A new report indicates the government will have three choices if it doesn't change retirement income policy settings; raise tax revenue, reduce spending on public services, or allow public debt to grow. Photo: RNZ / REECE BAKER
The future will be economically challenging for New Zealand if the government leaves retirement income policy settings unchanged.
A report by the Institute of Economic Research commissioned by the Retirement Commission indicates the number of people under 40 will be about the same by 2050, while those over the age of 40 will increase by one third, and the number over 65 will increase by half.
Report author Adrian Katz said the ageing population was a result of falling birth rates as well as a forecast in life expectancy.
He said the workforce would continue to shrink, even though more older workers were expected to continue to work beyond the age of 65.
"Migration is likely to play an important role in driving population growth and maintaining the labour force," he said, but that was not certain as the world's population was also rapidly ageing.
"New Zealand's migration levels will depend on its ability to attract skilled workers amid growing competition.
"While the extent of these trends is uncertain, they are unlikely to fully offset the overall decline in labour force participation."
A shrinking workforce will also increase the tax burden for younger New Zealanders.
Spending on the government pension will increase, along with health spending, just as the labour force shrinks.
"As labour force participation falls, tax revenues will need to be raised from a smaller share of workers," Katz said.
He said it could result in rising taxes, reduced public services, or growing debt.
"If government leaves retirement income policy settings unchanged, it has three choices - raise tax revenue by around 5-to-10 percent per worker, reduce spending on other public services, or abandon its long-term fiscal objectives and allow public debt to grow to over 100 percent of GDP."
However, Katz said an increase in long-term savings could change the outlook with increased investment in capital markets, which could support productivity gains, and reduce the role of NZ Super, while strengthening KiwiSaver.
"Another option would be to maintain NZ Super and KiwiSaver as they are today but significantly raise contributions to the NZ Super Fund to cover more of the expected increase in future NZ Super costs."
While there was a mix of options available to government, Katz said a period of transition was critically important.
"Retirement income policy settings affect people's consumption and savings decisions over their lifetimes, so changes should be gradual and signalled far in advance.
"Whatever the approach, moving along the spectrum from pay-as-you-go towards savings-based creates a double burden on the working-age population, who must pay for current retirees as well as pre-fund the increased costs of future retirees."
Sign up for Ngā Pitopito Kōrero, a daily newsletter curated by our editors and delivered straight to your inbox every weekday.
