Ageing populations are weighing down the Australian and New Zealand economies, but voters don’t want to see changes to the retirement system, a new CA ANZ survey shows.

IN BRIEF

• A CA ANZ survey shows people don’t want changes to the retirement system, despite accepting the need for policy shifts.
• Over-65s are forecast to be 21% of the population in Australia and 24% in New Zealand by mid-century.
• New Zealand’s cost burden will be 7.5% of GDP by 2055, the report shows, due to slow growth in younger taxpayer numbers.

By Garry Shilson-Josling.

The populations of Australian and New Zealand are ageing, but people are reluctant to face up to the financial implications. That tension is the subject of the new CA ANZ future[inc] report Population Ageing – Do We Understand and Accept the Challenge?

“Australians are resistant to change, including the prospect of increasing taxes to fund the inevitable increase in costs,” he adds. There could also be cutbacks in other areas of government spending, higher tax, or policies to increase the tax base by lifting fertility rates, labour productivity and immigration. Either way, the message that hard choices have to be made has not got through to policymakers, Negline says. The CA ANZ future[inc] report also shows the difficult choices politicians face, with the community divided over ways to make the retirement system more sustainable.

We are getting older

An ageing population is common among advanced economies. Japan’s experience was earlier and steeper than most, with 28% of its population already over 65 years old in 2017, compared with 5% in 1950. 

The over-65 cohort is expected to reach 21% in Australia and 24% in New Zealand by mid-century from about 15% in both countries now, according to their statistical agencies.

The latest standard projections from Statistics New Zealand and the Australian Bureau of Statistics show the 65-plus populations growing in lockstep at an average of 2.2% a year over the next 30 years.

The dramatic divergence is among the younger age groups. The “prime working age” population, aged 15 to 64, is projected to grow at 1.1% annually in Australia but only 0.4% in New Zealand over the same period.

In other words, the retirement-age population in Australia will grow twice as fast as the part of the population called on to fund their pensions but in New Zealand this will be more than five times as quickly.

The message that hard choices have to be made has not got through to policymakers

 – Tony Negline CA ANZ’s Superannuation Leader

The rising cost of pensions

A key report finding is that with unchanged policy settings, the cost of New Zealand Super will rise much more rapidly than the cost of Australia’s Age Pension, relative to the size of their economies.

That’s not because of different policies, the future[inc] report is at pains to point out. It’s because growth in the prime working age population sets a lower speed limit on economic growth in New Zealand, meaning Australia’s economy is projected to expand 30% more than New Zealand’s by 2055.

So, while pension funding requirements will grow for both, New Zealand’s will grow more rapidly relative to the size of its economy because of its slower economic growth. Unless policy settings change, New Zealand Super pension payments will rise from 4.8% of gross domestic product (GDP) in 2015 to 7.5% of GDP by 2055, the report shows. By comparison, Australia’s Age Pension will rise more modestly, from 2.9% of GDP in 2015 to 3.9% over the same period.

There are other costs driven by an ageing population. The future[inc] report projects that New Zealand’s spending on healthcare will rise from 6% to 9% between 2015 and 2055, and Australia’s (including aged care) will lift from 5% to 7%. Those two projections combined imply extra annual costs equal to NZ$15 billion at the 2017 New Zealand GDP level, and A$55 billion for Australia at 2017/18 GDP.

These are big numbers, but the future[inc] report suggests the scale of the problem is not matched by an appropriate level of concern in the communities.

Related: Retirement Survey AU/NZ

The survey of attitudes to pension reform was done by research firm Colmar Brunton via an online survey and adjusted to achieve a nationally representative sample by age, gender, and region.

Assessing the appetite for change

The future[inc] survey commissioned by CA ANZ polled more than 1000 New Zealanders and 1200 Australians. “We wanted to test how much the community is on board, whether they were accepting that those changes needed to be made and, if so, what would be acceptable,” Negline says.

The survey was carried out by the NZ Institute for Economic Research to map out fiscal challenges set by an ageing population and to investigate attitudes to addressing these, in view of a fraught history of reforms in this space.

