Presentation to NZSA conference Blenheim November 2010 1OVERVIEW

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Presentation to NZSA conference Blenheim, November 2010 (1)OVERVIEW OF JOINT RETIREMENT COMMISSIONER AND INSTITUTE

Presentation to NZSA conference Blenheim, November 2010 (1)OVERVIEW OF JOINT RETIREMENT COMMISSIONER AND INSTITUTE OF POLICY STUDIES CONFERENCE (2)LIVING WITHIN OUR MEANS: A FRAMEWORK FOR MAKING DECISIONS ON THE AGE OF ELIGIBILITY FOR NEW ZEALAND SUPERANNUATION GEOFF RASHBROOKE, INSTITUTE OF POLICY STUDIES

Overview: Retirement Income Policy & Intergenerational Equity conference July 2010 Retirement income policy is

Overview: Retirement Income Policy & Intergenerational Equity conference July 2010 Retirement income policy is an intergenerational issue; link between generations was focus for the conference No attempt to provide a single perspective: each presenter and discussant looked at retirement issues from their own viewpoint Covered international, fiscal and social perspectives, as well as strategies and options to analyse the implications of intergenerational impacts of retirement incomes. Papers available at www. ips. ac. nz – also book due out 6 December

Overview: Retirement Income Policy & Intergenerational Equity conference July 2010 Kent Weaver, from Georgetown

Overview: Retirement Income Policy & Intergenerational Equity conference July 2010 Kent Weaver, from Georgetown University, Washington, D. C. , spoke on the political economy of retirement income policy Examined the behavioural/social and political challenges that must be considered in attempting to embark on effective and sustainable policy reforms Outlined possible options for New Zealand Provided a score card

Overview: Retirement Income Policy & Intergenerational Equity conference July 2010 A REPORT CARD FOR

Overview: Retirement Income Policy & Intergenerational Equity conference July 2010 A REPORT CARD FOR NEW ZEALAND’S RETIREMENT INCOME SYSTEM SUBJECT GRADE Long-Term Affordability B+ Administrative Effectiveness and Cost-NZ Super A Administrative Effectiveness and Cost-Kiwisaver B Poverty Prevention B+ Income Replacement C Promoting Gender Equity A- COMMENTS Clarity on Expected Retirement Income-NZ Super B Exposure to Market Risk A- Exposure will grow Clarity on Total Expected Retirement Income C Encouraging Continued Work after 65 B Mixed signals Exposure to Political Risk D Shows improvement

Overview: Retirement Income Policy & Intergenerational Equity conference July 2010 Kent Weaver, from Georgetown

Overview: Retirement Income Policy & Intergenerational Equity conference July 2010 Kent Weaver, from Georgetown University, Washington, D. C. , spoke on the political economy of retirement income policy Examined the behavioural/social and political challenges that must be considered in attempting to embark on effective and sustainable policy reforms Outlined possible options for New Zealand Provided a score card Discussants: Jean-Pierre de Raad (NZIER) provided New Zealand data to support arguments of future fiscal challenges and the need to make trade-offs for fiscal sustainability Whereas independent consultant Peter Harris argued expenditure on pensions in New Zealand is low by OECD standards, poverty among pensioners is low, and the current system is equitable, hence no reason to alter the existing parameters of pension policies

Overview: Retirement Income Policy & Intergenerational Equity conference July 2010 Second keynote speaker, Peter

Overview: Retirement Income Policy & Intergenerational Equity conference July 2010 Second keynote speaker, Peter Whiteford, from the Social Policy Research Centre, University of New South Wales Discussed inter- and intra-generational issues Outlined the design features of retirement income systems in OECD countries, recent reforms, and their outcomes Gave international comparisons on the basis of progressivity and replacement rates, with frequent comparisons to Australia Discussants Andrew Coleman(Motu) suggested New Zealand tax system lacks incentives for private retirement savings compared to other OECD countries, & questioned the role of the New Zealand Superannuation Fund in terms of intergenerational equity Susan St. John (Auckland University) took a contrary view, drawing upon Whiteford’s ‘goals of pension reform’, where the primary goals of pensions were poverty alleviation and replacement of income while working, not savings incentives

Overview: Retirement Income Policy & Intergenerational Equity conference July 2010 Gabs Makhlouf (Treasury) spoke

Overview: Retirement Income Policy & Intergenerational Equity conference July 2010 Gabs Makhlouf (Treasury) spoke on the fiscal position and added a 2010 update to demographic change and the challenge the ageing population poses Rise in the ratio of older people to the working age population will act as a drag on the economy’s potential growth rate - even though New Zealand has a high labour force participation rate Some serious trade-offs will be required to balance Crown finances, as current settings for spending and revenue, projected on the basis of historic growth patterns, are not sustainable over the longer term Discussants Ganesh Nana (BERL) questioned use of labour force participation rates and dependency ratios in fiscal analysis. Suggested fiscal issues are about expectations of service provision Economic consultant Suzanne Snively accepted analysis but also queried argument on expected declines in future labour force participation rates as well as the impact on health costs

