The Post: What the Sensible Adults don’t tell you about the cost of super

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One of the firmest beliefs held by elite commentators – and one of the most ill-founded – is that New Zealand Superannuation is unaffordable. It is, in certain circles, a truth universally acknowledged, an opinion not worth questioning, the ultimate proof that our political system – which obstinately refuses to deal with the “problem” – is broken.

Nor does this opinion exist by itself: it forms part of an incessant drumbeat of fear, a repeated motif that there is no more money left. The country is about to go bankrupt, children, and the Sensible Adults are here to tell you that it’s time to cut super’s cost.

The basis for all this alarm? A projection that that cost will rise from 5% of national income in 2021 to – in 2060 – a startling … 5.9%.

Hang on, you may think: that sounds like nothing at all. But surely the Sensible Adults can’t be wrong?

Actually, as it turns out, they are. Their own, more alarming calculations typically fail to account for the multi-billion-dollar contributions the Super Fund will soon be making, not to mention the extra tax all those old people will pay.

Economist Bill Rosenberg, writing a few years back, pointed out that once those facts are incorporated, the estimated cost of Super in 2060 drops from 8% of national income to the 5.9% quoted above. And that’s on current settings, including eligibility at 65.

Ah but, the Sensible Adults say, you’ve forgotten about the dependency ratio. The total cost increase may be small, but a declining number of working-age people will each have to pay a skyrocketing amount.

Again, though, Rosenberg has a riposte. More pensioners will be counterbalanced by fewer children, so the number of non-working-age people sustained by each working adult in 2060 will be not much different to what it was in 1972. (Many people, moreover, will work past 65, easing the burden on younger adults.)

Nor is this a rogue interpretation. The Retirement Commission established last year that our pension spending is the eighth lowest of 38 OECD nations. Claims about super’s unaffordability, the commission concluded, are “not supported” by hard facts.

Still, the Sensible Adults insist, our retirement age remains ridiculously low. Again – alas! – inconvenient truths intrude. We already have a higher age of eligibility than 70% of developed countries, the commission found.

And, contra elite opinion, the point of super is not to give people the same “fixed” period of retirement they got in the 1980s. It is, rather, to provide a retirement that is as long, as comfortable and as secure as we, with our increasing national affluence, can afford.

There are, of course, other demands on the state’s budget, health spending chief among them. One could then ask: even putting aside the confected panic about the public finances, is it still wise to spend billions of dollars more on pensions, especially when some recipients are earning mega-bucks? Couldn’t we somehow free up cash for other purposes?

First off: if one did want to limit super’s cost, raising the retirement age would be absolutely the worst way to do it. That discriminates deeply against manual labourers and others with broken-down bodies, just hanging on till they hit 65, not to mention Māori, Pasifika and other workers with shortened lifespans. No-one has ever developed a convincing scheme for early super access on medical grounds.

A fractionally more sensible approach to cutting super’s cost would be to means-test it. Economist Susan St John has a conceptually elegant solution: over-65s who are still working would face a significantly higher tax rate on their labour income unless they give up their super.

The problem with this, other retirement experts think, is that politically it boils down to much the same thing as the “surcharge” levied in the 1980s and 90s, a policy so detested that it contaminated the whole idea of means-testing.

A means test only on wage income, moreover, wouldn’t capture retirees enjoying large capital gains or huge wealth holdings. But it would encourage assiduous tax avoidance, the artificial rearrangement of people’s financial affairs, and the deployment of armies of accountants.

The loophole could, theoretically, be closed by testing people’s assets as well as incomes. To which one can only say: good luck dealing with the radioactive political fallout from that.

And the loophole, ironically, points us towards a better answer. If we had comprehensive taxes on capital gains or wealth, much of which would be paid by the elderly, the richest over-65s would effectively cancel out the cost of their super payments.

Super could then remain universal, a payment more likely to protect the poor because even the rich would fight to preserve it. There’d be no expensive state apparatus to administer means-testing, no gaming the system, no troublesome edge cases.

Neither a capital gains nor a wealth tax, of course, is politically perfect. But still they might be the most logical solution to the super conundrum.