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Retirement income policies in New Zealand: - what really matters

Michael Littlewood for Retirement Policy and Research Centre. Retirement income policies in New Zealand: - what really matters. Wellington, 21 April 2015. Four main points. The cost of New Zealand Superannuation is the pensions paid (pre-funding doesn ’ t change that)

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Retirement income policies in New Zealand: - what really matters

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  1. Michael Littlewood for Retirement Policy and Research Centre Retirement income policies in New Zealand:- what really matters Wellington, 21 April 2015

  2. Four main points • The cost of New Zealand Superannuation is the pensions paid (pre-funding doesn’t change that) • Private provision not materially different (economically) from public • So, forcing New Zealanders (or the government) to save does not cut the cost of an ageing population • What can (should) governments do?

  3. Latest Treasury projections (2014) • NZS is a claim on the economy • Ageing population will double so-called ‘age-dependency’ ratio • Not a doubling in cost when measured against a growing GDP

  4. NZS projections

  5. How does NZ compare? Note: excludes the cost of tax breaks for private provision

  6. Pre-funding doesn’t affect cost • The cost of NZS is (and will be) the pensions paid • Pre-funding (the NZSF) doesn’t change cost, only the incidence of cost • The NZSF is effectively 100% leveraged • Three key questions: • Should the government borrow to invest? • Does ‘intergenerational equity’ matter? • What is it about pensions that justifies pre-funding? • Economic growth is what really matters

  7. What can only governments do? …with specific regard to retirement incomes • Reduce (eliminate?) poverty in old age • Enforce codes of private (and public) conduct – levelling tax and regulatory playing fields • Gather and publish impeccable, accessible data • Provide information and education programmes so citizens can make appropriate decisions

  8. What can’t governments do? • Force citizens to save more than they prefer • Encourage citizens to save more than they prefer • Both options tend to be: • Very expensive • Regressive • Complex • Distortionary • Inflexible • In addition, tax breaks: • Are inequitable • Increase deadweight costs of tax • Worst of all: neither seem to ‘work’

  9. In summary: Governments should: • Do things that only governments can do • Stay away from the things that: • Governments do not have to do • At the very least, seem not to work

  10. We need to talk about: • NZS: what do we think might be acceptable to 2060 taxpayers (benefits first; then costs)? • Data: better, deeper data – longitudinal data the ‘gold standard’ • Regulation/tax: simple, comprehensive rules; levelling the playing fields • Private provision: let employers and individuals make their own decisions It’s really not that complicated

  11. Talking about New Zealand Superannuation • Key benefit design decisions: • Universal or means-tested? • State pension age • Residency test • Annual amount • How re-valued? • How paid for (PAYG vs SAYG)? • Single person’s pension • Couples’ living together • Overseas’ pensions and section 70 deductions • Transition arrangements if changes made

  12. Talking about NZS - 2 • Minor benefit design decisions: • Interface with ACC pensions • Favoured periods of absence overseas • Annual revaluation floor • Hospital rates • Payments overseas • Special position of ‘specified Pacific countries’ • None of these 10 major and 6 minor design elements has ever been the subject of a research-led national discussion • Asking New Zealanders what they think first is a bad idea

  13. The politics of change • NZS the archetypal political football • National won’t talk about it • Labour now doesn’t know what to think • Other parties suggested different changes • Endless reports continue to suggest cost-cutting changes • We need to break the cycle

  14. What next? • John Key’s threat to resign constrains debate until, probably, 2020 • The debate will happen • Much work to be done in the meantime • Gathering impeccable, deep data is the first priority • …and perhaps, politically acceptable

  15. Impeccable, deep data? – home ownership

  16. Understanding pension claims • All retirement incomes are claims on the economy (private and public) • Forced private provision to replace public provision shifts costs but does not reduce them (and may increase them) • Governments must balance competing claims of all sections of society • Regardless of today’s decisions/process, tomorrow’s taxpayers can change things

  17. What really matters • Growth

  18. Deck chair from Titanic

  19. “Democracy is the theory that the common people know what they want and deserve to get it good and hard.” - H.L. Mencken

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