Overview: Retirement Income Policy & Intergenerational Equity conference July 2010 Next moved on to

Overview: Retirement Income Policy & Intergenerational Equity conference July 2010 Next moved on to the social perspectives Alison O’Connell spoke on people’s expected length of retirement, based on her empirical NZ research Chris Cunningham gave a Maori perspective, pointing out that the relatively high proportion of Maori who are young, and their socio-economic position, differentiates the Maori population from the rest of New Zealand’s population Judith Davey asked “what are we saving for” and discussed decumulation options – and precautionary savings Bob Stephens examined the objectives of the welfare state in relation to intergenerational equity, income redistribution and poverty alleviation, concluding that generations have not been treated equally

Overview: Retirement Income Policy & Intergenerational Equity conference July 2010 Final session on strategies

Overview: Retirement Income Policy & Intergenerational Equity conference July 2010 Final session on strategies and options Len Cook placed health issues into the mix Peggy Koopman-Boyden discussed older workforce participation and the factors there Ralph Stewart made a stirring call for supporting annuity provision Susan St John set out the argument for intra-generational equity, ie some form of means-testing to maintain an adequate level of NZS for the poorest Nigel Pinkerton gave the Gen Y perspective

Living within our means A FRAMEWORK FOR MAKING DECISIONS ON THE AGE OF ELIGIBILITY

Living within our means A FRAMEWORK FOR MAKING DECISIONS ON THE AGE OF ELIGIBILITY FOR NEW ZEALAND SUPERANNUATION GEOFF RASHBROOKE, INSTITUTE OF POLICY STUDIES

Living within our means: Outline Discuss the constraints of PAYG financing Brief outline of

Living within our means: Outline Discuss the constraints of PAYG financing Brief outline of model Caveats re job creation What no change means Exploration: Follow the Aussies No tax increase One possible acceptable option Longevity improvement

Living within our means: PAYG constraint PAYG equation Number of pensioners NP(t) times average

Living within our means: PAYG constraint PAYG equation Number of pensioners NP(t) times average pension amount P(t) equals number of workers NW(t) times average wage W(t) times average tax rate T(t) needed for balance

Living within our means: PAYG constraint [P(t)/W(t)] is constant for NZS (more or less)

Living within our means: PAYG constraint [P(t)/W(t)] is constant for NZS (more or less) Hence T(t), the average tax rate on worker income for balance, depends on [NP(t)/NW(t)] Statistics NZ project cumulative rate of growth in NP to be four times as much as the cumulative rate of growth in NW over the period to 2051

Living within our means: PAYG constraint [P(t)/W(t)] is constant for NZS (more or less)

Living within our means: PAYG constraint [P(t)/W(t)] is constant for NZS (more or less) Hence T(t), the average tax rate on worker income for balance, depends on [NP(t)/NW(t)] Statistics NZ project cumulative rate of growth in NP to be four times as much as the cumulative rate of growth in NW over the period to 2051 So Houston, we have a problem

Living within our means: PAYG constraint 4. 0% 3. 5% 3. 0% 2. 5%

Living within our means: PAYG constraint 4. 0% 3. 5% 3. 0% 2. 5% 2. 0% 1. 5% 1. 0% 0. 5% 0. 0% Cumulative FTE LF growth Cumulative pensioner growth

Living within our means: The model Projects pensioner numbers Projects worker numbers Incorporates increases

Living within our means: The model Projects pensioner numbers Projects worker numbers Incorporates increases in participation, including 65+ Assumes increase in participation when age of eligibility increased Expresses costs in current wage terms Calculates cost per worker net of recoveries Allows for NZSF as a smoothing mechanism Parameter driven Also age-related increase in health costs ditto Paper is available!

