A recent Herald editorial is headed “Pension not enough even for ‘no frills’ retirement” and concludes “The future of an ageing New Zealand needs a lot of close attention”. Could this be a topic to exercise the Tax Working Group (TWG)?
The background paper prepared for submissions to the TWG outlines a number of broad “challenges” to the future tax system. The first of these is “changing demographics, particularly the ageing population and the fiscal pressures that will bring”. To date this topic has been little canvassed in public debate on possible future tax changes. Perhaps the Herald editorial can start this.
The steady ageing of our society is putting pressure on our two most substantial taxpayer-funded programmes – superannuation and health. On top of this demographic pressure there is the stress we have put on ourselves by relying so substantially on personal taxes to fund these large items. New Zealand is heavily reliant on personal taxes in its revenue system; while the average in the OECD is less than a quarter, in New Zealand it is nearly 40 per cent.
With our “pay-as-you-go” (PAYG) superannuation system we have assumed that the payments of taxpayers and the receipts of beneficiaries will more or less balance out. With ageing this assumption becomes increasingly untenable as the ratio between contributors and beneficiaries increasingly gets out of balance. Indeed, the system looks increasingly like a Ponzi or pyramid scheme where current taxpayers are supporting a set of financial arrangements that they are unlikely to be able to benefit from when they come to retirement age.
With health, ageing is also placing pressures on current PAYG arrangements. Again we have a system of inter-generational transfer that is becoming less viable as the ratio between contributors and beneficiaries increasingly gets out of balance. In particular, the demands of long-term and social care, the multi-dimensional nature of health problems for older people, and the fact that a disproportionate amount of health expenditure is committed in the last year of a person’s life are all starting to weigh heavily on current provision.
In consequence we have massive unfunded future liabilities associated with our state superannuation scheme and an annual wrangling exercise with the health sector. Yet, at the same time, we also have the rudiments of pre-funding and tagged social insurance schemes for both sectors – KiwiSaver and ACC respectively – which we could be in a position to formalise and develop. And we also have the example over the Tasman, where the Australians have a levy-based superannuation scheme and a universal Medicare based on an income levy, together with their National Disability Insurance Scheme (NDIS).
We could, building on Kiwisaver and ACC, establish twin social insurance schemes for future superannuation and health respectively. These would be based on actuarial estimates of the required rates on a regular basis, be set up at some arm’s length from short-term electoral politics, and underpinned with regulations and structures to ensure their durability, efficiency and flexibility for future generations. This would permit income and company tax rates to lower, but in part be replaced by actuarial levies on employees and employers.
Taking the pension first, KiwiSaver and the Superannuation (Cullen) fund should be considered together so that we can progressively transition our state pension scheme from a Defined Benefit to a contributory scheme with a guaranteed benefit (as currently offered). Individuals would be free to save more than required for the basic superannuation, but the role of KiwiSaver and the Superannuation fund would in the first instance be to ensure that no citizen of New Zealand with the requisite residential qualifications would fail to gain the current “National Superannuation” pay-out (although necessarily adjusted for future living costs).
As for health, ACC should be extended to cover illness and social care, but with the income support element taken out and placed in an entity equivalent to the Australian NDIS. ACC rates vary by industry risk for injury. This could be extended for illness to other harm-inducing industries such as alcohol, tobacco and sugar, which could be levied in proportion to their estimated impact on the health budget (this semi-actuarial work has already been done in the Ministry of Health’s “Health Loss” report of 2016). This change would be carried out progressively, and individuals could still, as they do now, take out private insurance cover over and above their social insurance.
Pensions (superannuation) and health are two very large components of any developed country’s budget. Historically, these were introduced in response to clear “market failures” in a pragmatic fashion alongside other budgetary items and we can see in retrospect that they are a form of inter-generational risk pooling. As such, these can be characterised as inter-generational transfers that have a strong insurable element about them.
As pragmatic responses to social need of an earlier era, these arrangements are starting to look archaic and dangerously vulnerable financially. We should now build on two current New Zealand pre-funding schemes – KiwiSaver and ACC – that provide the rudiments of social insurance but that have to date not been allowed to meet their full potential, even while we have well-established models across the Tasman. These schemes would provide budgetary certainty for their respective sectors and communities, they would improve the national rate of saving, and they would allow income and company taxes to reduce accordingly.
Emeritus Professor in Population Health and Social Science, Department of Statistics University of Auckland
Published in The New Zealand Herald, 7th August 2018