Hello and welcome along to the Property Academy Podcast by Opus Partners.I'm your host, Simon Hine.
And today on the show we're talking about when will New Zealand's pension system collapse?Now, New Zealand's superannuation system is actually one of the most efficient in the world.What do you mean by that?
So it takes up about 16% of all tax revenue, which is quite low by international standards.But it is also
not very sustainable, and we're going to take you through some numbers that are probably going to shock you and make you a little bit scared about the future for New Zealand's superannuation scheme.
So if we think about right now, there are roughly four workers per pensioner, right?So that's working age population.
So you've got Martha, and then you've got four young'uns helping support Martha, is that what you're saying?
Well, I'm not sure if I'd consider you a youngin', but yes, old Martha, she's just turned 65, lovely baby boomer, and there are four people supporting her.
Now the scary thing is that within the next about 15 years, by 2040, that is going to go down, or is projected to go down, to 2.76 people per pensioner.So if you imagine the four people supporting Martha now,
Now you take one of them away and you chop off a quarter of the other one, you've got two and three quarter people supporting each pensioner.
Now the interesting thing, when you say people supporting, you're talking about working age, right?Yeah, the working age population.And what's the working age again?It's 15 to 64.Okay, so that
interesting part about that is probably not a lot of 15 year olds contributing much to Martha, right?Because some of them are going to be at school, some of them are going to be at university.
So the first part of that group, and probably even some others, they're not necessarily going to be working, even though they're working age.
Or you might think about people who choose not to work.If you're a stay at home parent, then you're doing a very important job, but you're not going to be paying income tax through that job because you don't get paid for it.
So that actual number will be slightly less.So if we project out to the 2070s, it's projected to get closer and closer to two workers per retiree.So you've got half the number of workers per retiree that you have today.
And the interesting thing here is that I think there's this misconception
that as we go through our work life we put money into a pot and that pot builds up and gets invested and then when we get to retirement the government uses that pot to pay for our retirement.Now it doesn't work like that.
What actually happens is Ed and I are currently contributing to the tax bill and then that goes to helping out Martha in retirement. and so on and so forth.So as we get older and fewer people replace us, well then they're not having money to pay us.
So it's kind of like, I mean, if you think of it like a financial thing, it's basically a Ponzi scheme, isn't it? Oh, I mean, I wouldn't go that far.Andrew Nichols says superannuation is positive.You know what I mean, though?
Rather than actually... I'm not sure if I do know what you mean.Rather than earning a return on your investment and living off that, because I've put money aside, I'm reliant on new people entering the superannuation scheme.
Yeah.Okay.So we've got what we've got primarily what's called a pay as you go scheme.Now we do have some of that putting money away in a pot for the future.It's called the New Zealand super fund, but it's primarily a pay as you go scheme, right?
So the workers of today pay for the pensions of today. and the workers of tomorrow pay for the pensioners of tomorrow.
Now, the big issue is that the pensioners of tomorrow is a much, much larger group because we've got a lot of baby boomers coming in, and the workers of tomorrow is proportionately much, much smaller because we're going from four workers per retiree down to two workers per retiree.
And so that's where we start to say, is this really sustainable?Because that money is going to come from somewhere.
Yeah, and I know what you're going to be thinking.You're going to be thinking, well, this probably just affects all the old people.Now, I did some numbers in advance of this to scare you a little bit.OK, go on.So right now, you're 32?
And you're supporting the quarter of Martha. Okay, yes, all right.
By 2040, you're going to be 48 and you're going to be supporting just over a third of Martha, okay?Oh yeah, she better be baking me some nice cookies.
Yeah, now when she pops her clogs and you get to the age of superannuation, the age of eligibility, there's going to be one person supporting 40% of your lifestyle. So you're part of the problem.You're one of the oldies now.Do you know what?
That's actually the scary thing that it's like you think about superannuation.If you're like 40, you're like, Oh, it's so 65 year old.
Why are you looking at me?No, because you're 40 years old.
But the interesting thing is when you actually start to project out that in 25 years, we're going to have a bit of a problem when it comes to superannuation.If you're 40 now, you're the problem.And I don't mean that in a disparaging way.
