With an ageing population set to strain the pension system, economist Susan St John proposes a way to reduce costs without deep cuts.
In the new paper New Zealand Superannuation as a Basic Income, University of Auckland economist Susan St John explores ways to reduce costs by reworking the current superannuation system.
The honorary associate professor in the Pensions and Intergenerational Equity Hub at the University's Economic Policy Centre highlights the economic challenges posed by Aotearoa's rapidly ageing population.
"The idea behind the proposal is to free up funds for those in need. More retirees have inadequate savings, are still renting, or are paying off mortgages. Many organisations, including foodbanks, are alarmed by rising poverty among older people, while aged-care facilities will struggle with the surge in demand."
St John examines various cost-saving measures, including raising the pension eligibility age, but argues this is "an ineffective tool that harms the most vulnerable while leaving well-off retirees untouched".
"Cutting the rate of New Zealand Super is another highly unattractive option that would lead to disastrous levels of poverty among older people."
Instead, she proposes a third approach: clawing back superannuation from top earners to generate additional revenue for future government spending in areas such as aged care, education, poverty reduction and climate change.
Her working paper introduces the New Zealand Superannuation Grant (NZSG) - a universal, non-taxable weekly payment (basic income) set at the current net amount received by those with no other income.
She argues that transforming the current pension into a genuine basic income could achieve significant savings with minimal harm compared to other options.
At age 65, if a person chooses to receive the NZSG grant, a separate tax scale would apply to each additional dollar of their earned or passive income.
"Whether other income is from paid work or investments, and whether it reduces or disappears, the right to the basic income floor of the NZSG would remain," says St John.
"Realistically, the basic income approach suggested in the paper is likely to mean that high-income people simply don't bother to apply for NZSG even if they could be a few dollars better off.
"But the option is always there should they need it. And, of course, the integrity of the NZSG proposal would require that the correct tax rate is paid on all income."
The paper shows that under realistic scenarios, at least 15 percent or $3 billion of the net cost of New Zealand Superannuation (NZS) per annum could be saved with little impact on the majority of low-income retirees.
Once in place, St John says the NZSG would be less complicated than other forms of clawback, such as a welfare-type income test directly on NZS, the 1985 surcharge introduced by the Labour government or a negative income tax approach.
St John notes that because the NZSG is consistent with current arrangements that don't require any retirement test, there would be little disincentive to earn extra from paid work.
She also suggests that once established, the NZSG could be expanded as a basic income to other groups, such as those in their 60s receiving the supported living payment.
Note: While Treasury was not involved in the paper's conclusions, it modelled potential savings under different tax scenarios using its datasets.
