Media Release

Friday 29 June 2012

Funding the costs of an ageing population

Economists need to engage in the discussions on how best to fund the costs of an ageing population

New Zealanders accept that with a rapidly growing population over 65 living longer in retirement, there will be in future increasing taxes to fund pensions, health and age care costs, shared between fewer working age taxpayers.

Most New Zealanders would be surprised if you told them that using savings to prefund post retirement costs like pensions, health and aged care is likely to be twice as efficient as funding those same costs from future taxation.

Economists who are familiar with the work of Nobel Prize winner Peter Diamond and former Council of Economic Advisers Chairman for President Reagan, Martin Feldstein, will know that provided the return on our invested savings is greater than New Zealand’s productivity growth rate, then funding from savings is a lot more efficient than paying for those costs out of taxation. It will also be a fairer allocation of costs between the generations. In remarks prepared for delivery at the NZ Association of Economists Conference in Palmerston North he asked economists to speak out in the community wide discussions on the future funding of superannuation, health an aged care costs about the options available.

Later this year the Treasury will be reviewing its long term fiscal forecasts using a reference group of advisers. To get the best value out of that review it should include an examination of the work of Peter Diamond, Martin Feldstein and our own Andrew Coleman. They should also extend the usual time horizon for the long term fiscal forecasts out to the end of the century to see if a transition to more reliance on Save-As-You-Go, SAYGO (savings) than Pay-As-You-Go, PAYGO (taxation) is feasible, affordable and can be fair between generations.

In the conditions of New Zealand it is likely that using savings rather than taxation can fund more pensions, health or aged care for the same contributions or meet the same costs with lower contributions.

When we undertook the project that produced our report Pensions for the Twenty First Century: Retirement Income Security for Younger New Zealanders I was surprised that the work of Peter Diamond and Martin Feldstein on the advantages of prefunding had not been part of the New Zealand fiscal sustainability and retirement policy debate to date.

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