I'm just saying like, it's going to be your problem in the future, right?Yeah, because we're going to be one of the ones that are receiving that pension.And there are two large demographic shifts that are kind of contributing to this.
First of all, old people are living longer, right?Damn it.
And it's because our healthcare system is a lot better, but the number of years that a person will spend in retirement is going up and up and up because we've kept the age of eligibility for when you start getting your pension the same 65 years old, but we're living longer.
And so. Every retiree, every pensioner is getting more expensive because you're drawing that pension for a longer period.The second big issue that we're having is that there are fewer workers coming in because people are having fewer births.
Now, what's really interesting is that fertility or the number of births per woman peaked in 1958.That was 66 years ago at just over four births per woman.
And then over the 60s and 70s, that crashed down to just over two births per woman in New Zealand.Now, the interesting thing is all of those births that were happening back in 1958, all of those people, they hit retirement last year, back in 2023.
And so we're already seeing that big shift of baby boomers heading into retirement, but we're not having the same number of people available to replace all of them, especially now that the births per woman in New Zealand is about 1.8.
So under two, under the replacement rate.And that's the reason why we're saying, okay, we've got all of these pictures, but we don't have the same number of workers to support them.How do we account for immigration?
Well, immigration could well be our saviour because the great thing about immigration is you get people in and they'll be working age, they might be 30 years old. and we haven't had to pay to educate them.
So they come in and they start paying tax straight away.So that could potentially be our savior.Of course, if we have a lot more people coming in to contribute to the tax system, we've also got to build the houses for them as well.
And so that'll contribute to housing demand.Now, there are a couple of other things that are really important that are really going to skew.
The first thing is that pensions as a percentage of government tax revenue are projected to increase from about 16 or 17% where they are today. all the way up to 21% of all tax revenue by 2037, which is about 13 years away.
Is that just because of the sheer volume of people?
Because there are that many more pensioners, which means we've got to spend 28% more revenue on the pension system.That's even after accounting for the fact that tax revenue is going to increase over time as the country gets wealthier.
So we're going to have to spend a disproportionately larger share of government spending on the pension system if we want to keep it as it is.That's according to Treasury's numbers.
The one that's really got to scare you Andrew now is if we project government spending versus government revenue, The Treasury is saying, look, over time, we reckon that government revenue is going to be about 29% of GDP.
But if we keep all of our settings the same across all of government, they project that core government spending is going to grow and grow and grow above 35% of GDP.So some things are going to have to change.
Otherwise, the government is going to go bankrupt.
So in terms of- I like that that's your, yeah, that's there, that's not good.
It's definitely not good.So I guess the solutions, kind of the major solution is, okay, well, we can massively increase taxes.So we can collect more as a country to try and cover these extra costs.
Or, like any other business, we can start cutting some costs.So we can take in the same amount of money, put more into the superannuation, and then we can get rid of money towards education or roading or hospitals.Or any government waste.
Yeah, and I don't think either of those options are going to be majorly palatable for any of us, but there will be a bit of one and a bit of the other.The other thing is changing the superannuation itself.So thinking about things like
Do we increase the age of eligibility?And this has been kicked around for a while now, right?So maybe people, because they're working longer, don't need the superannuation to kick in at 65.
Maybe we could have it at 67, or maybe we could have it at 70, something like that.The other thing is, maybe we don't get paid as much.So right now it's about $400 a week per person.
So maybe that either changes to $300 a week, or just doesn't increase as quickly.But then, of course, we've got a diminishing lifestyle, if you have that as the option.
Yeah, at the moment the pension is increased by wage growth, which is just over 4% per year.I think it would be totally reasonable to say we're only going to adjust it for consumer price index, so the cost of living increases.
That would mean that the pension doesn't go up as fast as it currently does, but it would make it significantly more affordable.And it would mean that whatever you could afford today on superannuation, pretty much stays the same going forward.
Of course, over time, though, you would see a lot more newspaper articles talking about the fact that workers are getting further ahead than superannuitants.
