Reforming the state pension needs lateral thinking

Analysis: Debate over age of eligibility is crowding out alternative ideas for reform, writes Rob Stock.

The debate about whether people should wait until the age of 67 to get the NZ Super is overshadowing other suggestions for making the state pension more sustainable.

National wants to increase the age of eligibility to 67, while Labour favours leaving it at 65, though it’s not an issue that looks likely to swing the October general election.

The ACT Party, which National looks like it might need to form a government, also wants to see a gradual rise to 67.

The discussion about the future of NZ Super is prompted by the rising cost to the taxpayer as the number of people aged 65 rises faster than the number of people aged 15 to 64.

But just hiking the age of eligibility from 65 to 67 risks causing hardship for poorer people, some say.

Retirement Commissioner Jane Wrightson says lifting the age to 67 would hit the poor and sick hardest.

And some people have their own eyes on longer-term alternative ideas which could make decent retirements affordable, without making people wait longer for NZ Super.

An NZ Super loans scheme

Christchurch actuary Lynley Jenness says NZ Super payments could be treated as a debt to be repaid after death.

The loan, including interest, would be deducted from the estate on death or on the citizen’s entry to a government-funded retirement home.

Those with net worth less than a specified threshold, say $300,000, would not be required to repay the loan.

Those with a lot of wealth locked up in property would be offered a mechanism similar to a reverse mortgage, if they wanted to boost their incomes.

The very rich might simply decide not to bother applying for NZ Super, and people who work past the age of 65, which many do, might also decide not to bother applying for NZ Super until they stopped work, she says.

Jenness says her proposal, which she submitted to Te Ara Ahunga Ora’s three-yearly retirement policy income review, could help avoid lifting the age of eligibility for NZ Super, which would be especially hard on people in illhealth, manual workers, Ma¯ ori and Pacific people.

It would progressively move the cost of state pensions for the wealthy on to wealthy people, but Jenness acknowledges that while the idea could fly well with younger people locked out of the property market, it would not play well with the asset-rich.

But if young people are made to repay student loans, a similar philosophy should be applied to state pensions, she says.

Higher tax rates on wealth pensioners

Instead of building a cumbersome and expensive means-testing system, one suggestion is for people getting NZ Super to pay a higher rate of tax on their other income.

In late 2021, associate professor Susan St John, of the University of Auckland Pensions and Intergenerational Equity research hub, released a briefing which updated work done in 2019 in the context of the Treasury’s fiscal projections for the superannuation scheme.

St John said that while most discussions about tackling the increasing cost of the pension scheme focused on a higher age of eligibility, or a less generous payment, a third option would be to reduce the appeal of the pension to those with significant other sources of income.

The paper suggested a tax rate of 39% on income other than the pension.

A land tax, with superannuitants able to defer payment

The Opportunities Party (Top) would bring in a land tax.

The intention does not appear to be focused on getting superannuitants to pay more tax, but to reduce income taxes, and shift the economy towards rewarding work, rather than just asset ownership.

The land tax would cover all residential housing, but crucially, superannuitants would be allowed to defer the payment of the tax, until they no longer needed their homes.

‘Self-determination’ a la Roger Douglas

In a 2021 paper called Funding Our Future, Sir Roger Douglas, minister of finance from 1984 to 1988, proposed radical change.

It proposes a shift to a future in which every generation pays for itself, including its own pensions.

It would do this through forced super saving.

Big income and company tax cuts would help workers afford this. There would have to be massive cuts to government spending of $15 billion to $20b a year.

‘‘The purpose of this reduction in government expenditure is primarily to give us the means to help/enable people on a low income to save the amounts they require to be able to look after their own welfare needs in retirement,’’ Douglas writes.

The shift would take 50 years to complete, he says.

‘‘Once the savings policies outlined in this paper are fully mature, 95% plus of all New Zealanders will retire with $4 [million] to $5 million in their super fund accounts,’’ he says.

‘‘No longer will New Zealanders get less out in pensions than the government takes in taxes.

‘‘Old age will never be a reason for poverty again.’’

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