Thursday, 29 July 2010

The "Why?" of Superannuation More Important That The "What?"

Offering Solutions? Dr Don Brash has never shied away from posing - or attempting to answer - the difficult questions.

NO ONE can fairly accuse Dr Don Brash of shying away from the difficult and the divisive. In stark contrast to his successor, Dr Brash’s preference has always been to confront contentious issues head-on: to offer solutions – not evasions.

It’s the quality I most admire in him.

Last week Dr Brash did it again. In a speech to the Asset Allocation Summit, meeting in Auckland’s swanky Hilton Hotel, he offered up a solution to the fiscal problems posed by the imminent retirement of the Baby Boomers (the first of whom turn 65 next year).

What Dr Brash is proposing is disarmingly simple. The longer you put off retirement – the bigger your pension. Or, in the good doctor’s own, rather dry, econo-speak:

"In my own view, raising the age of eligibility could be made more politically acceptable if we were to allow a degree of flexibility regarding when the pension is actually taken. If the age of eligibility were 67, for example, under a policy allowing flexibility regarding the age at which it could be drawn somebody might choose to take the pension at, say, 65. At that younger age, the amount received would be actuarially adjusted downwards, and would remain at that lower level (with regular upward adjustments with wages of course) until death. Conversely, if somebody chose to defer drawing the pension until, say 69 or 70, the amount received would be actuarially adjusted upwards."

This is by no means a silly idea – especially if one accepts the demographic and fiscal assumptions it seeks to address.

To hear both the National and Labour Party leaders dismiss Dr Brash’s proposal out-of-hand was, therefore, extremely disappointing. Only a fool would suggest that the vast expansion of our over-65 population will require no adjustments whatsoever to the current delivery mechanisms. But, given the knee-jerk reaction of the two main parties, it’s difficult to conclude that they are led by anything else. Change of some sort to the way we manage and/or pay for New Zealand Superannuation is – as Dr Brash rightly asserts – "inevitable", and political leaders who refuse to face the inevitable are fools indeed.

Dr Brash is similarly right on the money when he urges us to deal with this problem sooner rather than later. Young New Zealanders – the so-called Generations "X" and "Y" – should not be expected to wait until the brute facts of fiscal reality force some future government to implement an equally brutal series of last-minute solutions.

As a trained economist, Dr Brash is, of course, basing his ideas on a number of important assumptions. It’s one of the least understood aspects of economics – this assumption thing – and if more people realised on what a truly heroic scale the profession assumes all manner of things about the world, I suspect it would be taken a lot less seriously.

For example, Dr Brash is assuming that the Treasury’s "projections" about the shape of New Zealand society in 2050 are correct. But, of course, a "projection" assumes that everything that is happening now will go on happening in exactly the same way for (in this case) the next 40 years.

Just think about that for a moment. Cast your mind back (if you’re a Baby-Boomer) to the New Zealand of 40 years ago. Who, in the year 1970, would have accurately predicted where New Zealand would end up? Who could have foreseen "Rogernomics"? The fall of the Berlin Wall? China transforming itself into a capitalist powerhouse? A black American president?

How close would the picture of New Zealand 40 years in the future, projected by Treasury in 1970, have come to the reality of 2010?

Attempting to predict the future is like trying to freeze your own shadow. With every decision we take in the here-and-now, the shape of the future changes. That is why it’s always safer for a government to base its policies on solid and enduring principles. Heroic assumptions are best left to economists.

NZ Superannuation works because it embodies its beneficiaries’ clear expectations about what the state should provide and what the citizen should contribute. It’s universal availability acknowledges the right of every person to be supported in their old age. It is financed out of general tax revenues because every citizen has a duty to be his brother’s – and his sister’s – keeper.

Be guided by those principles, and Treasury’s doom-laden projections can be dismissed for what they nearly always are – "ideological burps".

A society dedicated to the support of its most vulnerable members – be they the very old or the very young – will do what it takes to meet its commitments. That may mean higher taxes. It may mean increased immigration. It may even mean adopting Dr Brash’s suggestion.

Ultimately, what we decide to do matters much less than why we decide to do it.

This essay was originally published in The Press of Tuesday, 27 July 2010.

13 comments:

Madison said...

Very very good post, and especially the last line. This crisis is already coming to a vast head in the US and they've done nothing to ease the damage. NZ can not afford to run into the problems they are having there, to do so would be to end up owned by foreigners as we try to inject money to help.

Victor said...

Absolutely spot on, Chris.

And full marks (for once) to the otherwise egregious Dr Brash for coming up with a sensible idea.

BTW I claim credit for also suggesting the introduction of incentives for delayed take-up of superannuation. But I only told my wife and not a gathering of corporate high-flyers.

To make the idea even more attractive, there should ideally be provision for superannuitants to take a holiday from receipt of their Super, if they so wished, and still be rewarded by subsequently higher entitlements.

Let's assume, for example, someone ceases to have sufficiently remunerative employment at the age of 65, goes on Super but six months later gets a well paid temporary position for, say, two years.

