Government and Fiscal Policy

New Zealand Superannuation – What would possible changes save the Crown?

Wednesday December 21, 2016 Mark Cox

As was seen from the reaction of former Prime Minister, John Key, to the warning from the Treasury that, without changes to the settings, the cost of NZ Superannuation would balloon out of control in the longer term, the issue of Superannuation is politically very sensitive.  Put simply, the country faces the prospect of much larger numbers of old people living longer, and the question of how they can continue to be supported financially demands to be addressed.

 

At around $12.9 billion a year, Superannuation payments currently represent 16.7% of total government expenditure.  Education, at $13.5 billion, and Health, at $16.2 billion, both command a larger share of the Budget, but it can easily be imagined that spending on Superannuation will soon surpass spending on Education.  At present there are around 48,000 people reaching superannuation age each year, but this number is projected to reach 60,000 within 10 years.  Moreover, based on the increases in life expectancy observed over the past two decades, people reaching the age of 65 in 10 years’ time will have a life expectancy of roughly 2.5 years more than those reaching the age of 65 now.  By 2050, it is not inconceivable that they will be expected to live a whole 10 years more than today’s 65 year olds.

 

Clearly, the challenge of affording Superannuation is going to become formidable and, while neither the government nor the opposition seem willing to grasp the nettle, New Zealand’s Retirement Commissioner, Diane Maxwell, has argued for two changes that would result in considerable savings.  One of her proposals is that the age of eligibility for Superannuation should rise from 65 to 67.  Another is that migrants into New Zealand should not become eligible for Superannuation until they have been in the country for 25 years, instead of the current 10 years.  The Commissioner does suggest that both measures should be phased in to allow individuals to plan accordingly.

 

Estimating precisely how much these two changes would save requires detailed financial and actuarial modelling, but the magnitude potential savings can be gauged relatively easily and expressed in relation to the current Superannuation budget.

If migrants’ eligibility for Superannuation is not changed retrospectively, savings from changing the qualifying period would start to accrue in 10 years’ time.  They would then cumulate as successive cohorts of migrants are affected.  Based on the numbers over the past 10 years, an annual average of around 4,000 migrants would be affected.  Also assuming that half are single and half are in a partnership, the saving would start at around $80 million a year and cumulate over a 15 year period to around $1.2 billion a year.  The eventual saving would be equivalent to a little less than 10% of the current Superannuation budget.

 

Based on current numbers in the population, delaying the age at which Superannuation becomes payable from 65 to 67 would save roughly $1.9 billion a year, if the change occurred immediately.  However, the saving would rise to roughly $2.4 billion in 10 years’ time because of the increasing numbers of baby boomers retiring.  $2.4 billion is equivalent to roughly 19% of the current superannuation budget.

 

Taken together, the two changes would eventually save the equivalent of almost 30% of the current Superannuation budget.  However, this almost certainly overstates the potential saving because of the prospect that people might receive Superannuation two years later, but live more than two years longer.

 

The two changes briefly examined here are, therefore, bold, but they might not be sufficient to keep Superannuation affordable.