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?

A report commissioned by CA ANZ and undertaken by the NZ Institute for Economic Research, maps the fiscal challenge set by an ageing population and gauges public attitudes to change.

Australia’s means-tested age pension and the universally available New Zealand Super continue a century-old tradition of government-funded pensions in both countries. But they are now under threat.

The number of retirees is expanding faster than the pool of tax-paying wage earners funding their pensions, which is not sustainable, Tony Negline, CA ANZ’s Superannuation Leader says.   

“Something’s got to give, whether it’s a lower pension rate, people retiring later, people saving even more through their working lives, or whether we limit the pension or New Zealand super more to those who either don’t have sufficient income or don’t have sufficient assets to look after themselves in retirement, or a mixture of all of those,” he says.

“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

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.

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.

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

New Zealanders acknowledge that the cost of supporting an ageing population is rising, but they don’t want to see further changes to the retirement system. 

Garry Shilson-Josling has been chief economist at both Australian Associated Press (AAP) and MMS Standard & Poor’s Australia/NZ and an economist at the Commonwealth bank of Australia.