OECD To NZ: Raise Pension Age To Prevent Super Shock

Economy

The OECD says New Zealand must extend the age of eligibility if the superannuation scheme is to remain sustainable, and it is concerned about the country’s housing market and climate change efforts

New Zealand’s ageing population will place growing strain on the country’s coffers unless the age of superannuation is increased, the Government has been warned in a new report.

The OECD has also expressed concern about Aotearoa’s “runaway house prices” and insufficient effort to meet its climate change commitments, while offering praise for the Covid-19 response.

The intergovernmental forum’s economic survey of New Zealand for 2022, released on Tuesday morning, said the country’s economy had recovered quickly from the pandemic shock “ thanks to effective virus containment, measures to protect jobs and incomes and highly expansionary macroeconomic policies”.

Government stimulus had been so effective that employment may have already reached its maximum sustainable level, and the economy was now overheating as demonstrated by inflation hitting 5.9 percent in the year to December 2021.

The OECD said the Government should withdraw fiscal stimulus “rapidly” while committing to explicit, long-term debt-to-GDP targets.

“While the fiscal deficit has begun to fall from the highs reached during the first wave of the Covid-19 shock, additional consolidation measures will be needed to put public finances on a sustainable path, including an increase in the pension eligibility age.”

Extending Super age ‘essential’ for pension sustainability

The age of superannuation has long been a contentious topic in New Zealand politics, with first John Key then Jacinda Ardern ruling out any increase during their prime ministership.

However, the OECD called on New Zealand to link eligibility to life expectancy, with the share of the population aged 65+ set to rise from 16 percent in 2020 to 25 percent by 2060.

As a result, the Treasury had projected superannuation expenditure would increase from five percent of GDP in 2021 to 7.7 percent in 2060, while healthcare spending would rise from 6.9 percent of GDP in 2021 to 10.6 percent in 2060.

“Based on these increases, the OECD projects that gross general government debt would increase from 49 percent of GDP in 2021 to around 140 percent of GDP in 2060 (baseline projection) and continue rising rapidly thereafter.”

Extending working lives was “essential for credibly ensuring pension sustainability”, the OECD said, and could be done in a way that meant the proportion of an adult’s life likely spent in retirement remained constant as was the case in Finland.

Responding to concerns about the negative effect of such a policy on groups with a shorter life expectancy, such as Māori and Pasifika, the report said the Government could provide superannuation on a means-tested basis from the age of 65 until everyone became eligible at the life expectancy-linked age.

Responding to the OECD’s recommendation at a press conference, Finance Minister Grant Robertson said it had been “a strong policy commitment of the Labour Party” to keep the age of eligibility at 65 and the Government had no intention of changing its position.

“This really ultimately becomes a question of priorities for each government and for us, we continue to believe that that is the appropriate age for the superannuation to become available.”

While the spend on superannuation as a percentage of GDP was relatively high compared to the rest of the world, Robertson said it was not out of kilter with a number of other countries, while the Government was aware of the broader issues related to an ageing population.

“In many senses, it’s an issue more in the area of health spending than it is in the area of superannuation in terms of how we have the ability to to finance and keep up with it, and we’re obviously making significant reforms in the health sector in order to be able to better support our ageing population.”

If house prices were to remain at their current level, it would take eight years for the median price-to-income ratio to return to pre-Covid levels.

The housing market, a topic of much angst within the country, was also raised by the OECD which said: “Runaway house prices are a major drag on wellbeing in New Zealand, especially for first-home buyers.”

“Real house prices had already increased much more than in most other OECD countries since the turn of the century before the COVID-19 pandemic hit, but went on to rise by another quarter since then, largely owing to the monetary policy measures implemented to support the economy.

“House prices have also increased more relative to fundamentals – household income and rents – than in most other OECD countries.”

However, the OECD noted the Reserve Bank had begun to tighten its monetary and macroprudential policies, which with an increase in interest rates and government policies to increase housing supply, should help to moderate house price inflation.

If house prices were to remain at their current level, it would take eight years for the median price-to-income ratio to return to pre-Covid levels.

Writing about New Zealand’s efforts to tackle climate change, the report said that while the country had “a solid institutional framework” to reduce greenhouse emissions, it needed to put extra measures in place to meet its objectives.

“The carbon price needs to increase substantially and complementary measures taken that address market failures not corrected by carbon pricing alone.”

At present, the Government was on target to miss both its target to reduce net emissions 50 percent below gross 2005 levels by 2030, and its 2050 net-zero commitment.

Covid variants, China slowdown, housing crash among risks

The OECD said New Zealand’s economic growth was projected to ease from roughly 4.7 percent in 2021 to 2.5 percent in 2023, with the passing of “rebound effects” from the Covid response and reduced growth in the housing market.

“Inflationary pressure will remain strong even after temporary effects from high fuel prices and supply chain disruptions pass, as the economy continues to grow faster than potential and the unemployment rate remains well below the natural rate, which the OECD estimates to be 4.5 percent.”

One of the main risks to its projection was if the lifting of border restrictions was delayed due to the emergence of new, vaccine-resistant Covid variants, postponing both the entry of migrants needed to ease skills shortages and the recovery of the tourism sector.

A sharp slowdown in China, New Zealand’s largest trade partner, would reduce export prices and lower farmers’ incomes, while there was also the risk of a large fall in house prices.

“Were this to occur, there would be a large negative effect on private consumption owing to the high level of household debt.”

Continued or worsening global supply chain disruptions could fuel higher inflation for a prolonged period, hitting consumer spending and constraining economic activities through shortages of imported materials.