1. Retirement income policies in New Zealand: - what really matters Michael Littlewood for Retirement Policy and Research Centre Wellington, 21 April 2015

2. Four main points The cost of New Zealand Superannuation is the pensions paid (pre-funding doesn’t change that) Private provision not materially different (economically) from public So, forcing New Zealanders (or the government) to save does not cut the cost of an ageing population What can (should) governments do?

3. Latest Treasury projections (2014) NZS is a claim on the economy Ageing population will double so-called ‘age-dependency’ ratio Not a doubling in cost when measured against a growing GDP

4. NZS projections

5. How does NZ compare? Cost of public pensions 20102060 Austria14.1%16.1% Canada5.0%6.2% Germany10.8%13.4% Greece13.6%14.6% Ireland7.5%11.7% Netherlands6.8%10.4% New Zealand4.7% (net 4.1%)8.0% (net 6.6%) Norway9.3%14.2% Portugal12.5%12.7% Spain10.1%13.7% Sweden9.6%10.2% United Kingdom7.7%9.2% United States4.6%4.7% Note: excludes the cost of tax breaks for private provision

6. Pre-funding doesn’t affect cost The cost of NZS is (and will be) the pensions paid Pre-funding (the NZSF) doesn’t change cost, only the incidence of cost The NZSF is effectively 100% leveraged Three key questions: –Should the government borrow to invest? –Does ‘intergenerational equity’ matter? –What is it about pensions that justifies pre-funding? Economic growth is what really matters

7. What can only governments do? …with specific regard to retirement incomes Reduce (eliminate?) poverty in old age Enforce codes of private (and public) conduct – levelling tax and regulatory playing fields Gather and publish impeccable, accessible data Provide information and education programmes so citizens can make appropriate decisions

8. What can’t governments do? Force citizens to save more than they prefer Encourage citizens to save more than they prefer Both options tend to be: –Very expensive –Regressive –Complex –Distortionary –Inflexible In addition, tax breaks: –Are inequitable –Increase deadweight costs of tax Worst of all: neither seem to ‘work’

9. In summary: Governments should: Do things that only governments can do Stay away from the things that: –Governments do not have to do –At the very least, seem not to work

10. We need to talk about: NZS: what do we think might be acceptable to 2060 taxpayers (benefits first; then costs)? Data: better, deeper data – longitudinal data the ‘gold standard’ Regulation/tax: simple, comprehensive rules; levelling the playing fields Private provision: let employers and individuals make their own decisions It’s really not that complicated

11. Talking about New Zealand Superannuation Key benefit design decisions: –Universal or means-tested? –State pension age –Residency test –Annual amount –How re-valued? –How paid for (PAYG vs SAYG)? –Single person’s pension –Couples’ living together –Overseas’ pensions and section 70 deductions –Transition arrangements if changes made

12. Talking about NZS - 2 Minor benefit design decisions: –Interface with ACC pensions –Favoured periods of absence overseas –Annual revaluation floor –Hospital rates –Payments overseas –Special position of ‘specified Pacific countries’ None of these 10 major and 6 minor design elements has ever been the subject of a research-led national discussion Asking New Zealanders what they think first is a bad idea

13. The politics of change NZS the archetypal political football National won’t talk about it Labour now doesn’t know what to think Other parties suggested different changes Endless reports continue to suggest cost- cutting changes We need to break the cycle

15. What next? John Key’s threat to resign constrains debate until, probably, 2020 The debate will happen Much work to be done in the meantime Gathering impeccable, deep data is the first priority …and perhaps, politically acceptable

16. Impeccable, deep data? – home ownership

17. Understanding pension claims All retirement incomes are claims on the economy (private and public) Forced private provision to replace public provision shifts costs but does not reduce them (and may increase them) Governments must balance competing claims of all sections of society Regardless of today’s decisions/process, tomorrow’s taxpayers can change things

18. What really matters Growth

19. Deck chair from Titanic

20. “Democracy is the theory that the common people know what they want and deserve to get it good and hard.” - H.L. Mencken