Superannuation, is Labour doing the right thing.

Superannuation is one of the most significant costs of government expenditure, and raising the entitlement age seems a relatively simple way of balancing the books.

Labours proposal

Labours proposal is to lift the retirement age to 67 by 2033, starting with an increase of 2 months each year from 2020.

They suggest it will save the country $100b over 30 years. 

The Good

People are living longer and more healthy lives. The ratio of retired people to working people is way out of proportion with the time when the retirement age was set.

The retirement age needs to be reconsidered from time to time, and any changes need to be signalled well in advance so we can make allowance for the change.

The proposed change will save money in the long term. 

The Bad

This change comes too late for the baby boomers. The changes proposed by Labour will do nothing to curb the eminent cost of the baby boomers reaching retirement age. The cost of funding the baby boomers will be funded by taxes or debt on their children, who are short in number. The baby boomers should have structured the economy to prefund the cost of their retirement, and the Cullen Fund went some way to achieving that, but National stopped payments into that fund. 

Both National and Labour have favoured votes over doing the right thing. This is generational theft, leaving the young with the financial burden. 

Some Improved Suggestions

Just the same way a pension is set at 66% of the average salary, then so should the age criteria be kept in line with average life expectancy. This should keep the proportions of retired persons to working age persons roughly inline over the long term, and keep the funding of shortfalls achievable.  

Although it is important to signal changes early, the approach of raising the age by a faction each year is a tidy and fair approach. An alternative approach might be to increase by 1 month each year starting in 2012. Given the impending cost of funding the baby boomers into retirement, this would be a fair way to save a lot of money for the government, with only a small opportunity cost to each individual. If you are about to retire in 2 years, then you just need to work an extra 8 weeks. If you are about to retire in 12 years, then you need to work 1 extra year. (Don't ask what your country can do for you, but what you can do for your country.) The final age of 67 would be met by 2036, but the cost savings would be more immediate at a time they need to be.

A number of smaller political parties have raised the issues of poor living shorter lives, and those working in hard labour situations needing to retire earlier, and Maori being disproportionately in younger death statistics. They raise good points, however, it is very hard to determine who should be eligible or not for earlier retirement. For example, if you are 25% Maori blood, what entitlement would you have? If you are a rich Maori lawyer, what entitlement would you have? If you were a coal miner, or a manager of a coal mine, would it be based on your industry code, or occupation? If you have worked in a coal mine all your life, but then transitioned to management, what entitlement would you have? I think you get the idea. Peter Dunne came up with a proposal that you could apply for your retirement at any age you wanted over 60 years old, but the value you receive would be prorated against the average life expectancy, meaning the cost to the tax payer is the same. Critics had said that would only leave low paid and hard working people on a lower retirement wage. That is a good point, but what else can you do that would not create a complex eligibility regime? I think his idea has merit, as it goes some way to dealing with the issue of both Maori and hard working low paid people. 

Although i am generally not in favour of asset testing, due to the fact that higher income people already pay more taxes, I accept that asset testing is a way that you could temporarily stretch the tax dollar further. It also deals with rich foreigners who come to live here and retire. A capital gains tax might also apply as an alternative approach to asset testing, which would factor in some remuneration for the government when those who are asset rich die. 

As you can see there are a number of changes that could be made to make the cost of funding the pension more affordable, but so far none have been suggested by major political parties. Labours policy is the only one of the table, and it is a good start, but it will be tough for them as they will take the brunt of the criticism. But good on them for starting the conversation. 

The important point for all political parties to move on with is that the retirement age should not be set in stone. Accepting that retirement age and funding should be revised slightly every 10 years will ensure no generation is left with a hard pill to swallow. 

Posted: Sunday 6 November 2011


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