The superannuation sky is not falling




There is a lot to like about the NZS model:





Their first recommendation is one I’d agree with

Recommendation 1: Link the pension age to health expectancy


I’m much less convinced by the second recommendation





What of the third recommendation?




And what of the fourth recommendation









21 thoughts on “The superannuation sky is not falling

  1. Your analysis of our super arrangements is bang on, economically and morally. The indexation to CPI post-retirement is an interesting and sensible idea and the linking of entitlement to residency post age 20 is important. Abolition of NZS is also the right thing to do – it was really a device to constrain spendthrift, generally Labour, governments. Michael Cullen was afraid he would not be able to control the spending ministers in the Clark Government.

    I don’t understand, however, why you think a state-guaranteed retirement income is inconsistent with taxing income from savings. The large gap in the income tax base due to exclusion of owner-occupied housing eviscerates taxes on capital income. It implies you think taxes on consumption and/or labour income should be relatively higher.


    • THanks.

      My point was mostly about the combination of a system that provides a universal modest income (while expecting people to provide for themselves beyond that – thus unlike many European systems where the state system offers a (personal) income related pension) and an undue tax burden on capital income. But my starting point is that capital income is generally overtaxed (and I’m not fully convinced by the economic or – more especially moral – case for taxing imputed rents). We have among the highest share of GDP taken in capital income taxes of any advanced country (and, perhaps not coincidentially modest savings rates and low rates of business investment). With the fiscal surpluses that we are currently running I would be happy to use the margin to markedly reduce capital income taxation (and, of course, the rates at which interest can be deducted). Without doing the numbers (and not assuming in dynamic gains from eg more business investment) I don’t know how deep a fiscal hole that would leave, but there are expenditure saving opportunities (including on NZS) to look too before raising consumption taxes further.

      (Not, of course, that this is ever likely to be very feasible politically, but we are a bit of an outlier in how onerously we tax many forms of capital income, including because we don’t have – labour only – social security taxes).


    • The big problem with taxes is the misallocation as we have seen with Shane Jones, Pablo Escobar style of dishing out cash to anybody in the regions prepared to put their hands up and note in their feasibility analysis that they will vote for NZFirst at the next election. $3 billion in wasted tax dollars to buy votes for NZFirst. As Shane Jones would regularly tell us “To the victors the spoils” and how he chooses to throw away NZ tax dollars is entirely at his personal discretion.


  2. Social Security Agreements help address the residency issue you have described by deducting any other country, tier one pension entitlements from a person’s New Zealand Super. There is a bill before the House at the moment which proposes to increase the residency criterion to 20 years but if this were to pass it would shave less than 2% off the cost of NZS while probably having a number of negative consequences


    • But if you leave Australia at 65 having cashed out your compulsory private super, large enough to have no entitlement to the Aus age pension there would be no such deduction would there?

      2% of a large number is still worth having, but I’d argue the case for change (as per the model in my post) as more a moral one than a purely fiscal one.


      • That’s probably the case but I wonder if it might be possible to address the anomaly re the Aussie pension directly rather than via a more sweeping measure (changing the residency criterion).


  3. Link the pension age to health expectancy. As you say it is a moral issue and a sensible response. It will become more of a moral issue if in the near future millionaires are able to buy DNA tweaks that extend their life. Effectively we already are in that situation with anyone over 65 needing Keytruda and paying for it themselves.
    There is a moral minefield with life expectancy of women being longer than men and desk-workers being longer than manual workers.


  4. Buying a house on mortgage and paying it down over one’s working life while accumulating tax free gains is the commonest means of personal lifetime saving in NZ and arguably the soundest as it hedges the cost of retirement housing. Retirees owning their own home supplemented NZ Super are comfortably well off as you note whereas retirees that rent are much less so but qualify for other income-tested welfare support, if in need. That’s the core of our system and it works tolerably well.

    Given that taxing owner-occupied housing is off the political agenda (note however local authority rates are a significant tax on all property) it is hard to justify tax breaks for any other capital income let alone subsidies for private saving via Kiwisaver. Most other capital income is already subject to income tax, however, so the capital gains tax currently being floated by the TWG is really only a shift in timing and will be administratively challenging to say the least. Tax experts to my knowledge question whether the complexity is worth it. to the extent that there are long term capital gains on investment properties (essentially appreciation in land values) the touted capital gains tax may divert private investment into other avenues (financial assets) and result in more limited supply and higher rental yields but I suspect the impact would be marginal.


  5. Thanks Michael. Don’t particularly disagree without your additional proposals, but I’ve a hard time seeing their making that substantial a difference to the overall costs of NZ Super. I’m certainly not opposed to Super being scaled to years of work in New Zealand so someone coming in at age 50 and working for 15 years here receives a smaller entitlement than someone who starts work here at age 25 before taking retirement. Could that possibly make more than rats-and-mice difference to the costs at 2050 though? And it looks like the government is already moving to do it anyway.

