This is the second report from the New Zealand Treasury’s conference ‘Affording Our Future’ in December 2012. PensionReforms looked at another report here.
“This report considers the prospects for the welfare states in Australia, New Zealand and the United Kingdom. These countries provide an interesting comparison given their similar social policy traditions and similarities and differences in their approaches to reform. There are also important lessons – on what to do and on what not to do – that the countries can learn from each other.”
Dependency ratios are rising in all three countries as they age. This will produce fiscal pressures and, after 70 years of Beveridge-style welfare systems, it is appropriate to see how they might need changing.
A “key area of difference between the three countries” is the extent to which private provision plays a role.
“Australia has done the most to encourage a nation of savers and private contributions to services like healthcare. In the United Kingdom and New Zealand pensioners rely to a greater degree on the government for their incomes, although the situation has changed in New Zealand in recent years. A similar bias is present in their health systems, with both countries having relatively low levels of private health funding.”
The report suggests that the “best welfare states” have “strong private pillars”. This allows public provision to be better targeted.
“A mixed model also has important political effects, with a stronger private pillar helping to build consensus that funding the welfare state is not just the job of the government. As a result of population ageing, countries with small private pillars will face pressure to further expand their welfare states, while the broader funding base in other countries will mean greater flexibility to introduce pro-growth policies, such as more competitive tax systems.”
On the other hand, “…policymakers in the three countries still need to get a grip on key areas of age-related spending.” It can “no longer be put off”.
The expected fiscal costs are reasonably plain:
“Yet the argument for early reform is much more than a fiscal one. The temptation for governments will be to put off dealing with these challenges but this will limit future governments’ options. This is not just a challenge for the distant future but will be felt as political parties in all three countries start to develop manifestos for their next general elections (baby boomers are retiring now). Looking forward this is going to intensify, so that by 2050 the share of the voting population over 65 in the United Kingdom, for example, will have increased from 1 in 4 now to 1 in 3.”
The reform process should be “an open process of consultation and robust scrutiny of policies.” That is not an excuse for delays.
“Reform should also be based on a clear set of principles.” These principles could include acting quickly; not being restricted to what the state does now. Nothing should be “off limits” but no single fix (such as increasing the State Pension Age) is likely to suffice.
Citizens should be expected to do more for themselves, including working for longer.
The report “…also emphasises the need for entitlement reform, as the scale of the fiscal challenge means revenue changes cannot realistically be seen as the sole answer. There is a limit to which tax burdens could rise without damaging international competitiveness and leading to an erosion of living standards (particularly as shrinking working age populations mean that to even just hold revenue constant (as a proportion of GDP) average tax rates on workers could have to rise or tax bases expand in any case).”
The report suggests that the “…state pension system should focus on poverty reduction.”
Reforms should also aim to “[i]mprove value for money for support for accumulation. There is a need to reform poorly designed subsidies and tax breaks for savings and insurance;” also to “strengthen the decumulation phase.”
The state pension age should increase as working lives increase.
“Australia and the United Kingdom have already introduced plans to increase their ages to 67 by 2013 and 68 by 2046, respectively. There are no plans to increase the age from 65 in New Zealand, which is a major omission.”
The report emphasises that none of this will be easy.
“Yet delaying reform will increase the costs of change and mean future reforms must be more disruptive. There is a need for an honest conversation over the real costs of population ageing and how to address them, no matter how difficult this may be.”
PensionReforms thinks this is all sensible but feels that the challenges might be over-stated. There is certainly a need to gather data and start the conversations discussed in the report. But PensionReforms suggests that calls for greater private provision are overdone and that both Australia and the UK need to move more than the report indicates. The costs of retirement incomes, including the costs of tax incentives for private provision, in New Zealand are somewhat less than in the UK and are even smaller than in Australia. Also, despite being seemingly behind with the State Pension Age still fixed at 65, New Zealand has one of the highest older-age labour force participation rates amongst developed countries.
PensionReforms agrees with the recommended open process of consultation but suggests that the Tier 1 pension should do more than aim simply to reduce poverty amongst the old. In fact, the state can do better than that, especially if it gets rid of tax breaks for private provision. (File size 651 KB; 65 pp) 681