Some key findings:

• Two-thirds of Australians know the age pension will cost more in the future and almost three-quarters of New Zealanders know New Zealand Super will. And three-quarters in both countries know health care, including residential aged care, will cost more, too.
• Young people are more likely to accept that change will come. Among 25-34 year olds, only 33% in Australia and 39% in New Zealand believe the current pension scheme will stay as it is.
• Few believe they can live comfortably on the Age Pension or New Zealand Super – only 12% of couples and 12% of singles in Australia, and 16% of couples and 8% of singles in New Zealand.
• Many say they “could not get by” on these pensions – 31% of couples and 55% of singles in New Zealand, and 38% of couples and 47% of singles in Australia.
• The strongest opposition is to across-the-board cuts in pension levels, with 80% of Kiwis and 78% of Aussie giving it the thumbs down.
• The weakest opposition is to paying lower pensions to people with more assets or income – that’s the preferred option for 30% and supported by 45% of Kiwis, and the top pick of 44% and supported by 65% of Aussies.
• Increasing the age of entitlement for pensions has only weak support, with 54% of Kiwis and 55% of Aussies opposing it.

What’s next?

The future[inc] study is a fact-finding mission, rather than a blueprint for reform. It does establish one thing clearly – there is no clear consensus on the way forward. But it urges a cautious approach to getting the message across. “Scaring the community into begrudging acceptance is unlikely to be effective,” the report finds.

What’s needed is more compelling evidence about the costs of doing nothing, engagement with all stakeholders to build trust, and patience as governments build the case for reform. “Both New Zealand and Australia need to find a way of moving the public beyond wanting to have it both ways,” the report finds.

Related: Hands off savings, Australians say

Australians don’t want further changes to the retirement system, despite an acceptance of growing costs to support our ageing population.

A new survey has revealed Australians don’t want further changes to the retirement system, despite an acceptance of growing costs to support our ageing population.

The latest future[inc] report highlights the real hurdles in managing the cost of an ageing population

IN BRIEF

• The latest future[inc] study from CA ANZ identifies the rising cost of ageing populations in both Australia and New Zealand
• People on both sides of the Tasman are resistant to change, seeing a pension as an entitlement
• Meaningful reform hinges on public education, leadership and an electoral mandate

Anthony O’Brien

The latest future[inc] paper by Chartered Accountants Australia and New Zealand addresses the issue of population ageing in Australia and New Zealand.

The paper, Population Ageing – Do we understand and accept the challenge? investigates attitudes to retirement income policies on both sides of the Tasman.  Like many developed nations, each country faces an ageing population, increasing the cost of their superannuation/pension schemes and health care. The future settings for retirement policy and their fiscal outlooks however are quite different.

In New Zealand, the Labour Government under Jacinda Ardern has pledged to retain the age of eligibility for New Zealand Super at age 65. In Australia, eligibility for the age pension is rising to age 67 with a planned further increase to 70. 

As a result, the pension cost to GDP ratio in New Zealand is projected to rise by 60% in 40 years. In Australia the corresponding increase is around 25% under current policies and a small decline if the announced entitlement age increase to 70 is enacted.

The two countries have a fraught history of reforms in this space. A survey conducted as part of the future[inc] paper has revealed that neither New Zealanders nor Australians want further changes to the retirement system. That’s despite acceptance of the growing cost to support our ageing population.

Opposition to change

Indeed, the future[inc] study identified remarkably similar attitudes among New Zealanders and Australians when it comes to retirement incomes policies. The strongest opposition across all age groups was to broad brush reductions in the amount available through government pensions.

Tony Negline, CA ANZ’s Superannuation Leader, says both Australians and New Zealanders “are resistant to change, including the prospect of increasing taxes to fund the inevitable increase in costs.” This leaves politicians in a difficult position when it comes to retirement funding, and Negline says the study shows the community is divided on how to improve the sustainability of the system.

“The New Zealand public’s dominant preference is for the status quo to remain in place and that the government pension should be provided universally, without a means test,” says Negline. In Australia, the majority view also wants the status quo to hold steady, backed by a belief that the government pension should be provided without continued means testing.”

On both sides of the ditch, there is clear resistance to the prospect of increasing taxes to fund the inevitable rise in costs. There are also strong views regarding protection of the family home from asset tests, and an enshrined view that an age pension is an entitlement. Yet as Negline points out, the future[inc] research also highlights “a real gap when it comes to knowledge about the level of payment and how the schemes are funded.”

