What the LTFS does and doesn't tell us about NZ Super

I'm going to take a position that's guaranteed to sideline almost everyone: we need to tweak NZ Super (NZS), but not because the long-term fiscal position statement (LTFS) tells us so.

That was the conclusion of a report I wrote a lifetime ago: Embracing a Super model: The superannuation sky is not falling. I can't bring myself to read and repeat the whole report again, but it's worth a squiz if NZS is your thing (and my God, there are a lot of people who get jazzed about Super). The main argument in that report was that the future fiscal costs of NZS are not a cause for concern in and of itself, but there are distributional impacts to consider that support the case for change.

First, let's look at what the LTFS does tell us (based on projection based on historical trends): 

• Net debt rises from 34% of GDP to 177.3% in 2061.
• Debt financing costs rise from 0.6% of GDP to 7.6% in 2061
• And Crown net worth decreases from 11.7% of GDP to -117.6% in 2061

So, fiscally we're not likely to be in a happy position if no big policy changes are made. Regardless of your views on what level of debt is acceptable, carrying high levels of debt can harm economic growth, and can leave the country vulnerable if unexpected disasters (say, an earthquake or pandemic) hit and require even more borrowing and expenditure.

The LTFS also projects future fiscal costs based on demographic change:

• The cost of healthcare rises from 6.9% of GDP to 10.5% in 2061.
• The cost of NZS rises from 5% of GDP to 7.6% in 2061.

Are these numbers big? Are they bad? These are judgements the LTFS can't make. But I'll be honest: the rise in the cost of NZS doesn't spook me.

Here's a graph from the Embracing a Super Model report which is obviously a little old now, but shows how the costs of our pension compare to the OECD average in 2050.

I find it interesting that headlines following the LTFS focus so heavily on NZS but hardly worry at all about the rising cost of healthcare. The logic cannot be that our pension costs are out of step with most other countries, nor that NZS is particularly amenable to policy change: it's the political hot potato. I'm not implying that I know of good ways to reduce health spending while achieving good health outcomes, but it's surely something to consider even if the conclusion ends up being "nope, there's zero wriggle room or opportunities to do things better".

And as for those high debt levels in the LTFS....yes they're scary, but one has to wonder whether they are actually even feasible. It assumes that spending continues to exceed revenue over a large period of time, which is a shift away from the Public Finance Act. Here's what the Office of the Auditor General had to say about the 2016 LTFS:

There are two main reasons why, from 2016 onwards, the Government's long-term financial position is projected to become unsustainable over the long term:

• government spending continues to exceed government revenue because, as a share of GDP, tax revenue is held constant and healthcare and superannuation costs increase; and
• finance costs increase significantly because all resulting operating deficits are funded by debt.

In our view, it is difficult to imagine these assumptions would hold over a 40-year horizon because both move away from many of the principles of responsible fiscal management set out in the [Public Finance] Act. The duration of these assumptions reduces the reasonableness of the outlook and potentially the confidence that users have in the 2016 Statement's main messages – particularly when we look at how government finances have moved in the past.

Yet, in spite of all of this, I still think there are tweaks to NZS that can be made. First, because where inefficient spending can be identified, changes should be made. While the universal eligibility of NZS is definitely a strength, there are ways of better-targeting it while preserving universalism. And second, because in spite of the fact that I think there's a lot to like about the NZS model, there are still tweaks that could be made to ensure the costs are better distributed: as it stands, public spending on NZS could increasingly become a tool for regressive redistribution, transferring funds to the relatively well-off. The opportunity cost must be considered where other groups face greater hardship and/or need.

We shouldn't change NZS because of what might happen in the future. We should tweak it because the model already has a regressive element and it's only likely to get worse when there is a higher ratio of superannuitants to working age people.

These are the recommendations in the Embracing a Super Model report with some further additions in italic brackets because I'm not confident the report was clear enough about this:

• Recommendation 1: Link the pension age to health expectancy (while acknowledging that there are huge variations in health expectancy both between population groups and within population groups. This will require better support from the welfare system for those people who have not reached pension age but cannot work. I think there's more work to be done about compensating the losers of this approach, but that's not a reason to avoid action IF there are net benefits).
• Recommendation 2: Index NZS to CPI only rather than both CPI and wages (again, while ensuring that those on lower incomes are not worse off under this new arrangement, with support via the welfare system).
• Recommendation 3: Contributions to NZ Super Fund should not be at the expense of paying down debt (yep, I don't have much to add to this except that it is infuriating that this isn't happening, not even in response to Covid). 
• Recommendation 4: Productivity growth will make NZS – and everything else – more affordable (this is a cute recommendation. I mean, it's right and important, but no one should be deceived into thinking this is a straightforward task).

Rightly or wrongly, the LTFS has sparked the semi-regular debate on what to do about NZS. Refusing to touch the system in order to provide certainty to those approaching the pension age isn't really an excuse: starting the conversation early means you can ensure a smooth transition rather than a sharp shock if the need arises in the future.

And, if governments (plural, because neither major party has made much progress when in government) really really do not want to even look at NZS, then we at least need to have a conversation on what does need to give. It is not likely that NZ will reach the very scary debt levels in the LTFS projections because something will need to give. It would be great to know there is a plan for what that something might be, and that this is something governments are proactively thinking about, rather than reacting to when the time comes to take action.

*One thing I would change in the Embracing a Super Model report is the denial that there is a looming fiscal crisis or that NZ is sitting on a fiscal timebomb. Overall, it kind of looks like we are if nothing changes. But the point I was trying to make is that NZS itself is not yet looking like a timebomb.