The new National leader, Christopher Luxon, recently stated that he intends to revive the party's 2017 policy of incrementally increasing the retirement age to 67. As always, that has triggered a flurry of opinions for and against – almost all of them tired and familiar. Here’s something a little different as my two cents – we should index the retirement age to life expectancy at birth.
From Pension to ‘Grey UBI’.
When New Zealand’s pension was introduced in 1898, it provided a small means-tested sum to elderly people of “good moral character” who had few assets and were at risk of exhausting their savings due to having already outlived their expected lifespan. At the time, the qualifying age of 65 exceeded the average life expectancy of both males (56 years) and of females (63 years). The idea of the pension was that it was reasonable to expect people to save to fund their own retirement, but not reasonable to expect them to save enough for an unusually long life.
Nowadays, the pension is no longer means tested (it is paid even to multi-millionaires), it is universally available (there are no longer any morality conditions), and a far greater proportion of the population receives it. For example, while a person reaching retirement age in 1898 would have already outlived his or her average expected lifespan, a male retiring today would anticipate living for another 28 years on average and a female retiring today would expect to live nearly another 30 years on average. Put another way, today’s retirees have over 30% of their life left to live.
Perhaps unsurprisingly, the pension is no longer seen as targeted support available to a select few in genuine need. Rather, it is perceived as an entitlement owed to each of the growing number of New Zealanders who live to see their golden years. It’s a UBI for the grey of hair.
Superannuation? Super expensive.
Leaving aside the reasonableness of this changed perception of the purpose of the pension, our ability to fulfil it is under increasing strain.
The fact that New Zealanders retiring today will spend nearly one-third of their lives on the pension is unprecedented. With ongoing advances in medical technology and social investment, that proportion will only grow – a person born today will inevitably expect to spend even more than one-third of his or her life over the age of 65. In short, and despite the NZ Super Fund planning to start to assist from 2035/36, the cost of the pension to taxpayers will become increasingly large and unsustainable.
Many ingredients, many cooks, a spoiled broth.
There are many potential solutions:
- Increase taxes to increase Super Fund contributions
- Increase taxes to directly fund current obligations
- Increase spending on superannuation relative to other public spending
- Grow the economy via increased productivity
- Grow the economy via imported labour
- Increase the retirement age
- Decrease the value or purchasing power of pension payments
- Means test eligibility
Many solutions that can be applied in myriad combinations make it possible for almost everyone to be in technical disagreement with almost everyone else. And that’s what happens. There’s no broad or enduring coalition behind any particular solution or mix of solutions. So, the result is endless repetitive debate – a political discourse that is as painful than the fiscal burden it seeks to avoid.
I have an idea to get the cooks out of the kitchen.
Increasing the retirement age is a moral imperative.
First, it is the only solution that goes directly to increased life expectancy as a cause of this affordability crisis. In a nation with a public health system, should taxpayer investments in lengthening life expectancy be ‘punished’ via increased retirement obligations? I doubt that the state acts on its incentive to save on pension costs by promoting fast and early death over the age of 65, but I’d much prefer that the incentive doesn’t even exist. And, from the state’s point of view, it seems only fair that the gift of longer lives should be reward enough in itself without having to ice the cake with an ever-lengthening span of pension entitlement.
Second, moral arguments against increasing the retirement age tend to be arguments to mitigate a symptom of inequities. It’s more moral to fix the root causes of that symptom. The fact that workers in certain professions endure greater wear and tear could cause a growing gap between having to retire and starting to get the pension as the age of eligibility increases. However, that’s better fixed by addressing the conditions in those industries so they don’t wear workers out so quickly… or at all. Similarly, Māori have lower life expectancy. That is not made equitable by keeping the retirement age at 65! The only equitable solution is to eliminate that gap in life expectancy.
Third, most of the other solutions are relatively less moral. While I believe that the social cohesion benefits of UBIs tend to be over-stated, there are few things as corrosive to social cohesion than denying eligibility for a previously universal entitlement. That tends to rule out means testing. And as for raising taxes or prioritising public spending away from health, education, and other public services to fund superannuation, well, don’t we have enough mechanisms of upward intergenerational wealth transfer already?
But increasing the retirement age is politically difficult.
Increasing the retirement age can never be done suddenly – those who are retired or nearly retired will have made major life decisions around the current age. Increasing the retirement age without providing potential future recipients with sufficient opportunity to adjust their saving patterns in response is unreasonable.
So, it’s always a decision that current politicians have to make now to effect voters much later. That makes it a gamble that more current voters will see it as a good thing (they’re unaffected, they see it as fiscally responsible, they have greatest empathy for future taxpayers) than a bad thing (they’re effected, they aren’t motivated by fiscal responsibility, they have greatest empathy for future recipients).
Because inaction passes the buck to future taxpayers and politicians, and because political opponents can and will work to skew the odds, most current politicians would rather not take that gamble. The retirement age has changed infrequently since 1898. No MMP government has altered it .
It follows that New Zealand is facing the prospect of (1) reaching a crisis point before it is able to arrive at a solution and (2) remaining in crisis mode thereafter – even at that point, there would be minimal political incentive to make the hard decisions required to resolve the long-term problem compared to focusing on short-term crisis management.
So, let’s make it a non-political decision.
New Zealand should set an individual eligibility for the pension at birth as a fixed percentage of life expectancy at birth (LEB) so that the retirement age automatically increases over time as average lifespans grow but remains fixed for each individual throughout their life.
To illustrate, suppose that it was thought to be sustainable and equitable to provide a pension that started from 80% of LEB on a sex basis . A female born in 1966 had a LEB of 86 years at that time. If this approach had been in place, she would be eligible for the pension upon reaching the age of 69 - 80% of 86 years. A female born in 2016 had a LEB of 93 at that time. If this approach had been in place, she would be eligible for the pension upon reaching the age of 75 - 80% of 93 years. Note that both women, upon retiring, would actually have significantly more than 20% of their life left to live – an individual’s life expectancy late in life significantly exceeds their LEB because the latter incorporates the risk of dying at younger ages.
I have used 80% of LEB on a sex basis as an example. The figure used would require actuarial analysis and consultation to determine what figure and what basis are both affordable and reasonable. And an implementation mechanism would need to be defined for those of us already born – possibly an average of 65 and the retirement age that this model would generate, weighted by when the model comes into force.
Certainty and sustainability.
Indexing the retirement age to LEB would create both certainty and sustainability. For the state, it would result in a more manageable and consistent pension obligation, the sustainability of which would no longer be jeopardised by expanding life expectancies. For politicians, it would eliminate the need for ongoing, risky political intervention and avert a semi-permanent political crisis. For individuals, it would provide certainty – retirement dates known and fixed from birth that allow them the maximum possible opportunity to tailor their savings plans and spare them the shocks associated with any sporadic jumps in the retirement age.
It is commendable that National appears likely to campaign in 2023 on slowly raising the age to 67. However, why fix something temporarily when it can be fixed permanently? There’s no better time to start being bold.
 It increased from 61 to 65 between 1993 and 2001 based on a decision made by the Bolger National government prior to MMP. National campaigned on an increase in 2017 and appears likely to do so again in 2023.
 LEBs can be calculated overall, by sex, by ethnicity, and so on. I expect an ethnicity basis would be both unworkable and undesirable as it is (a) an unclear, self-identified basis for classifying individuals (much more imperfect than sex) and (b) differences in life expectancy by self-reported ethnicity should be eliminated rather than slightly mitigated via retirement age calculations.