Living within our means: Caveats Assumes increases in workers – but need jobs for

Living within our means: Caveats Assumes increases in workers – but need jobs for them And must be private sector jobs Increase in age of eligibility may not be associated with jobs for all who want them Increase in age of eligibility has disproportionate effect on lower socio-economic groups Essential that older people have additional income to buy goods and services – hence Kiwi. Saver an important policy intervention

Living within our means: What no change means Cost per head of the working

Living within our means: What no change means Cost per head of the working population, in $real wage Stats. NZ medium projection: no change in eligibility age $7, 000 $6, 000 $5, 000 $4, 000 $3, 000 $2, 000 $1, 000 60 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056 2057 2058 2059 2060 $0 NZS incl NZSF NZS alone Extra health, 0% Extra health, 1% 2061 LF = 2. 93 million

Living within our means: What no change means

Living within our means: What no change means

Living within our means: Do like our neighbours? $7, 000 Cost per head of

Living within our means: Do like our neighbours? $7, 000 Cost per head of the working population, in $real wage Stats. NZ medium projection: age 66 by 2018, 67 by 2022 (Australian action) 6767676767676767676767676767676767676767 6565656666 $6, 000 $5, 000 $4, 000 $3, 000 $2, 000 $1, 000 10 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056 2057 2058 2059 2060 $0 NZS incl NZSF NZS alone Extra health, 0% Extra health, 1% 2061 LF = 3. 02 million Eligibility age

Living within our means: Hold cost at $3, 000 per head Cost per head

Living within our means: Hold cost at $3, 000 per head Cost per head of the working population, in $real wage Stats. NZ medium projection: age 66 by 2012, . . . , 70 by 2024, . . . , 75 by 2050 $7, 000 $6, 000 6565 686868 6666 67 67 67 6969 7070 73 73 73 71 71 72 72 72 74 74 75 75 75 $5, 000 $4, 000 $3, 000 $2, 000 $1, 000 20 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056 2057 2058 2059 2060 $0 NZS incl NZSF NZS alone Extra health, 0% Extra health, 1% 2061 LF = 3. 45 million Eligibility age

Living within our means: Fix cost at $4, 000 per head Cost per head

Living within our means: Fix cost at $4, 000 per head Cost per head of the working population, in $real wage Stats. NZ medium projection: age 66 by 2015, 67 by 2020. . . , 70 by 2040 $7, 000 $6, 000 656565 686868 66666 676767 6969696969 7070707070707070707070 $5, 000 $4, 000 $3, 000 $2, 000 $1, 000 20 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056 2057 2058 2059 2060 $0 NZS incl NZSF NZS alone Extra health, 0% Extra health, 1% 2061 LF = 3. 29 million Eligibility age

Living within our means: Fix cost at $4, 000 per head Cost per head

Living within our means: Fix cost at $4, 000 per head Cost per head of the working population, in $real wage Stats. NZ very low mortality : age 66 by 2015, 67 by 2020, . . . , 70 by 2040 $7, 000 $6, 000 656565 686868 66666 67 67 67 6969696969 7070707070707070707070 $5, 000 $4, 000 $3, 000 $2, 000 $1, 000 20 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 2042 2043 2044 2045 2046 2047 2048 2049 2050 2051 2052 2053 2054 2055 2056 2057 2058 2059 2060 $0 NZS incl NZSF NZS alone Extra health, 0% Extra health, 1% 2061 LF = 3. 38 million Eligibility age

Living within our means: Growth in NW(t) & NP(t) 4. 0% No change 3.

Living within our means: Growth in NW(t) & NP(t) 4. 0% No change 3. 0% 2. 0% 1. 0% 0. 0% 4. 0% EA 70 by 2024, 75 by 2050 =$3, 000 per head 3. 0% 2. 0% 1. 0% 0. 0% 4. 0% EA 70 by 2040 =$4, 000 per head 3. 0% 2. 0% 1. 0% 0. 0% Cumulative FTE LF growth Cumulative pensioner growth

Living within our means: Conclusions Intergenerational equity can be addressed by holding amount available

Living within our means: Conclusions Intergenerational equity can be addressed by holding amount available for pensions to a fixed proportion of labour income The trade-off is increase in the eligibility age against the fixed contribution level (or other taxes/means-testing etc) Model suggests current $3, 000 per head requires eligibility age of 75 (by 2050) a one third increase in per head cost needed to bring it down to 70 (by 2040) could consider higher increase in per head cost and less increase in age If fix an increase over current, need to invest the short/medium term difference sensibly Job creation is key – need to ensure older people can be active in the economy, both earning and spending If change age, must look after those disproportionately affected – including chronically ill

The report card – what do people think? A REPORT CARD FOR NEW ZEALAND’S

The report card – what do people think? A REPORT CARD FOR NEW ZEALAND’S RETIREMENT INCOME SYSTEM SUBJECT GRADE Long-Term Affordability B+ Administrative Effectiveness and Cost-NZ Super A Administrative Effectiveness and Cost-Kiwisaver B Poverty Prevention B+ Income Replacement C Promoting Gender Equity A- COMMENTS Clarity on Expected Retirement Income-NZ Super B Exposure to Market Risk A- Exposure will grow Clarity on Total Expected Retirement Income C Encouraging Continued Work after 65 B Mixed signals Exposure to Political Risk D Shows improvement