New Zealand needs Treasury scenarios to be realistic

New Zealand needs Treasury scenarios to be realistic so it can get the future cost of funding of NZ Super right

The 2012 Treasury scenario* for the future cost and funding of NZ Super that is now being widely used as a forecast is not based on realistic assumptions, CEO of the Financial Services Council (FSC), Peter Neilson told experts gathered at a Retirement Policy Workshop in Wellington today (3 April).

“We need a realistic no policy change scenario to start a useful conversation about what we need to do about the future cost and funding of New Zealand Superannuation and the sustainability of retirement income policy,” said Neilson.

“The Treasury has an important role to produce an independent and authorative Business As Usual (“BAU”) scenario on the long term trend in the cost of Government services. The best starting point for that is a BAU scenario which assumes no policy change and the continuation of existing trends.”

Neilson said that Treasury has assumed that:
• the improvement in longevity after age 65 that has been observed since 1970 will slow considerably over the next 50 years.

• successive Governments won’t give tax cuts to return fiscal drag for the next 50 years. (Fiscal drag is the increase in revenue received by the Government as inflation and real income improvements push taxpayers into higher tax brackets. Typically, in New Zealand fiscal drag has been given back as tax cuts, usually when the economy slows after a period of higher growth.)

• labour productivity will increase by 1.5 per cent on average over the next 50 years, a 25 per cent higher rate than the 1.1 to 1.2 per cent average rate that has been achieved over the past 40 years.

“The use of unrealistic assumptions produces a much more manageable fiscal scenario than is likely to occur in reality,” said Neilson. “The great risk for New Zealand is that this unlikely fiscal scenario will encourage policymakers to do nothing. If they do nothing then New Zealand will find itself in an unsustainable fiscal position within the next 50 years. Assuming away the scale and momentum of the existing NZ Super policy just provides an excuse to delay actions that could prevent the unsustainable no change scenario from occurring.“

With the assistance of Infometrics, the FSC asked the Treasury to prepare a more realistic scenario where the long term trend of improving longevity continues taking the NZ Statistics Very Low Mortality (“VLM”) scenario, where fiscal drag is given back as has been the practice in the past, and where labour productivity improves at the average rate it has for the last 40 years.

“When more realistic assumptions are used we find that results in an unsustainable fiscal position emerging over the next 50 years,” said Neilson.

In the United Kingdom the long term forecasts of the Office of Budget Responsibility, which is independent from the Treasury, assume a productivity trend based on the average over the last 50 years, said Neilson.

“The Congressional Budget Office in the USA similarly uses the average achieved productivity rate over the past half century to prepare its long term scenarios. On fiscal drag, the Office of Budget Responsibility assumes it is returned to tax payers after the first five years.

“The best starting point for a discussion on the future affordability of NZ Super is a realistic Treasury no change BAU scenario. The Treasury 2012 scenario does not provide that. The New Zealand public needs and deserves full and frank advice from the Treasury.”

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