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New Zealand is facing an upcoming fiscal crisis. Its source? Our parents. In an unprecedented and worldwide scenario, our population is getting older faster than we are getting it on. As the number of pensioners increases, greater financial pressure is put on a decreasing number of taxpayers (read: us, when we finally leave the comforts of university). Laetitia Laubscher explains how our ageing population will affect your wallet.
It all started with one baby somewhere in 1947.
In the period we endearingly refer to as the ‘baby boom’, from 1947 to 1973, New Zealand women were producing, on average, more than three little ones each—even peaking at 4.3 kids per woman in 1961. Then, in a reversal of priorities, women and men found other things to do with their time—like careers, or divorce—thus delaying having babies, and decreasing the quantity of said babies. The average fertility rate started to slowly decline to 2.18 in 2009. This is currently still enough to ensure that our population replaces itself (‘replacement level criteria’), but is a poor comparison to the past, resulting in a serious thinning at the younger end of the age demographic pyramid—the beginning of an ageing population.
Since 2010, this sizeable baby-boomer section of the population has started to stroll into retirement with their palms open, ready for their piece of the New Zealand Superannuation pie. While they may seem like a harmless bunch, the fact that we are faced with a substantially higher population of retirees is no light matter. Currently there is one dependent member (those under 15 and over 65) of the population for every two taxpayers (those over 15 and under 65). According to a forecast cited in the a March 2002 Treasury report The Economics of Population Ageing, the amount of people in New Zealand over the age of 65 will have more than doubled from being 12 per cent of the general population in 1999 to 26 per cent in 2050. As medical advances have led to increased longevity, this growing grey crowd also boast a current life expectancy of around 23 years for males and 25 years for females after retirement.
But someone’s got to look after grandma and grandpa.
New Zealand first started showing some universal love to our older folks in 1898 with the introduction of the Old Age Pension Act, which provided each retiree with a taxpayer-funded £18 a year. Originally, a state pension was considered to be a mutually beneficial intergenerational agreement between those who enjoy the benefits of tax—the elderly—and those who pay the taxes. After working to pay taxes to support the elderly, at age 65 a taxpayer can retire and be supported by other taxpayers. It was almost quite a generously encompassing pension plan, even including Maoris, but it did leave out any Asian races. Presumably their stereotype of being hardworking self-sustaining small business owners must have been the reason affecting the government’s choice to bypass any provisionary schemes for them.
Currently, the New Zealand Superannuation is a fortnightly payment to New Zealand citizens and residents over 65; our ageing population is placing increased pressure on this taxpayer-funded system of care. Greater economic strain is placed on the taxpayer to fund an increasing number of Superannuation payouts, not to mention healthcare and other expenditures related to the elderly. In New Zealand, this situation is forecast to continue to worsen as the growth rate of New Zealand’s working-age population is predicted to decline and become negative by the year 2041.
So, where to from here?
Beyond increasing the working class’ taxes, increasing immigration, or diverting funding from other essential areas (which all present their own problems), three other solutions are being debated. The first solution under investigation is to raise the retirement age. This seems like an easy solution, considering it would increase the size of the workforce and decrease the amount of pension pay-outs.
However, some commentators argue that if a higher number of older and more skilled and experienced workers stay in the workforce, this may increase unemployment amongst youth who are comparatively inexperienced. (Although this seems to be more of a concern in countries already facing high unemployment rates.) on the other end of the spectrum, the Treasury report indicates that elderly workers are discriminated against in the workforce on the basis of technological illiteracy as well as their expectation of higher wages for longer terms of service.
Another consideration in raising the retirement age, suggests Dr Susan St John, Associate Professor of the retirement Policy and Research Centre of Auckland University, is that “there would be equity problems with raising the retirement age, especially for groups who have to ‘hang on’ until a pension is available to them, and cannot work due to illness or other reasons.”
A second option would be to cut the burden on the working population by decreasing the value of pension a retiree receives. According to Dr St John, this solution is problematic, as “40 per cent of pensioners rely solely on the Superannuation fund.” The potential consequences of pulling the financial rug out from under our ageing population aren’t pretty. In Germany, a country with one of the fastest ageing and slowest growing populations, an increasing number of pensioners are unable to afford retirement homes. The solution? Thousands of pensioners have been sent abroad to cheaper rest homes in Eastern Europe and Asia, left to age alone in a foreign country, far away from their families and home.
There may be hope though. Dr St John suggests that there is a third alternative. In 1985, the Labour government introduced a surcharge tax of 25 cents per every dollar of income earned by pensioners other than their pension. This essentially worked as an income test for pensioners, effectively ensuring that those who were able to support themselves through ongoing employment were less of a burden on government funds. In its first year, this surcharge saw 10 per cent of pensioners paying the value of their pension back entirely, and 13 per cent making a partial pay-back. Unfortunately, half a decade later this surcharge was abolished. “If that system were installed today it would lead to a saving of at least 10 per cent of taxpayers’ money,” claims Dr St John.
A Grey Area
Beyond the economic impact, an ageing population has further effects on the greater fiscal structure of New Zealand. For us students, a growing need for healthcare professionals and support workers may affect our choice in careers. an ageing population can also affect the affordability of certain services. “Some government provisions will get more expensive, superannuation and healthcare especially,” explains Treasury Analyst Rebecca Prebble. As the problems and shifts in our society’s structure as a result of a highly-dependent ageing population are unprecedented on a worldwide scale, there are many more areas which are likely to be affected, but for now the exact outcomes are unknown.
“There are many options to explore [in managing this demographic shift], but it is a decision that has to be made within the next 15 years,” says Prebble.
In the lead-up to the 2011 General Election the Labour Party announced their intention to raise the age from 65 to 67 by 2033 if successful. United Future proposes a flexible pension rate which increases as older workers choose to defer retirement, leaving the choice to retire between the ages of 60 and 70. The Green Party has no exact policies addressing the issue in place, but say they continue to aim to provide policies “that will benefit all New Zealanders and the environment.”
And as our population gets increasingly older and the issue creeps slowly closer, the government appears to be leaving the problem for future politicians—and future generations—to deal with. Encouraged last year by the Retirement Commissioner to begin gradually increase the retirement age from 2020, Prime Minister John Key responded, “[That] may be for another day, but not for today.” When that day is exactly, and how many problems we’ll have to deal with then, is yet to be seen.