Budgeting early for the very long term

You’re 30 and want to know how much government superannuation you will get when you hit 65 and whether you will get a new hip at 75? Tune in on Thursday for some clues on how to start working it out.
One calculation you probably will make is that you won’t get any government pension at 65 — that is, the qualifying age will rise well before 2048.

That is because there are projected to be far more 65-and-overs than now and the under-65s won’t be able to pay for them all or won’t want to.

The 65 qualifying age was set in 1991: that was reached in 10 annual steps. Life expectancy has been rising two years each decade. So if 65 was right in 1991, 69 would be right in 2013.

But this is only one way to think about the pension. Other ways include tax rises, a funded scheme, mandatory private lifetime contributions, indexing to inflation instead of wages (so the cost falls as a share of GDP), means-testing or toughening up residency requirements from today’s 10 years.

Some will be canvassed in the long-term fiscal statement — to 2060 — the Treasury will table on Thursday.

This is the third such statement. The previous two have featured scary future levels of government debt if existing policies stay unchanged. But apocalypses appeal to very few and even fewer act on them. They were one-day wonders.

This time the Treasury tested its assumptions at length with an external panel of people of various backgrounds.* It held a public conference in December. It related its thinking to its wider-than-GDP “living standards framework”. That testing changed some of its thinking but the final statement is the Treasury’s alone.

The most important shift the Treasury made was to switch the issue from projecting mountains of debt to asking what policy options would need to be considered if a target was adopted for net government debt — say, keeping it averaging 20 per cent of GDP (the 2014 budget’s aim) through economic cycles and economic and natural shocks.

Some say 20 per cent is too high. But there is no right number. The point of a number is to focus policymakers early (except for John Key, whose head is deep in the sand on superannuation) — to start making policy changes now and phase them in after building consensus. The adjustment can then be smoother and is more likely to be fairer between generations and more politically manageable.

The alternative is lurches and panics, as in Europe, the United States and Japan now. That often plunges politics into ideological conflict and/or populism. Policy made in such circumstances needs remediation later.

But finding the right policies is easy said and hard done. There are big unknowns and some unknown unknowns.

Take climate change, on which the Treasury struggles to get a grip. Take superannuation: the numbers seem straightforward but the options are complex.

Take health: current trends say technology and the rising proportion of older people will drive up demand so that either the government will have to raise taxes or ration what it pays for or people will have to pay for more themselves.

But baby-boomers were better fed as kids than today’s over-70s so will likely be in better shape as they age. They will on average die older, so near-death aggressive intervention may be less common than with today’s earlier-dying oldies. Technology might start cutting costs more than raising them: cyber-aids may be the key. The workforce might rearrange so less expensive medics do more of the work. Places like India, which can do top-class complex operations now at a fraction of the cost here, might radically reshape aspects of health care globally and so here.

Education can be projected as costing a smaller share of GDP as the proportion of young people falls but might actually start costing more as global capabilities competition gets fiercer, or less as technology globalises teaching and study resources.

And within any 40-year stretch over the past 100 years there has been a major disjunctive event: the global financial crisis was one. Such shocks, plus major new technologies, sharply alter governments’ operating environment.

So, is it just too hard? Should the Treasury bother us with its numbers and options? Why not just drift on?

The answer, which top global companies and governments like Singapore’s understand, is that thinking through potential scenarios and how to respond to them and doing that early and continuously develops resilience that better enables management of shocks.

Who needs to do that? Not the Treasury alone. The whole country, through constant serious debate aimed at consensus. The deep point of the long-term fiscal statement is to ask whether we want that debate and consensus.

For decades we have ducked it. Is this the turning point?

* Note: I was an external panellist but not to give advice. I wrote a paper on how big and long-term decisions are most effectively and enduringly made in a democracy. I have not seen the final statement.