Yeah.The other thing which I think is kind of a bit of a no-brainer in my mind is means testing.So we don't necessarily pay everyone.If you've got a whole bunch of cash, you use that cash first.
And that's the way it works with the rest home subsidy in New Zealand.You have to deplete your savings before the government kicks in to give you the rest home subsidy.I think that's completely fair and I wouldn't object to that.
Yeah, in the past we've had types of means testing.There are different ways to do it.
Like there used to be what was called the super surcharge, which is that if you're receiving NZ Super, your tax rate on the first bit of earnings that you get is actually incredibly high.
And then after a while it starts to drop down to just take into account that if you're still earning a pretty decent income, then effectively you're not getting super, though it's a bit of a roundabout way of doing it.
And of course, I always give you a lot of shtick on the show, Andrew, saying you can't just look at Australia and think that that's inevitable.
But I do think there are some things to learn out of Australia's retirement scheme, which is the majority of people put over 10% of their pay away because they're looking after themselves.
In Australia, as we've talked about previously, the superannuation is means tested.That makes a lot of sense.And I think the general trend of where we will end up heading is that we will take more responsibility for our own retirement
because in 20, 30, 40 years, is it really going to be sustainable for two taxpayers to be looking after me?I don't really think that's fair.You know, at four workers per retiree, you think, okay, maybe that starts to make sense.
But at two, you're like, Well, if the current superannuation is, and that's for a couple, is about $400 a week after tax, that means that two people are giving me $200 a week.
I don't see that as particularly sustainable, especially when we start to look at the Treasury's numbers and say, actually, they are saying that the country would go broke if we don't change some of our settings, because expenses are projected to rise as a percentage of GDP, income's going to stay the same.
The other thing we haven't talked about is the healthcare system.
So as you get older and as we're living longer, retirees and pensioners, because they're living so long and they have more health problems as you get older, they're particularly expensive.
So not only do you have pensions becoming more and more expensive, you also have healthcare becoming more and more expensive.And so these are some of the issues we're going to have to grapple with.
I think the main takeaway for all of us is how do we be a little more responsible for our own retirement, for our own superannuation, because Look, if you're 55, you're most certain to get the superannuation as it is.
I don't think much is going to change for you.But if you're my age, if you're 32, and you're, what's that, 33 years away from the current age of eligibility, I'm pretty certain there's going to be some changes over the next 30 years.
Even for somebody like yourself, you're 40, you're 25 years away, I think there's probably going to be some changes for you as well.
Yeah, for anyone that I'm working with to build a financial plan, I absolutely would exclude that and consider it a bonus if you got anything.
It's quite interesting.I was reading in the newspaper, sometimes companies that are involved in helping prepare for retirement are accused of catastrophizing around the pension system and the retirement system, right?
Effectively, I think I saw an article by Mary Holm talking about that.Often, if you're a company that is into investments, you've got an incentive to say, don't rely on the pension system because it might not be there.
Instead, invest and grow your wealth because that's how those sorts of companies make money.
But I also think it is completely irresponsible to suggest that over the next 25 years, or the next 20 years, that there would be no change to the pension system, especially when you look at the demographic shifts and say, okay, we're going from four workers per retiree down to two workers per retiree.
If we look at projected government spending versus projected government revenue, the country would go broke if we don't change any of the the tax settings or the spending settings.
So I think, yes, there is an element of bias of any investment company who helps people prepare for retirement start saying, hey, the pension system isn't sustainable.But it's not just us.
The pension system, once you look at the facts, is not sustainable.Right, let's wrap it up there, but please don't forget to rate, review and subscribe to the podcast.It really does help us get the message out to more people.
If you're listening on Spotify or Apple Podcasts, you'll want to see some of these graphs.Google Opus Partners YouTube, it'll be the first thing that comes up.If you're watching on YouTube, make sure you hit that subscribe button.
We release new videos on here every Monday. Thanks for listening to the Property Canopy Podcast.I'm your host, Ian McKnight.And I'm Andrew Nichol.
We're going to be back here tomorrow with even more daily strategies, tactics, and insights to help you get the most out of your property market.Until next time.
Sign in