    I would quibble about your suggestion that the report does not make a moral case about raising the age of entitlement. The report argues that maintaining the current eligibility age will come at greater and greater opportunity cost where the funds devoted to the could-be-working healthy older population could be put instead to other more pressing needs. That’s a moral case, no?


  6. I was hoping the report would address the rising opportunity cost of New Zealand’s primarily PAYGO-funded Superannuation scheme on young people- a subject almost always ignored in the debates about NZ Superannuation. NZS may be a not-too-bad scheme for people born before 1970, but those born afterwards will be paying a much larger sum for the pensions they will receive than those born in earlier years. Peter Diamond showed us how to calculate these opportunity costs 50 years ago; it is strange that the Treasury has never been interested in calculating them, but maybe it is because it would show that the opportunity costs are likely to keep rising, even if the age of entitlement is increased by one or two years a decade.

    The resumption of the funding of the NZSF will help to reduce these opportunity costs, by altering the amounts current and future generations pay for the pension. (That is, if the Honourable David Parker can keep his fingers off the fund.) But it is not the only way to reduce the opportunity costs of a PAYGO pension scheme on young people and future generations, and it would be useful if NZ had a proper debate about the way to design a scheme that is in the interests of young people as well as oldies like me.

    I can’t say this too often: if you read Gokhale, Kotlikoff, Sefton and Weale(2002) you might have a different opinion about the way a pension scheme like New Zealand’s can have a detrimental effect on long-run wealth inequality even if reduces income inequality among the elderly. Forcing lower income people (who often have lower life expectancy (conditional on gender)) to provide for their retirement through a system that starves them of bequeathable assets does not generate an equitable distribution of wealth. It is possible to design schemes that reduce income and wealth inequality, but NZ policy makers have expressed little interest in thinking through this problem.

    Gokhale, Jagadeesh, Laurence J Kotlikoff, James Sefton, and Martin Weale (2001) “Simulating the transmission of wealth inequality via bequests,” Journal of Public Economics 79(1) 93-128


  7. In a similar vein to Andrew’s comments, given that our economic system is fundamentally focused on price stability (+2%) that absolutely requires a % of the population to be unemployed, effectively through fault of their own. Individuals may move in or out of unemployment but as a group there will always be a % unemployed.

    There are thus good moral and ethical grounds that this group of people should receive a similar level of entitlement as those eligible to qualify for superannuation.


    • Probably a better policy than, unemployment remuneration equivalent to super, would be a job guarantee. The unemployed miss out on much more than just income but also career development and the good mental health that comes from engaging in productive employment.

      Though the term is (probably intentionally) overloaded I expect our host thinks of full employment meaning near the NAIRU rate. If you accept that you must also agree with being able to give 110% because the economy is above it today.

      Anyway its probably correct to say actual full employment cant only be attributed to just monetary policy. It frequently requires appropriate fiscal policy to be achieved.


    • ?

      1) Yes, in a totally deregulated market with no social support everyone would have to work (or be supported by family) and minimum wages would be very very low, but rise & fall to reflect demand, or

      2) The government could be employer of last resort removing all unemployment (

      But I don’t see given empirical evidence from all other countries running price stability regimes (& a welfare system & all the other distortions in a modern economy) that any have zero unemployment, or can maintain “full employment” for little more than an instant.


      • But material levels of unemployment usually result from the interaction of regulatory/stautory provisions such a minimum wage laws, unemployment benefits rule, and rules around how easy (or otherwise) it is to hire and fire. There may very well be good reasons for all those provisions, but they are the culprit, not monetary policy.


      • Interesting read, thank you.

        I have to say that if I hear any government suggesting trying to do away with NZ Super (or devaluing it in relative terms by linking only to the CPI) anytime soon,I will be investing my savings in a Yellow Vest supply company.


  8. Peter Dunne had the sensible idea that the age for starting to collect National Super should be flexible (60 to 70 – and I would push out to 75), with those getting it a younger age early getting comparatively less and those waiting getting a little more. Giving that flexibility should also making raising the mid-point age more acceptable.

    Once you give some slight benefit for deferring then all those people still working and earning a good income have more of an incentive to keep working and putting off collecting National Super. You would probably also find more moral pressure coming on well paid people (like parliamentarians) to not collect their National Super until they actually need it.


    • The cost of super on the economy is the actual material cost of retirees consuming goods and services of the economy without producing them. On the other hand the financial cost no longer functions as a cost at the macro economic level as, pensioners generally spend their income which makes them having an income a support for the economy and taking that away (relatively speaking) depressant on the economy. Instead of a cost pensions are a way of the government providing more or less support to the economy as it goes (while giving pensioners an income).

      I don’t know of anybody who thinks NZ has a pensioner induced shortage of real goods and services.


    • Can’t see the point of deferring the age for Universal Super entitlements when Universal basic wage is being considered as future entitlements.


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