to follow. But it is important not to lose sight of the opportunities. If politicians grasp the nettle now, New Zealand would be in a much better place, with families preparing for their own futures, higher levels of saving and insurance, smarter drawdown of assets, and eventually, lower burdens on the taxpayer.

Dr Patrick Nolan is the chief economist at the independent think tank Reform. Their report Entitlement Reform is available at, #entitlementreform

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