Saturday, December 18, 2010

On the economics of the caring society...

This past week saw the release of the government's Budget Policy Statement; this is the first step toward the Budget for 2011 and sets out "where we are at present" and "things the government wants to do". That the statement carried "bad news" is not an understatement. A deficit was forecast for the current year. The bad news is that it is in fact considerably more then forecast, and greatly more than the previous years' actual deficit. Brian Gaynor has a summary here which gives a reasonable run-down of the salient points.
Finance Minister Bill English announced on Tuesday that the Crown's operating deficit before gains and losses (obegal) is now forecast to be $11.1 billion, or 5.5 per cent of gross domestic product, for the June 2011 year. This compares with the previous deficit forecast of $8.6 billion or 4.2 per cent of GDP.

The 5.5 per cent of GDP deficit compares with a similar deficit of 6.1 per cent for the 30 OECD countries but a number of points are worth noting:

New Zealand's projected deficit is not too far off the four "pigs", which are forecast to have the following budget deficits to GDP next year: Portugal 5.0 per cent, Ireland 9.5 per cent, Spain 6.3 per cent and Greece 7.6 per cent.

As he points out, things have not been that bad...
New Zealand had a great record throughout most of the 1990s and 2000s with 15 consecutive budget surpluses between 1993 and last year. Norway was the only OECD nation to have a better performance over the same period.

But as the saying goes, all good things must (will) come to an end. And so it is.

Gaynor lists the causes of "the end" thus -
The Crown's fiscal position has deteriorated since 2008 because of a number of initiatives including KiwiSaver, Working for Families, the indexation of benefit and this year's income tax cuts.

There have also been a number of one-off items, including the Canterbury earthquake and the leaky homes scheme, while tax revenue growth has slowed because of the weaker economy.

There are essentially two elements that give rise to the deterioration of NZ's financial position over the next 40 years. They parallel the difficulties being experienced in the PIGS economies; the increasing cost of age pensions and health care. There is a common factor in the two; the "aging population". Gaynor again -
The Treasury's long-term Crown revenue and expenditure figures are based on a number of assumptions, the most important of which are population demographics. Its main assumptions are:

The total number of individuals aged 65 and over will rise from 549,900 this year to 1.3483 million in 2050. As a percentage of the population, this age group will increase from 12.6 per cent to 24.5 per cent over the same period.

The number of individuals aged 90 and over will go from just 22,400 this year to 155,100 in 2050. This age group is expected to represent 2.8 per cent of the country's population in 2050 compared with 0.5 per cent at present.

Yep, include the ol' probligo in that demographic for sure.
The first expenditure line, which is New Zealand Superannuation, demonstrates the dramatic impact of the ageing population on Crown finances. NZ Superannuation is projected to cost $71.1 billion in 2050 compared with just $8.3 billion last year.

Most retirees claim that they are entitled to full Government superannuation because they paid taxes throughout their working lives but the big question is whether the country can afford this.

There will have to be a dramatic increase in the country's economic performance, and the Crown's taxation revenue, if the current superannuation scheme is to be maintained for all those aged 65 and over.

The next major expenditure item is health, which is projected to blow out from just $13.1 billion last year to a massive $95.1 billion in 2050.


The basic problem is that total government expenditure on superannuation and health is projected to escalate from just $21.4 billion last year to $166.2 billion in 2050, yet the working age population - those in the 25 to 64 age group - will only increase from 2.268 million to a projected 2.612 million over the same period.

In other words, each working person will have to pay annual tax of $63,600 in 2050 just to pay for superannuation and health, compared with tax of only $9400 this year to pay for the same two items.

And that is where I drop out of the demographic. It is not as if this is a "new" problem. It was foreseen when I first started work; it was the number one reason why I started contributing to personal superannuation savings almost immediately. But let's leave that debate there because there are some very sore points within.

It is at that point that dear old Garth George chips in. Now, to explain, George is one of those media commentators who would fit very nicely with the lifestyle and attitudes of the likes of TF Stern. Not that I expect TF will pass this way, let alone comment. Unlike TF, George is a sad, angry, and probably (I am guessing) lonely old codger.

Garth George picks up on that last (quite true) comment from Gaynor and uses it to beat his anti-abortion drum.
However, when it comes to the argument that the major problem with national super is the population increase in the number of people aged 65 and older, I want to vomit.

I wonder if it occurs to any of these doomsayers - invariably comfortably well-off folk in middle age and younger - that between April 24, 1974, and the end of last year, more than 409,000 potential New Zealanders have been slaughtered in the womb by state-paid abortionists - at the cost of tens of millions of taxpayer dollars.

I do not need to quote any further from his tirade.

I wonder if it has occurred to George that if those 409,000 "potential New Zealanders" were alive in 20 years time (when the last of them might have been starting work) there would likely be 200,000 more in the unemployment lines; 60,000 on permanent benefits as permanently hospitalised adults, or enjoying the free board and lodging of HMTK (I doubt that ER will be still going in 30 years...); the rest having departed for greener pastures in Australia and further afield.

