Other Super options preferred

Raising the age is not the only way to reduce the cost of superannuation for future generations, and nor does it appear to be the option preferred by New Zealanders, writes Andrew Coleman.

The news the Government now wishes to discuss changes to New Zealand Superannuation is welcome. While the current scheme has many positive features, it has the disadvantage that it shifts a disproportionate fraction of the cost burden on to young people and future generations.

By reducing the payments that people born after 1972 will receive once they turn 65, the Government can reduce the amount that tax rates will have to increase in the future.

Raising the age is not the only way the Government can reduce the cost for future generations. One of several options would be to keep the age at 65, but raise taxes now and invest the funds in the New Zealand Superannuation Fund. The earnings of the fund could be used to make some of the future payments, reducing the amount taxes must increase.

As well as reducing future taxes, this system would shift some of the burden of the higher future payments to people born before 1972, who under the newly announced proposal will still get a pension from age 65. These people (which include the Minister of Finance, the Prime Minister, and me) may have paid taxes all of their lives, but they have not had to pay very high taxes to fund Superannuation as there weren't many pension recipients when they were younger.

The Prime Minister's willingness to discuss changes to the current system is welcome because research shows New Zealanders are very concerned about the scale of tax increases future generations will face if nothing is changed.

Two years ago, a study by staff from the Treasury and the University of Otago and partly funded by the Commission for Financial Capability investigated the relative importance of seven aspects of New Zealand Superannuation to a large sample of New Zealanders.

They found most people are strongly opposed to means testing, but that support for raising the age to 67 was mixed - about a third are supportive, but a third are strongly opposed.

More importantly, they found 65% of people of all ages and incomes would be prepared to raise taxes now by 2% if it could reduce the future increase in tax rates needed to fund New Zealand Superannuation to 3% instead of 5%. Even if the New Zealand Superannuation Fund earned much less in the future than it has in the last 10 years, this goal could be achieved.

This study further evaluated how people would rank two policy changes relative to the current version of New Zealand Superannuation based on their costs and benefits.

In a three-way contest between leaving the system unchanged, raising taxes immediately to prefund future New Zealand Superannuation payments without raising the age, and raising the age of eligibility in the future, there was a clear winner and a clear loser.

Raising the age of eligibility to 67 has the least support and the most opposition in the country, whereas keeping the age at 65 and raising taxes now to reduce the burden on future generations had widespread and majority support, and the least opposition.

The differences are stark: 58% of people ranked prefunding (with no age change) the best of three options, compared with only 16% who favoured raising the age; whereas 16% thought it was the least attractive option compared with 55% who thought raising the age was least attractive. Prefunding had majority support from people of all ages and incomes.

Are there big differences between the options? The prime beneficiaries of prefunding New Zealand Superannuation without changing the age are people who will have low earning opportunities when they are 65 sometime in the future, possibly because they are ill, or possibly because they have had low incomes for much of their lives.

The primary losers of prefunding relative to raising the age of eligibility would be people born before 1972, as they will pay more taxes - but the survey results suggest they wouldn't mind.

There are some differences in the risks surrounding each policy, but a strong case can be made that prefunding is less risky overall.

It is important the Government makes alterations to the current scheme to reduce the costs on future generations. Raising the age is not the only option, and nor does it appear to be the option preferred by New Zealanders.

For this reason it can only be hoped New Zealanders are not just offered a two-horse choice in the next election. The issue is too important and a great deal of economic analysis shows that other options may be preferable.

-Dr Coleman is a senior lecturer in economics at the University of Otago. He also works as an economist in Wellington, most recently at Treasury and Motu Economic and Public Policy Research. In 2010 he was a member of New Zealand's Saving Working Group.

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