Covid-19 crisis could ring death knell for NZ Super as we know it

Tuesday, 26 May 2020

National recommits to a policy to raise the age of Superannuation eligibility to 67.

The knives are out for NZ Super in its current form as the country faces up to the impact of Covid-19 on its long-term financial health.

'A bunch of our sacred cows might be getting reviewed, and one of those is universal super,' said ANZ economist Sharon Zollner.

New National Party leader Todd Muller has already indicated it will fight the next election pledging to push up the age of eligibility progressively from 65 to 67 starting in 2037 and finishing in 2040.

But while calls to make NZ Super less generous- including linking rises to inflation instead of wages- are growing in volume, Alec Waugh from the KiwiSaver, Annuities, New Zealand Superannuation Protection Society urged politicians not to make badly-thought through changes that undermine NZ Super's success in preventing people slipping into poverty in old age.

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'We have the best model probably in the world, and whatever the economic scenario, it's still going to be one of the cheapest,' Waugh said.

WHY THE PRESSURE IS COMING ON NZ SUPER

Government debt was forecast to rise to around $180b by 2024, taking the debt-to-GDP ratio to 50 per cent from 27.8 per cent of GDP in 2019.

Pre-Covid-19 forecasts indicated the cost of NZ Super as a proportion of GDP would rise from around 5 per cent of GDP to around 8 per cent by 2060, but that was before the world's economy took a huge shock to its system.

'The voices will arise for the reassessment of the 'big ticket' items, like NZ Super,' Waugh said.

The economic crisis in Europe after the Global Financial Crisis had made it easier for governments there to convince voters to let them lift the age at which people qualified for state pensions.

Economist Eric Crampton supports lifting the age of eligibility of NZ Super.

But Waugh urged the public not to listen to panic rhetoric, and countenance only careful, well thought through changes, such as increasing the qualifying period after which new migrants were able to get full NZ Super payments.

LIFTING THE AGE FROM 65

He also urged politicians considering lifting the age of eligibility to think about the rampant prejudice older job-seekers faced from ageist recruitment companies and employers, meaning many could find themselves unemployed in later life, and be forced to scrape by on benefits.

Already surveys showed the public did not believe was enough for people to live on, and half of people in retirement relied on NZ Super as their sole source of income, Waugh said.

NZ Super was also important for combatting wealth inequality for women in retirement as unlike many state pensions around the world, the amount paid to individuals was not linked to how much they earned while working, Waugh said.

Sir Bill English pledged in 2017 that the age of eligibility for NZ Super would rise to 67, and then lost power.

Eric Crampton, senior economist at the New Zealand Initiative think-tank, was in favour of increasing the age of eligibility over time to reflect increased longevity.

In 2018 the NZ Initiative released a report calling for the age of eligibility for NZ Super to be indexed to life expectancy.

THE POLITICS OF CHANGING NZ SUPER

Changing NZ Super has been seen a 'third rail' policy for politicians- touch it, and you get a nasty shock, but under leader Sir Bill English, National dared to make lifting the age of eligibility party policy, and then failed to hold onto power.

His predecessor Sir John Key had refused to touch NZ Super.

The policy was carefully penned to ensure no quick change, instead reassuring people in their 50s they would not be affected. It relied on the pessimism of younger voters that change was inevitable.

A survey by BNZ at the start of the year showed just 37 per cent of people aged 35-44 thought it would either be 'very likely' or 'quite likely' NZ Super would remain unchanged.

'I remain somewhat surprised they have reached that conclusion,' Waugh said.

'NZ Super is a great scheme that is able to go for many years with only small changes needed.'

Paid for from general taxation, NZ Super was affordable as long as voters deemed it to be, and were willing to fund it through transfers of wealth from them to retired people.

CRACKING OPEN THE NZ SUPER FUND

While the political divide remained open on the age of eligibility for NZ Super, which Labour showed no intention of changing, a second chasm in policy may be emerging.

Pensions expert Michael Littlewood says it's madness to be borrowing to fund contributions to the NZ Super Fund.

There were growing calls for the giant NZ Super Fund, which was set up to help pre-fund the future cost of NZ Super, to be cracked open.

The fund contained just under $43 billion, which could be spent now to keep Government borrowing down and to help fund the post Covid-19 economic recovery.

Crampton said the New Zealand Initiative was working to calculate how much of the fund could be drawn down on now to reflect the reduction in the future cost of NZ Super, should the age of eligibility be lifted.

'The earlier you would start to have changes, the more that could be released,' he said.

ENDING NZ SUPER FUND CONTRIBUTIONS

Waugh, Crampton and Littlewood all agreed the NZ Super Fund made no material difference to the affordability of NZ Super in 20, 30, or 40 years' time.

And all would be glad to see the Government stop borrowing money now to continue building it up.

Pension expert Michael Littlewood calculated that between 2020 to 2023 contributions totalled $8.03 billion.

That was money the Government should not be borrowing to invest in global sharemarkets, he said.

Crampton agreed.

'It makes absolutely no sense for the Government to be contributing to the Super Fund while it is borrowing so heavily,' he said.

National created a precedent for stopping payments to the NZ Super fund from Government borrowing when it stopped contributions to the NZ Super Fund in 2010 in the aftermath of the Global Financial Crisis.

'They should be drawing down on the NZ Super Fund, or like National did during the earthquakes, freezing contributions to it,' Crampton said.