Someone is going to have to pay to keep the country’s finances in order while the population ages – but who and how need to be decided soon.
That’s the message economists say the Treasury has delivered clearly with its latest long-term fiscal statement.
It outlines the pressure an ageing population will put on finances including from the cost of NZ Super and healthcare.
It suggests some solutions that could be unpalatable if they were introduced on their own.
Stabilising debt, the report said, would require an increase in the average tax rate on labour from 21% this year to 32% by 2065.
If GST was used instead, GST would need to rise to 32% over the same period.
NZ Super could be tied only to consumer price inflation rather than lifting with general wages.
If not, achieving the same savings would require the age of eligibility to rise to 72, it said.
“Means testing would need to kick in at relatively low levels of non-NZS income to generate similar levels of savings.”
Treasury said New Zealand’s policies were not sustainable for the long term.
Without change, by 2065 government spending per person would be double what it is today.
Health spending would be double, interest costs would be six times higher, defence spending would quadruple and spending on education and social security would grow modestly as a smaller share of public resources could be available for the younger generations.
Infometrics chief executive Brad Olsen said it was notable that NZ Super was the only form of benefit tied to wage inflation.
“That sort of inconsistency does lead to some pretty odd outcomes over time when you have one set of money being given out to a group in society that accelerates and grows at a much different, much faster rate than the support and money that you give to another group in society.
“It would seem to me more sensible that if the government is giving out money in general, that as long as it is maintaining its purchasing power, ie inflation adjusting it, that seems if it works for one group, it should sort of work for them all.”
Treasury said the government could also reduce other forms of welfare spending.
But to fully offset the projected increases in NZ Super by reducing other forms of welfare spending, non-NZ Super welfare spending would need to fall to 2.2% of GDP by 2065, compared to an average of 5.7% between 2006 and 2025.
Westpac senior economist Darren Gibbs said the time to act was drawing nearer.
“By 2030 there will be a very significant acceleration of ageing of the population, along with the costs an associated with that.”
It was likely that a portfolio of solutions would be needed, across both spending and tax, to address the issues, he said.
“The problem is so large that everyone is going to have to pay something.”
It was likely some would end up paying more than others, he believed, and it would become a political issue.
He said if NZ Super was tied to inflation rather than wages, it would allow the country to grow out of some of the problem in a way that the current settings did not.
People could fill the gap with private savings, he said.
“I hope what will happen is we will address it with a mix of policies.”
It would require political consensus, he said.
Olsen said Treasury had expressed a stronger view that there were difficult decisions ahead.
“But doing absolutely nothing becomes just eye-wateringly unsustainable.”
He said there was no point panicking.
“Would it have been nice to have started earlier? Sure, but trying to sort of change 40 years worth of current trajectory can take a little bit of time. And Treasury makes that point that you don’t have to solve everything immediately, but you do have to start. And I think that’s where you’re seeing some changes.
“I think the challenge is that … we’re still waiting for various tax policy conversations to come through. But we’ve also got other parts of the political system that are saying I’ll never talk about tax ever, ever, ever, you know, pinky promise. It’ll never happen.
“It just means that you’d never have what seems to be a more reasonable conversation.”
The statement noted that net migration had been higher than projected to date which meant the population had aged more slowly than it predicted in earlier forecasts.
But government debt was higher today than most statements had projected.
“We said in [the long term insights briefing] that since the late 1980s, the cost of government responses to economic shocks has averaged about 10 % of GDP per decade,” Treasury secretary Iain Rennie said.
“The Treasury has confidence that shocks will continue to hit NZ, though we can’t predict their exact timing and magnitude. It is good management to expect bad luck – and this is why rebuilding our fiscal buffers prior to the next set of shocks is a cornerstone of the Treasury’s advice to governments.”
Rennie said there was a “strong case for acting sooner rather than later” even when the future was uncertain.
The report said starting sooner would reduce the overall cost of change.
“Making all the changes now would squeeze current generations, who would bear a ‘double burden’ as they pay for current retirees as well as pre-funding their own retirement.
“However, if New Zealand continues to delay change, we will instead be squeezing people born in future decades. The longer we wait, the greater the transition cost will become.”
Rennie said there was no simple answer to how transition costs should be shared across generations.
“However, starting earlier provides more opportunities to share those costs, rather than leaving larger and more disruptive change to both currently young and future generations.”
