Adapting to the risk of a superannuation fiscal crunch

When is a backdown not a backdown? When you do it going backward. That way you are facing forward.

John Key is by nature forward-facing. If the focus groups, or poll numbers or, in the case of minerals under schedule 4 land, a march and a torrent of submissions are facing the wrong way, he can go backward with the flow.

It’s called managing risk (the political bit). Managing risk (country, economic, social and environmental, in addition to political) is core government business. Or should be.

National superannuation is both a political risk and a large fiscal risk.

Polls and focus groups align with Key’s promise never while Prime Minister to lift the retirement age. So at 65 he defines you as in need of his care. You are old.

A third of 65-year-olds show they don’t agree by working for income. And, as health and longevity continue to improve, more are likely to.

But not enough, Treasury projections suggest, to offset the long-term fiscal risk of not starting to take action now.

Treasury Deputy Secretary Gabs Makhlouf produced updated numbers at a Retirement Commission conference last Thursday. Superannuation is now 13 per cent of government spending. On present trends it will be 22 per cent by 2050. Health cost come on top of that.

This would significantly push up government debt. The Treasury’s 40-year fiscal statement last October projected net debt to reach 223 per cent of GDP. The future having brightened since October, the projection is now for a little over 100 per cent — but rising.

The message: start lifting the retirement age as Australia, Germany, Britain and Scandinavian countries are doing.

That is fair, speaker after speaker at Thursday’s conference said or implied: according to Mahklouf, in 1977 a 65-year-old would live on average to 80, today’s to 85 and 2060’s to 89. Today’s 65-year-old can expect on average five more years superannuation than a 1977 65-year-old.

Guess who pays: younger folk in fulltime work, some faced with prohibitively high house prices as a result of baby-boomers’ borrow-and-spend binge. A young economist, Nigel Pinkerton, told the conference his contemporaries often grizzled that their baby-boomer parents had scoffed the goodies.

That suggests an intergenerational transfer to baby-boomers from younger generations. But there has also been some intergenerational transfer the other way. Much more analysis is needed if government policy is to ensure intergenerational equity.

So what is to be done?

Auckland University economist Susan St John, of the Child Poverty Action Group, noted, with several others, that on official statistics poverty in this country is low among over-65s but high among children.

St John canvassed four options: raising the qualifying age (economist Geoff Rashbrooke offered some numbers on that); indexing payments to inflation rather than wages (and so slowing the rise); lowering the 66 per cent rate set to satisfy Winston Peters; or targeting payments by taxing superannuation at a higher rate.

Don Brash was not at the conference. But in a speech elsewhere last week he said the qualifying age must be raised and suggested the rate could depend how early a person signs up, though this is hardly fair to those who do not have the option of working for income.

There is a parallel of sorts with climate change. The argument for acting to lower emissions — mitigation — is that there is a risk and it is prudent to insure against it. But arguments over the science and arguments between and within nations over how much to do have limited mitigation, so that if the risk eventuates and is large we will just have to adapt.

Since “66-at-65” is a “third rail” issue (touch it and you’re dead), politicians of the next five or 10 years are unlikely to mitigate much beyond the now frozen Cullen fund and KiwiSaver. But at some point, if the Treasury is right, fiscal red ink will force adjustment. As with climate change, the later the mitigation the harsher the adaptation.

There are options. Judith Davey of the Institute of Policy Studies noted that those who have houses can eat them by trading down, renting or reverse-mortgaging to provide income while drawing down capital — for some living and health expenses. Some local bodies defer rates until assets are realised at death.

But can that be left safely to the market? Not if finance companies’ leaving older folk in the lurch is a guide. There is likely to be a growing demand for governments to monitor, regulate and/or act as lender of last resort.

The other option is for more people work longer; the “workforce age” becomes 18-69 or 18-74 instead of 15-64; that holds down the “dependency ratio” which looms over future productivity and prosperity, generating shock-horror articles and fiscal frighteners.

On this reading there is no urgent need for a backdown from Key — even a backward one. He will work to 80 to set an example. And everything will be for the best in the best of all possible worlds.