Yet few admit the pension provides comfort

The irony here is that government support payments are widely recognised as providing only a meagre level of household income. One in two (48%) New Zealand couples believe they could only ‘get by’ on current New Zealand Super levels – a figure that drops to 41% of Australian couples. Far fewer people, 16% of New Zealand and 12% of Australian couples, say they could ‘live comfortably’ at that level.

Negline sums up the conundrum of retirement funding saying, “Politicians are caught between a rock and a hard place – the public don’t want change, despite knowing the system will cost significantly more in the future.”

No easy solution

Negline notes, “It’s clear older citizens suffer from reform fatigue and they are sick of constant change.” That may be the case but at some point, something has to give.

“The clear finding from our survey is that we need more than public education to change this debate,” observes Negline. Though he adds, “Meaningful and successful reform will need a range of supporting factors – an electoral mandate, leadership, cohesion and persistence.”

Only time will tell if politicians in either country will be able to satisfy what appears to be a very tall order.

Discover the real challenges

Get the full picture on why the rising cost of an ageing population calls for significant change.

READ MORE

Source: Chartered Accountants Australia New Zealand

Australians and New Zealanders do not want their family home counted as an asset for government retirement benefits

IN BRIEF

• Strong rejection of the family home to be counted in any test for government retirement benefits
• Rejected by across all major demographics

 The recent market research we conducted for our Future inc document, Population Ageing, Do we understand and accept the challenge,makes it very clear New Zealanders and Australians do not want the family home’s value used in determining what government retirement benefits they might receive.

First some background information

Only very few New Zealand residents are ineligible to receive the government retirement benefit called NZ Super.  That is, there is no income or assets test.

The only real penalty for retirees with additional significant income, say from employment or savings, is that NZ Super is subject to income tax.

The concept of equity in the New Zealand context is that everyone regardless of circumstances receives the same amount.

One benefit of the New Zealand system is that there is no penalty for earning employment income – that is, you can continue to work fulltime and receive NZ Super.  NZ has also outlawed age discrimination and both these policies have resulted in a larger number of New Zealanders working beyond age 65 when NZ Super first becomes available than occur across the Tasman.

Australia, on the other hand, has decided on a very different system.  It applies both an income and assets test to determine eligibility to the age pension.  Whichever of these two tests that produce the lower result is the amount paid to a retiree.

Equity in Australia means that only the most deserving should receive the age pension.  In reality the impact of the Australian system is such that it actively discourages individuals from saving above cer

tain amounts and even encourages retirees to spend their wealth to maximise their government benefits.  This pension is also subject to income tax but with a generous tax offset system most retirees receive this benefit tax free.

In addition the Australian system effectively includes an amount for the family home in the assets test but at a low level.  For example, for a home owning couple, both retired, the assets test starts to have an impact at $380,500.  On the other hand a non-homeowner retiree couple can have $583,500 of assets before the assets test will begin to reduce their pension.

This $200,000 approximate differential also applies to single pension recipients.

What this effectively says is that the family home is worth $200,000.Why the $200,000 difference? This just happens to be the lowest median house price for cities and regions as measured by the Australian Bureau of Statistics.  The area with this lowest value is regional South Australia.

This notional value applies throughout Australia – even in locations where the median house price is significantly higher than $200,000.  For example, the median house price in Sydney is approximately $1.15 million but in the wealthy suburb of Mosman the median house price is about $3.5 million.

There is no doubt that relatively speaking the NZ Super is much easier and simpler to understand than the complex web of rules that applies in Australia.

Regular calls to include the family home in Australia’s age pension income or assets testing

Over the last several years there have been regular calls from a variety of think tanks suggesting that above a certain amount the market value of the family home should be included in the tests to determine age pension/NZ Super eligibility.

The reasons for this view vary but in some cases the argument runs that most retirees have significant untapped wealth in their family home and the government retirement benefits are an open ended benefit the cost of which is both countries is expected to rise strongly because of increases in longevity and population ageing.  Essentially the argument is that it is inequitable not to assess the market value of this valuable asset.

Some think tanks have produced research to show that retirees would have a better standard of living if they were able to extract value from their family home.