I think such a person should have the right to opt out of Super for those two years and be rewarded commensurately. Just as long as the opt-out is voluntary!

I believe this would reflect the realities of the employment market for older people. On the whole, their employment prospects are dismal but, every now and again, somebody recognises their specific experience and offers them a plum .

Let's be totally realistic and cold blooded, though, about the "Brash scheme". Despite people living longer, there might well be some who would opt for deferred Super and not live to receive it.

This would represent a clear saving to the State. Should this consideration rule the scheme out on ethical grounds? I don't think so but would be interested in learning the opinions of others.

Anonymous said...

A firm no to immigration as a solution. If you bring in more people, what do you do when they are old? Do you then bring in more people to look after the people you brought in to look after the baby boomers? When do you stop?

I think an obvious solution is to make families once again responsible for the care of their elderly. I'm not sure how much more we can and should ask of the state in terms of elder care.

I don't think higher taxes will be acceptable to the younger generation if those higher taxes give the elderly a higher standard of living than the people who are paying for them. And that is a likely scenario.

Anonymous said...

Long time reader, first time poster...

Chris, you must be a Catholic, right?

Chris Trotter said...

Nope, Anonymous, I'm a good Presbyterian.

fruitshop said...

Baby boomers are the luckiest generation. We are wealthier and will live longer than both our parents’ and children’s generation – if we can’t largely provide for our own retirement, what chance has any generation?

We are screwing our children’s generation and it’s third rail politics. eg Seniors are willing to vote Winston Peters back in on the strength of losing their free rides to Waiheke Island.

Trotter and Brash make an unlikely alliance. Force the conversation. In a room full of elephants, this is the biggest elephant.

Cnr Joe said...

And what portions of our population don't make it to even 60?
Fine voice you were in last night at the uni bash Chris.
Stirring stuff.

Victor said...

fruitshop

You're probably aware of Nietzsche's statement that "all that does not kill me, strengthens me".

It's probably true until you're about 60. After that, I'm not so sure.

Baby Boomers often had a golden start in life but, like every generation, they have known the vicissitudes of fortune, particularly since the Post War age of assured affluence came to an end more than 30 years ago.

Some have flourished and some have suffered huge and often undeserved loss. The one thing they have in common is that, once past about sixty, they're too old to do anything about it.

From what I observe of my own friends and contemporaries in the older boomer category, the notion that they're going to end up with more than their children seems quite fanciful.

Anonymous said...

I don't understand why people think allowing people to defer receiving National Super and then giving them a financially equivalent increased payment from a later age makes any sense at all. It does enable careful manipulation of tax liabilities to the benefit of the individual, but it doesn't make any savings for the government (the possibility of death before the higher pension starts is allowed for in the higher pension from the later age).

This was a typical distraction from the right - an attempt to manipulate the system for the advantage of the wealthy, rather than address the real issue of funding income in retirement.

The papers to the recent conference indicate that we can afford our system, particularly in comparison with many other countries, and there are some real advantages to it; but a weakness is the willingness of National to sabotage long terms benefits (while supporting current benefits) whenever they are in government.

And the children of baby-boomers are likely to live longer than baby-boomers.

Joshua said...

I have to agree with the previous poster- this is no solution, merely another quiet twist of the system towards favoring the wealthy. In fact I am astonished that Mr Trotter appears to have failed to see how this will favor the rich professional over the working person.

Think about it- a senior executive or other well-heeled professional will find it much less of a burden to continue working in their mid to late sixties. Indeed, it might be the most profitable stage of their career- a few more years on top of the pyramid. On the other hand its a fact that people who have to contend with grinding menial/manual labor throughout their working lives are going to find it much harder to continue working at this age and much less rewarding if they do. Furthermore, demographically speaking these are the people most likely to check out in their late sixties and early seventies while their white collar counter parts continue to draw in a upgraded super well into their 80's.

Victor said...

Joshua

You seem to assume that there's no middle ground between the manual worker understandably longing for an end to his or her daily torment and the rich professional looking for another means of creaming off.

But a very high percentage of older New Zealanders are now self-employed or small-scale employers. By and large they are not rich. Some are former manual workers who still get their hands dirty. Others are former middle managers or other white collar types eased out of their original, more lucrative, careers by recurrent waves of downsizing.

Typically, they don't have much in the way in savings and (unlike higher-paid professionals for whom it would be mere icing on the cake) would gain a proportionately worthwhile boost from higher Super when, eventually,they have neither the desire nor ability to stay working.

The same goes for many older women who have returned to work. They're often lower down the salary scale than when they were younger but earning more than they could get on Super. So, it might make sense for them to continue working for as long as possible provided there's a reward at the end.

No, it won't help everyone. Nor is it a total answer to the Super conundrum. But it could help a reasonably large spectrum of older New Zealanders and, at the very least, is a useful contribution to the debate.

Ideally, I would prefer to receive increased Super at the age of 65. I've been a good citizen and tax payer for many a long year and feel I deserve it. But, politically, that doesn't seem to be an option.

