NZ Super's need for reform

On a recent panel discussion on RNZ, the economist Brad Olsen expressed his frustration that New Zealand spends more on NZ Super than on education. “Where are our priorities?” he asked. “It sure as hell isn’t spending on getting people smart, so they can get better jobs in life. We’re paying people to be old …”

The total budget forecast for social security spending (transfers and subsidies) is $44.7 billion of which 52 percent is on NZ Super. In the meantime, the poverty, outright hunger and desperation of the younger population on low wages, high rents, and swelling debts to the Ministry of Social Development and Inland Revenue gets worse.

To put Olsen’s quote more accurately, the spending on NZ Super shows we value a universal pension at 65 paid to those still in well-paid full-time work or who are asset rich, no questions asked, more than we value the wellbeing of the young.

Spending on NZ Super sits alongside a cash-starved, failing tax credit system that is supposed to support children but pays less if parents are on a benefit. Then, when parents are in low-paid work, clawbacks of Working for Families lock families into poverty traps as the Treasury has shown.

Unemployment benefits for adults, and disability and accommodation support are woefully inadequate, and badly designed. The results are that child poverty statistics are going backwards, there is widespread unmet dental and health needs, rising household debt, suicide, and homelessness.

We should of course celebrate NZ Super alongside a yet-to-mature, but well-designed KiwiSaver scheme. It is potentially a world-class retirement system. Imagine how much more painful the recession would be without the spending of New Zealand Super into the economy. It is important not to change its basic character.

For those over 65 it is a secure and basic income that doesn’t disappear if the share market crashes, or if you lose your paid job, or if you live a very long time in retirement. It isn’t based on paid work contributions and is therefore fair to women who may have contributed disproportionately to the unpaid work of caregiving.

It has been a policy with wide political support. It is so much better than a standard welfare benefit, not least because a partner’s income does not reduce what you get. It is also wage linked, so it keeps up with general living standards and is very easy to access assuming you meet age and residency requirements.

But we can’t put our heads in the sand and ignore the rising fiscal pressures. From 2030, the number of peopled aged over 85 will grow rapidly along with the health costs that inevitably come with an older population. Many more are coming into retirement with high costs and inadequate savings, paying rent or repaying mortgages. Organisations including foodbanks are very concerned by this emerging poverty, and aged-care facilities are nowhere near prepared for the deluge of demand.

A fresh look at this subject is outlined in a working paper I recently published, New Zealand Superannuation as a basic income, which was the result of research conducted at the Pensions and Intergenerational Hub, Economic Policy Centre, Auckland University. I propose that we cream off NZ Super from the very well-off at the top end to make it more sustainable and redistribute the cost saving to help solve the massive social problems we face. The challenge is to do this as simply as possible, with immediate effect and with little or no impact on low-income superannuitants.

The paper proposes a New Zealand Superannuation Grant which would be a universal, non-taxable weekly grant (basic income) set at the current net amount that someone with no other income received. A 65-year-old who chooses to apply for this grant would automatically have all other income taxed on a separate tax schedule designed to gradually claw back the grant.

Though not implicated in the views expressed in the paper, the Treasury modelled the outcomes of how much would be saved under different possible tax schedules. It confirmed that under realistic scenarios at least 15 percent ($3b) of the net cost of NZ Super could be saved with little impact on most retirees who are on low incomes.

The proposal would be easy to introduce and cause minimal pain to those on low incomes who depend on NZ Super. Investing savings in the wellbeing of the young would provide the best insurance policy that the older population will have access to an empathetic, caring and skilled workforce to support their needs.

It’s commonly argued that we could curb our spending on Super by raising the age of eligibility. But that is only going to hurt the most vulnerable who cannot support themselves. The policy would not affect current very high-income superannuitants and cannot be introduced quickly. It will cause higher welfare costs that offset any saving.

Reducing the indexation of NZ Super to inflation adjustments only is a second option but given that many struggle to live on it, at least with any quality of life, this would have a disastrous effect on levels of older people’s poverty.

A third option, some kind of a means test, has not been talked about much. A welfare-styled approach for income and asset tests for the pension in Australia would be unlikely to be accepted in New Zealand.

The grant option outlined in my paper is income-based and operates through the tax system. It builds on what happens already where the better-off pay a higher tax on their pension. Once in place, this system would be less complicated than other forms of clawback, such as a welfare-type income test directly on NZ Super, the old surcharge, or a negative income tax approach.

Realistically, the basic-income approach is likely to mean that high-income earners simply don’t bother to apply for the grant, even if they could be a few dollars better off. But the option would be there should they need it.

It would have several potential advantages compared with other options such as raising the age, or lowering the amount paid or complex means tests:

Relative simplicity in administration compared with other income tests and the old surcharge.
Universality: The grant is paid irrespective of other income as a basic income grant if eligible people elect to take it.
Continuity: Higher income superannuitants already elect a separate tax code to reflect the appropriate taxation of their NZ Super: there should be acceptability of a separate tax code for other income under the grant as there was for the old surcharge.
Flexibility: The choice of tax rates for other income allows flexibility and clarity in reaching a desired break-even point and required fiscal savings.
21st century basic income: Once seen as working well as a basic income, the grant could be usefully extended as a basic income to other groups such as those in their 60s on the supported living payment.