Should the over-65s face a higher tax rate?

The idea is one way to address the rising cost of New Zealand Super

Summary:

• The cost of New Zealand Super is set to rise significantly as the population ages, leading to fears about its sustainability

• Raising the age of eligibility seems unwise, given it is not especially low currently and doing so would discriminate against those with shorter life expectancy

• It would be preferable to either keep Super the way it is or, as one tax expert has recently suggested, levy a higher tax rate on the other earnings of the over-65s

• This would effectively create an incentive on high-earning over-65s to not take Super, substantially reducing its cost, although there are potential objections to this proposal

Just how Super is our Super?

The sustainability of New Zealand Super – a relatively generous flat-rate pension paid to all over-65s – is a perennial topic of conversation. As the population ages, and people live longer in retirement, the cost of Super – currently around $22bn – is set to rise significantly. This sparks debate about whether New Zealand can afford to maintain this system.

The first thing to be said, however, is that Super is immensely successful. Its universal nature makes it easy to administer and dignified to receive. And because it is set (at least notionally) above the poverty line, at around two-thirds of the average wage, it does well at ensuring at least a minimal standard of living for retirees. Whereas 13% of families with children live in material hardship, just 4% of retirees do.

Of course, people dependent on New Zealand Super are not exactly living the high life, and pensioner poverty is growing. This is not least because Super’s payment rates are predicated on the idea that by 65 everyone owns their own home mortgage-free, and this is increasingly untrue. Still it is a successful policy by global standards.

Dispelling myths

It is also important to counter the myth that Super is predicated on people enjoying a fixed length of state-supported retirement. The argument sometimes runs that, at a certain point in history, the typical person only lived to 80, and thus got 15 years of Super. Now, if they live to 85 typically, we should raise the Super age to 70 so that people still, on average, get 15 years of Super.