If 'Anonymous' is right and we can still afford current Super levels, this still leaves most of our Superannuitants living in constrained circumstances. That's another reason why anything that might make a reasonably large number of them less poverty-stricken deserves a bit more discussion.

Meanwhile, in theory, providing that the total amount payed out in deferred/increased Super is less than the total amount that would have been paid out without deferred Super, there should be a saving to the state.

It's the subject of another debate how that surplus could be used. One way might be to increase, however slightly, the base Super level of those retiring at 65. Again, politically, I can't see that happening. But it remains a theoretical possibility.

Anonymous said...

There certainly are many people who for various reasons 'retire' before age 65, the age at which NZ Superannuation starts to be paid to those eligible. That is however I believe a different debate. Brash was raising the issue of those who continue to work after age 65. His proposal was that an individual should be able to defer the start of payments until a later date - and, in fairness, such a person should be able to expect to receive higher payments - he has missed some payments, and, other things being equal, can be expected to receive fewer payments before he dies.

One immediate impact is that such a person does not have taxable income increased by the amount of NZ Super - and when they do choose to start receiving NZ Super they may well have no other taxable income. So things are not 'otherwise equal' regarding tax - the calculation of the 'higher amount to pay should allow for the net amount that would have been paid, not the amount before tax.

Then think about the person not living as long. In effect by asking for a deferred start, the individual has 'self-selected' as being more than average healthy and likely to live longer than average. Perhaps it should be assumed that in future they can expect slightly more payments than average, to allow for the fact that they have decided it is worth deferring the income.

Brash was proposing that a calculation would be made to allow for the missed payments and presumed fewer future payments so that the expected cost to the taxpayer was unchanged.

Allowing for tax effects and the one-sided choice relating to expected period of future payments wasn't mentioned, but that is typical of someone proposing a deal - they will try and get the best deal they can by not mentioning things that the are not in their favour. For of course Brash was talking for those who would benefit (at a cost to the taxpayer) from deferring payments). If a truly fair calculation was made, there would be no financial advantage from deferring the start of NZ Super payments, but a greater surety of future index linked income.

So how does that help the country? Yes it might encourage a few more people to work a bit, but that is by no means clear. It would not affect the total cost of NZ Super however, it would not help most people have a better standard of living wither now or when they retire. All it would do is possibly make a few people like Brash better off.

So there is no surplus to be distributed. Most people will be happy to pick up NZ Super as they are preparing for retirement, even if they do continue to work. As usual, Brash has self interest at heart, but there is a darker motive behind the deception. He is implicitly trying to reinforce a view that NZ Super in its current form cannot be afforded - like his political party he clearly believes that the wealthy need further 'incentives' in the form of further tax cuts.

NZ pays less than many countries for retirement provision (as a percentage of GDP or other measures). We can afford to maintain NZ Super in its current form for future generations. It may not always be easy, but it is a worthwhile goal.

If Brash believes we need to raise additional income to pay for NZ Super, perhaps we should reintroduce estate duties . . .

Victor said...

Anonymous

Thanks for the well thought-out response.

You write:

"the calculation of the 'higher amount to pay should allow for the net amount that would have been paid, not the amount before tax."

Agreed

You also write:

"In effect by asking for a deferred start, the individual has 'self-selected' as being more than average healthy and likely to live longer than average."

I see this as an unwarranted assumption, based on the notion that everyone seeks a lengthy number of years as a Superannuitant.

Personally , I dread the thought of ever having to rely entirely on New Zealand's current niggardly levels of Super.

I would like to earn income for as long as possible and then be spared for a few more years during which I could supplement a rather higher level of Super with such small savings as I have. That might give me, say, around five "golden years" before I carp it.

Unfortunately, however , I come from a long-lived family and, therefore, poverty, pain and disempowerment are probably my inevitable lot.

You write:

"If a truly fair calculation was made, there would be no financial advantage from deferring the start of NZ Super payments, but a greater surety of future index linked income."

Yes, but the scheme would not have to work in a truly fair way. If it did, it would be unique.

And you write:

"He is implicitly trying to reinforce a view that NZ Super in its current form cannot be afforded - like his political party he clearly believes that the wealthy need further 'incentives' in the form of further tax cuts."

Agreed. But the idea of voluntarily deferred Super may have merit independent of its author's intent. As I wrote earlier in this thread, I'd already been cogitating inexpertly along these lines from what, in my case, is very much a Social Democratic perspective.

And you write:

"NZ pays less than many countries for retirement provision (as a percentage of GDP or other measures). We can afford to maintain NZ Super in its current form for future generations. It may not always be easy, but it is a worthwhile goal."

Yes, but we also need to look at ways of raising Super levels. And we need to explore ways of helping older people stay in the workforce if that is what they so wish.

Above all, we need to do our best to ensure that old age is not a time of misery and disempowerment for the elderly, now that medical science has decreed that most of us are going to live longer but has not made corresponding advances in ensuring quality of life.

And finally

"If Brash believes we need to raise additional income to pay for NZ Super, perhaps we should reintroduce estate duties . . ."

Well, obviously....plus rescinding the recent upper income group tax breaks.