Treasury Long Term Fiscal Projections A Wake Up Call

11 July 2013

Treasury Long Term Fiscal Projections A Wake Up Call for our Politicians.

The Financial Services Council (FSC) welcomes the release of the Treasury’s Long Term Fiscal Projections. The Treasury projects that expenditure on NZ Super could rise to 7.9% from around 4% today. We expect that the cost of NZ Super will be about 8.5% by 2060 and about 10% of GDP by 2100.

We believe the numbers projected should spur the politicians to give greater urgency to addressing the viability of our current retirement income policy based on NZ Super and some take up of KiwiSaver.

While long term projections are hard to make and get right they do provide the basis of a discussion on what we can expect from the taxpayer in terms of retirement income.

We need an honest conversation which starts with the politicians agreeing what they can provide from the taxpayer funded NZ Super and how the Government will help you to save using KiwiSaver to top up that pension so you can retire on a comfortable income.

According to Horizon Research only 9% of New Zealanders believe they can live on NZ Super alone, currently $357 a week in the hand. New Zealanders want to catch up with Australians in terms of retirement incomes and 2million have signed up to KiwiSaver. Most New Zealanders see a comfortable income as around 2 times the level of NZ Super.

On balance the FSC thinks the Treasury projections probably underestimate the number of people likely to be eligible for NZ Super and the cost to the economy. We also expect that the Treasury has overestimated likely economic growth.

The actual trend is likely to see many more people eligible for NZ Super and receiving it for more years. New Zealanders will however still be retiring on much lower pensions than people on similar incomes in Australia. To pay for NZ Super we are going to need steady increases in average income tax rates out into the future.

We already have another 100,000 people aged 65 plus than were projected in the early 1990s and over the next 20 years our baby boomers will become the retirees. By 2055 New Zealand is forecast to have 1.7 million people aged 65 or older with an expected life span of 95. That means for every two people of working age there will be one retiree.

“Something has to give if we are to avoid huge tax hikes and inadequate incomes that in no way can match the living standards we had when we were employed – let alone the income secured for an Australian retiree. Taxation funded Superannuation alone and current rates of contributions for retirement under KiwiSaver will not cover the cost of this retirement boom,” he said.

The last time the cost of NZ Super reached 6% of GDP we had to quickly impose a surcharge and moved eligibility for NZ Super out by 5 years to get the costs back down to 4% of GDP.
We don’t want or need sudden lurches.

New Zealanders know the cost pressures with NZ Super will inevitably see the age of eligibility for the pension move out. The more important issue is how to increase KiwiSaver contributions and coverage so that most New Zealanders can fund a pension from KiwiSaver sufficient to give them an income in retirement of 2 times NZ Super.

If we don’t do this we will become 70 year olds picking up the travel bags of much richer Australian retirees.

To bring this about we need a new cross party agreement on retirement income updating the one last negotiated in 1993.

The FSC work on this matter is contained in the Infometrics report “The Sustainability of
New Zealand Superannuation: Getting the Starting Point Right” March 2013
http://fsc.org.nz/site/fsc/files/reports/LTFMScenarios4c2013.pdf

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