Changing plans on pension age – why?

A change of government means the age of eligibility for New Zealand’s public pension will stay at 65. Meanwhile, the UK hastens its state pension age increase to 68.

This post looked at the rationale for raising the age of eligibility for state pension (superannuation) which in many countries is seen as a simple and transparent match to the trend of increasing longevity.  Written in March 2017, the post contrasted:

  • the UK, already on a track to increase its state pension age to 65 for women, then to 66 for all by 2020 and 67 by 2028, with legislated regular reviews which could change the future timetable for planned increases to age 68; with
  • New Zealand, which had just announced a plan to increase the age of eligibility for New Zealand Superannuation to age 67 between 2037 to 2040.

Since then, the two countries’ paths have diverged:

  • As recommended by an independent review, published alongside an analysis by the Government Actuary, the UK government announced plans to bring forward the increase in state pension age to 68 by seven years, from 2044/46 to 2037/39 “in line with continuing increases in life expectancy”.
  • In New Zealand, a general election brought in a new government. All three parties (two in coalition; one a confidence and supply partner) went into the election with a policy pledge to keep the age of eligibility at age 65. As a result, the plans for change have been scrapped.

The UK has hastened its plans for an increase in state pension age from age 65 to age 68 (and through its review process has a locked-in discipline to consider further changes), while New Zealand has decided to stay with its age of eligibility at age 65. New Zealand is going against the norm.  Its neighbour Australia is on an even faster track than the UK, with plans for the Age Pension age to increase to 67 by 2023.

Increasing life expectancy is often given as the rationale for increasing eligibility age.  Average lifespans are continuing to increase in most countries, but the rate at which mortality is improving has slowed in many countries, including the UK. New Zealand, though, is bucking that trend.

Longevity trends might be a critical part of the justification for raising the eligibility age, but often the stated problem is the increasing cost or even “unaffordability” of public pensions as the population ages. The cost of public pensions is higher in the UK (6.1 per cent of GDP versus 5.1 per cent of GDP in New Zealand according to the OECD, 2015), and in both countries the cost will grow as the populations age*.

Raising the eligibility age will reduce the future cost of public pensions. The recent UK decision to bring forward the increase in state pension age to 68 by seven years was estimated to save 0.4 per cent of GDP in 2039/40.   But other policy settings can address costs. For example, the New Zealand Superannuation Fund helps smooth the cost of superannuation between today’s taxpayers and future generations. The current government has chosen to resume contributions to the Fund, which were suspended by the previous government, and linked that specifically to helping “safeguard the provision of universal superannuation at age 65“.

There are no absolute rules on affordability – there are policy choices on what to spend on public pensions or where else some of that money could be better spent.  Comparisons between countries are then only interesting up to a point.  Governments make policy choices in different environments, including different aims and structures of public pension coverage, work and economic situations, and views on equity across income or other groupings.

One reason not to increase the age of eligibility is a concern for those who have worked in jobs which are physically tough. An answer might be to raise the eligibility age on the basis that means-tested allowances are available for those younger than the new age who are unable to find work. But means-testing can be a costly process and it introduces distortions around incentives to work or save. A universal entitlement may be preferred on the grounds of simplicity and equity even taking net cost into account.



* See here for UK, p. 51, and here for New Zealand.  Note that even the starting numbers are different from the OECD figures above, because of different calculation methods and data availability. Don’t put much emphasis on comparing the numbers projected into the future. The projections are made using one set of assumptions where a range may be more appropriate, the assumptions will not be consistent between countries, and each country includes different items. For example, should the UK include other pensioner benefits or the cost of tax relief on private pensions?  How should the net effect of the New Zealand Superannuation Fund be treated?

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