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Is New Zealand Superannuation affordable?

The age of eligibility to receive New Zealand Superannuation is again being challenged.

The usual reason given for raising the age of eligibility is affordability of the scheme. For example the Commission for Financial Capability (formerly the Retirement Commission) in its 2016 Review of Retirement Income Policies justified it by asserting that in 2015/16 New Zealand Superannuation (NZS) cost 4.1 percent of GDP, and that “Treasury predict that it will rise to 7.1% (net) of GDP in 43 years”.

I have a look at these numbers and find that they are misleading. The picture looks very different if we take into account the tax paid by the New Zealand Superannuation Fund, the contributions both main parties say they will start making to the Super Fund, and the contributions the Super Fund will start making to the cost of New Zealand Super in 2032/33.

There are further arguments to be considered about the affordability to the public purse of current levels of payment and economic affordability.

The affordability to the public purse is frequently presented as an absolute. But affordability is a matter of priorities, what New Zealand society wants and what it is prepared to pay in the way of taxes. Many other countries are facing the same problem and many have considerably more retired people, costs and tax revenue in proportion to their size than we do.

Economic affordability centres around the ‘dependency ratio’ – the number of people who are working, thereby generating income to be taxed and shared with superannuitants, compared to the growing number of superannuitants. But this does not take into account either other ‘dependants’ such as children, nor Treasury’s most recent long-term projection which did not show a looming economic problem.

Finally, the question of New Zealand Superannuation cannot be seen on its own: we need to think about matters like New Zealand’s population and other forms of retirement income.

Download the full Bulletin: Economic Bulletin 187 – March 2017