Retirement income policy reform: start with values, not cost

Superannuation is not just a cost problem. We should recognise that people hold strong views on the social value of retirement income and want stability, not reform.

The increasing cost of the first tier of public pensions is often the starting point for a discussion of the retirement income policy problem.  This recent NZIER report Retirement income policies in Australia and New Zealand is a good example of that narrative in its subtitle Facing the fiscal challenge from an ageing population.  The report covers New Zealand Superannuation and the Age Pension in Australia.

Stating the problem

The average cost of public pensions in the OECD is set to increase from 8.9 per cent of GDP in 2013-15 to 9.5 per cent of GDP in 2050*. This may not seem like an impossible fiscal challenge, but the figures reflect that many countries have already made reforms to cut costs.

Entitlements can be cut by reducing the level of the pension now, or over time by reducing the rate of increase, or by reducing the numbers of people eligible, or by means-testing. If there are no reforms to cut costs, then an increasing share of taxation will be needed. Some of this could be pre-funded.

  • New Zealand’s current policy is to maintain entitlements to the universal NZ Super at age 65 but increase pre-funding through the NZ Superannuation Fund.
  • Australia is keeping its means-tested Age Pension, with an increase in eligibility age to 67.

NZIER adds new and interesting insights from research on what people know about superannuation, and on their preferences for reform to address the increasing cost. Despite the New Zealand and Australia pension systems being very different, people in both countries want their current system to stay in place, unreformed. Each option for policy reform attracts some support, but there isn’t one option revealed as a majority favourite.

NZIER take from these results that…

…politicians are between a rock and a hard place: the public resists changes despite knowing it will cost significantly more in the future… [the public thinks that] “the government has a solution looking for a problem”. p. 32

The proposed solution

Even after further information was given to survey respondents about the reform options, the responses did not change much. NZIER took this to mean that

…public education on population ageing is unlikely on its own to move the debate forward. p. 26

But NZIER stayed with the view that increasing public pension cost is a problem and reform is necessary, so recommends more debate, based on setting out

a future scenario that is clearly “better” than the current projections. p. 34, and,

an evidence-based discussion of everyday Kiwis’ and Aussies’ attitudes to retirement income policy and their openness to policy change. p. 33.   

Or even take Kiwis and Aussies through a structured process such as a citizen’s jury so they can make a more informed choice from amongst the policy options. p. 34

Why the solution may not work

Over a decade ago, the UK’s Pension Commission gathered research, evidence and analysis to recommend reform of the public and private pension system. The Commission’s work had a good deal of publicity, so it can fairly be said there was a national debate.  Focus groups and a citizens’ jury were used.

The Commission found similar attitudes in the British public as now clear for Kiwis and Aussies. The Commission worked through detailed descriptions of four reform options, explaining the costs and the trade-offs needed to be faced to make the choices necessary because of the ageing population. Here too, people favoured not one single option, but a mix of paying more into a private pension, more in tax to support the public pension and voluntarily working longer**. Participants’ understanding may have improved after detailed explanation and discussion of the options, but preferences changed little. The Pensions Commission view was that:

This surprising lack of movement in overall preferences demonstrates how the four options touch on deeply laid attitudes on issues of social justice, autonomy and the role of government in peoples’ lives. p. 106 Pensions Commission second report, 2005

This UK experience suggests it is unlikely that people in Australia and New Zealand will agree on a reform option, even after a participative structured process. If superannuation touches on deeply held attitudes, facing the fiscal challenge from an ageing population is unlikely to become a rallying cry.

Why the solution may not be necessary

The Pensions Commission successfully set up a process for politicians to make changes to UK pensions legislation.  But it should not be copied as a template for how to make change in other countries without understanding that the UK system had plenty of unique problems beyond population ageing.  The increasing cost of public pensions was the least of the UK’s worries, with the cost of public pensions actually forecast to reduce from 5.5 per cent of GDP in 2000 to 4.4 per cent of GDP in 2050 (p. 61).

More pressing problems were that the public pension was ungenerous, complex, giving higher pensions to people who has earned more, while poorer older people were increasingly relying on means-tested welfare, and high tax incentives for private saving persisted even as private pension schemes became unsustainable. People were engaged on these issues, all of which touch on the social values the Commission identified.

The reforms that the Pensions Commission started led eventually to the UK introducing a pension system very like New Zealand’s: a new single-tier public pension is almost universal and private pensions are focused around auto-enrolment.  The UK public pension is going through a complex transition from old to new. Apart from that, critical differences between the two countries’ systems are that the age of eligibility for the public pension is increasing in the UK but not New Zealand; and the auto-enrolment contribution rate for private savings is higher in the UK which has more generous savings incentives.

The scale of current problems is very different in New Zealand. New Zealand only has to change a couple of parameters to achieve a pensions system very like the UK’s, but to get there the UK first had to go through complex structural change.

A different approach

In a country like New Zealand, where a much-loved system does not have major, widespread negative outcomes, a dogmatic pursuit of change on cost grounds seems misplaced. A fiscal problem statement will not resonate without a values-based, more personal discussion.

In the New Zealand election of 2017, the party then leading the government had a policy to slowly increase the age of eligibility. That party gained the largest number of votes, and although they did not form the government, the policy was proven to be not entirely toxic.  A cost analysis could be found in the Treasury background papers, and many earlier reports had covered cost issues, but the main message on the rationale for raising eligibility age focused on values. People living longer is something we can all relate to. The way the costs and benefits of superannuation fall on different generations speaks to the widely shared value of fairness.  The slow pace of change reassured those who dislike reform.

A values-based policy reform will still require trade-offs to be made (not just within the cost of public pensions, but between pensions and other costs), but those trade-offs have to be informed by the values of the time. Instead of starting from regret that it is difficult for people to change their values to follow the cost narrative, policy makers must fit policy around what those values are.


* As the NZIER report correctly explains, such forecasts as simply projections made assuming no retirement income policy change (unlikely) using only one set of economic and demographic assumptions (a range is more appropriate given the uncertainty involved). The assumptions will not be consistent between countries, and each country includes different items. Think of such projections as giving a direction of travel rather than a detailed track of what exactly will happen.

** The fourth option was people over 65 getting poorer relative to the rest of society

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