Population Ageing and the Role of the State Affording Our Future Conference 10-11 December, 2012
Entitlement Reform
Old and Broke: 1 – Old • International comparisons of demographic changes present challenges. Nonetheless, median ages are expected to rise: – NZ, from 37 in 2012 to 44 by 2061 – AU, from 37.1 in 2011 to 41.3 to 44.5 in 2050 – UK, from 39.7 in 2010 to 42.2 in 2035 • When looking at specific groups, key themes that emerge from the three countries are: – A large increase in the population over 65 – The populations over 65 grow significantly too – The working age population (15 to 65) shrinks – The old age dependency ratio increases – The total dependency ratio will increase too
Old and Broke: 2 – Broke • International comparisons of long term fiscal projections provide even more challenges (“inconsistency multiplied by uncertainty”). But key themes emerge: – Following short term falls, government spending will increase – Tax burdens will increase – Structural deficits will be a problem – Growth in spending on health services will be significant, and health services will be increasingly consumed by the elderly – Spending on pensions will increase – Government debt will rise
The Australian Debate • Retirement age for men 65, male and female ages being equalised and raised to 67 by 2030, compulsory pension contributions (Australian Superannuation Guarantee), means- tested (income and assets) age pension, incentives for private health insurance, 69% health spending public • Decumulation – growing focus on drawdown phase of retirement income system • Long term care – Living Longer Living Better care reform package, Aged Care Financing Authority (pricing and financing issues across sector), single, national information line • Private health funding – means-testing Private Health Insurance Rebate • Longer working lives – Australian Law Reform Commission consulting on Grey Areas, including restrictive regulation in superannuation
The UK Debate • Retirement age for men 65, male and female ages being equalised and raised to 68 by 2046, auto-enrolment for private pensions, tax relief for pension savings, basic state pension linked to contribution history, no incentives for private health insurance, 83% health spending public • Decumulation – equity release and pensioner income choice (end of compulsory annuitisation but restrictions on drawdown remain) • Debate on funding care – with a “cap” model (Dilnot) on table • Plans to increase retirement age and link future increases to longevity • Little effort to bend down the health cost curve • Proposal to introduce a singe tier state pension and auto- enrolment being phased in • Longer working lives – default retirement age scrapped
The NZ Debate • Retirement age 65 with no plans to increase, auto-enrolment and subsidies for (DC) private pensions (KiwiSaver), universal state pension, no incentives for private health insurance, 83% health spending public • Accumulation – impact of KiwiSaver on national savings and distribution of wealth ownership • Universal New Zealand Superannuation – means-testing a “third rail” • Senior political opposition to introducing a timetable for state pension age increase • Little debate on funding care • Fast growing health spending with focus on inputs not outcomes • Working lives extended since 1990s
Sources of Pensioner Incomes • Often overlooked but fundamentally important dimension. Not particularly new (Beveridge Report, December 1942): – “social security must be achieved by co-operation between the State and the individual …. The State in organising security should not stifle incentive, opportunity, responsibility; in establishing a national minimum, it should leave room and encouragement for voluntary action by each individual to provide more than that minimum for himself and his family.” • Highlights importance of all “four pillars”: basic state pension (I), private occupational pillar (II), voluntary individual savings (III), and post-retirement work (IV)
Sources of Pensioner Incomes • Variations in the three countries: – Public transfers are relatively important source of pensioner income in NZ (64.4%), c.f., OECD (59.6), UK (49.8) and AU (44.6). Although KiwiSaver has changed the situation in NZ – Work accounts for a relatively low share in all three countries, especially in the UK (11.9), c.f., NZ (15.1), AU (19.4) and OECD (21.4) • Pillars I and II under pressure given fiscal positions and economic conditions, Pillar III under pressure given “decline in yield” and Pillar IV growing in importance • There is potential for drawdown of wealth (esp. housing wealth), esp. in the UK (65+ group own 29% of homes, 93% of these owned outright), but also in AU (28% of homes, 78% owned outright) and NZ (22% of homes, 65% owned outright)
Entitlement Reform • Themes: – Budget constraints (value for money) are only going to become more important. There are limits to which government debt is sustainable. Revenue cannot be increased indefinitely without shrinking tax base. Thus spending needs to be looked at (entitlement reform) – “You can’t always get what you want, but if you try sometimes […] you can get what you need.” Spending has an opportunity cost. Must be clear on goals (e.g., income smoothing or poverty reduction) – Ring-fences make reforms weaker – Funding the welfare state is not just the job of the government. The private pillar is important
Entitlement Reform • General options include: – Increase retirement age and link to longevity – Increase flexibility for older working – Means-test core state pension (New Zealand Super) – Tighten supplementary benefits – Tighten (reduce generosity of) indexation – Cut subsidies and tax breaks – Reform funding of and ration (around a core?) services like health and long term care – Look to bring budgets together • Important to have a coherent package and good process
Moving quickly helps • This path is politically difficult: – Frits Bolkestein, European Commissioner, February 2001: “pay more, work longer, get less, is not an easy message to sell” – Even harder when you add “sell your home” – Brian Lenihan, Irish Minister of Finance, December 2010: “The job of the Government on behalf of the State is to ensure that the common good is served: that requires saying ‘No’ at least as often as saying ‘Yes’” • But moving quickly helps: – Reduces the fiscal costs of change – Minimises disruption to families – Sidesteps political barriers. By 2050 the share of voters 65+ will increase by 12.2 percentage points from 18.1% to 30.2%
Contact Details • Thank you and please do feel free to get in touch – patrick.nolan@reform.co.uk – @patnzl
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