The ageing elephant in the room

" If there's one thing that scares the bejeezus out of me, it's the looming cost of superannuation."
Andrew Little, NZ Opposition Leader

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The size of the elephant in the room and its ability to squash debate has been there for all to see in Canberra and Wellington in recent months.

The International Monetary Fund reminded Australians in its biannual report in June that the country's economic growth was likely to be much slower over the next five years than the last 20 years. It recommended reducing the tax breaks for superannuation contributions as part of a raft of tax reforms.

Treasurer Joe Hockey's call for a debate over the retirement age and those tax breaks has been controversial.

The Labor opposition initially signalled it may support reducing those tax breaks but it still fought hard in mid-June against a move to reduce access to Australia's means-tested pension for those with over $A800,000 in assets outside the family home. The Government had to call on the support of the Greens to get the measure through Parliament.

The debate is even more contentious in New Zealand. Labour Opposition Leader Andrew Little stumbled into a political firestorm shortly after the Government's Budget in late May by suggesting it was not fair those working after the retirement age of 65 were also collecting New Zealand's universal pension.

"If there's one thing that scares the bejeezus out of me, it's the looming cost of superannuation. That's a significant chunk of the Budget," Little told a business audience in Wellington.

He didn't directly call for the pension to be means tested, as it is in Australia, but his initial vagueness on the topic was leapt on by his opponents.

Finance Minister Bill English said the next day New Zealanders didn't want means testing, even if Labour did, and that Labour's proposal at last year's election for a phased-in delay in the retirement age to 67 was also unpopular.

"There doesn't appear to be an alternative viable political path to changing national superannuation," English said.

Little was forced within two days to recant and recommit to the status quo, which is a retirement age of 65 and a universal pension indexed to average wages, although he remained critical of the Government's 2009 decision to stop contributing to the New Zealand Superannuation Fund, which is New Zealand's version of Australia's Future Fund.

"If I was unclear about what Labour stands for and what I stand for, let me be very clear now," he said. “We stand for a universal scheme. We don't support means testing. I don't support means testing. We want super to be there - but we need the government to resume contributions to the New Zealand Super Fund as quickly as possible."

His parting shot before retreating into his shell was aimed straight at English and Prime Minister John Key, who has effectively cordoned off the boundaries of the debate by saying he would resign before agreeing to change the retirement age or the current indexation of the pension for a couple at 66 per cent of the average wage after tax.

"That is confirmation of their political recklessness," Little said. "They know they've got this big fiscal issue staring them in the face. The political plan is to ignore this and make it everybody else's problem. It is totally reckless."

FROZEN IN TIME

Key's three consecutive election wins with increasing majorities and his consistently high personal popularity have frozen the debate in time since he pledged before the 2008 election not to change the rules while he was in power. He has since set his sights on a fourth election victory in 2017, which would leave the settings in place until 2020.

That's despite regular calls from Treasury, the OECD and New Zealand's Retirement Commissioner to revisit the arrangements well before the cost overwhelms the Budget and starts driving up net debt.

Treasury warned in its 2013 Long Term Fiscal forecast, which it has to deliver every four years, the cost of an ageing population would double public healthcare and pension costs to 19 per cent of gross domestic product by 2060.

It predicted net public debt would explode from under 25 per cent of GDP to 198 per cent of GDP by 2060. It gently suggested extending the retirement age and shifting to a less expensive form of indexation such as the Consumer Price Index.

Nominal average wage inflation has risen much faster than the CPI, which along with the ageing population have helped drive New Zealand's universal pension costs up much faster than any other line of Government spending.

Treasury forecast in its Budget on May 21 that New Zealand Superannuation spending would rise by $NZ667 million to $NZ12.3 billion or 4.9 per cent of GDP in the 2015-16 year.

That dwarfed the much-trumpeted $NZ200 million in extra spending on other welfare benefits. Treasury forecast pension spending to rise to $NZ118.5 billion or 8.1 per cent of GDP by 2069-70 without any policy change.

Yet Key and English remain committed to the current settings, arguing Treasury's current forecasts show net debt falling towards 10 per cent of GDP by 2025, albeit with restrictions on spending growth in other areas such as education and health.

"I don't think we are being irresponsible," Key said after Little's attack. "If you have a look at our fiscal track we've built in the increases for New Zealand Super and the costs associated with an ageing population. On our numbers actually the debt numbers for New Zealand are reducing, so it's well and truly affordable."

But it is only affordable while the Government bears down on spending growth in other areas. Health spending pressures erupted in June when the Government was forced to appoint commissioners to the Southern District Health Board because of a budget shortfall and launch a spending review of the Canterbury District Health Board. Complaints about poorly maintained classrooms and state housing are also growing.

The intense pressure on other parts of the Budget has even rebounded onto the rest of the superannuation landscape through the Government's decision in the May 21 Budget to cancel its $NZ1000 'kick-start' for the voluntary KiwiSaver pension scheme to save $NZ196 million.

That allowed the Government to forecast a $NZ197 million Budget surplus for 2015-16.

The withdrawal of the 'kick-start' has already had an impact. ANZ, which is New Zealand's largest manager of KiwiSaver funds, reported new enrolments more than halved after the May 21 withdrawal.

Even as the financial pressure builds for a change, the political pressure remains against change and the stalemate continues.

In last year's election 87 per cent of New Zealanders over the age of 60 voted, while just 49 per cent of those aged 18 to 29 voted. For now, politicians can afford to ignore the future while the taxpayers of the future ignore their politicians of today.