To make matters worse, he completely ignores the fact that adding 400,000 to the total population used for the Treasury numbers (quoted by Gaynor) reduces the taxation load from $63K to $55K. That assumes that all of those 400,000 people will be in full employment; an unlikely prospect.

As I said, Garth George is a sad, angry old man. He is also well past his use-by date.


Anonymous said...

The Garth Georges of the world are indeed sad relics. And that's quite enough on him.

Government Superannuation is interesting. Our crimson-wattled commentators have a mantra along the lines of "I deserve my super as I've paid my taxes all my life". Notwithstanding the fact that those very taxes have helped fund the health system, paid teachers, judges, police and a welter of others who keep us in the way we is accustomed to, the elderly beneficiaries (and despite ther protestations that's what superannuitant are) argue that they have a right to handouts to the tune of $whatever it is, no matter that many of them are millionaires plus by virtue of all the moolah that wasn't squeezed out of them by the taxperson.

And furthermore, said beneficiaries begrudge the very ones who DO need the handouts, bu virtue of being on the lower tiers of the economic pile. The noble Mr Key of course, to garner a few more populist votes from the grey of locks, promises on pain of disestablishment from his PMship, not to raise the age of entitlement to NZ Super, not to reduce the weekly entitlement. To use the word twice in the same paragraph, a noble sentiment indeed. He is assured of a nice little income from his ex-banker days and of course his pension for being such a good fellow as an MP.

The Nats cannot of course grasp the nettles that might move this country ahead a little. Thanks to Our Winnie the NZ Super system is what it is now, much cheering and huzzahs. But as we all know the greyed domes of the arthritic, cardiac bypassed brigade of
seniors will shake in ever increasing numbers at the very notion of a suggestion of the concept of (hushed tones!) means testing...

So what does our Government do while its thumb is stuck firmly up its fundament? Actively discourages an improved public transport system in NZ's biggest city, thus contributing to pollution (who ends up paying for that?) but also continuing to fleece the populace by assorted taxes for the privilege of not having a decent public transport system. Won't reduce the legal blood alcohol limit, thus ensuring that while lives will continue to be lost and disrupted by alcohol-caused 'accidents', the Government coffers will continue to be filled by taxes on liquor, and at the same time appeasing the booze lobby. Offers tax reductions to those whose weekly income exceeds the annual income of a checkout operator. Oh...I forgot: they will spend their extras thus 'stimulating the economy'.

All because our MPs want to stay in power another term...

The probligo said...

Be careful here, Monkfish, for yt falls into that category of "the grey of locks", and I have only 2 years before gaining my birthright of becoming a ward of the state. And, you may be assured, I will fight to retain that right, to the death. Probably, literally.

That, on the other hand, has not dissuaded me from the benefits of saving for my own retirement.

If things had gone to plan, I could have retired some 4 years back on 75% of my last five years salary. It did not work out that way. The scheme (a very well known and popular at the time) went broke, and I was left with just my personal contributions and accrued interest, not the employer subsidy portion, amounting in all to about 45% of the total credit to my account. On enquiry, I was told that if I wanted to withdraw my savings from the scheme, the withdrawal value was around 60% of the total credit in my account (yep, the NEW balance).

I will leave that there, because it is not the biggest thievery imposted by successive governments on the value of my personal savings.

That honour lies with the fact that the true value, the true worth of those savings has gone from representing about 2.5 years of my full salary to just under 2 years; a loss in value of roughly 25% in 20 years. I estimate that another 10% value will be lost by the time that I get to 65.

Anonymous said...

As I said, it's an interesting situation. I'll expand a little more...

I am a superannuitant, and the weekly feed from Uncle John helps keep me in the manner to which I am accustomed. But, and this is a BUT, though I am legally entitled to it, being of a senior age, how much am I morally entitled to, as we (I have a spouse) have a small independent income? I have no 'super' as such from my old workplace, having ditched it many years back on some rather dubious advice. Had I kept in my employer scheme, I would still be working n my 70s. So, we (my wife and I) took steps to ensure that we could retire early(ish) on various investments. That has worked fine.
However, had we not been (awful term coming up) proactive in looking to our retirement needs at an early stage of our working lives, we would be in dire straits now and retirement would not have been an option.

So, yes it is a minefield of ethical, moral and legal convolutions. What rankles with me are is the universality that allows retired people (and I know several) with 6 figure incomes from investments to continue to receive their weekly handout of dosh while the powers that be say the scheme cannot go on in its present form.

There are a lot of people in the same position as you, particularly in the light of the Hubbards, Watsons and Hotchins of the world who fleeced the investors who in good faith gave them their money to grow.

My beef is with the VERY well heeled who can well-afford to give up NZ Super and not even notice the difference.

I say this at risk of being termed a hypocrite, but my income without the super payments isn't in the same league as those who have millions to invest and reap the rewards. Hence my argument for a pension scaled according to income. I know that this is no simple thing, as many people hide their income in trusts, so I guess it will never happen.

The probligo said...

Your line of thought is a large part of my recollection of the justification of "downgrading" the super from 75% Gross Average Wage to 66%.

The real point (as far as I am concerned) about the universality of the super is that if a limit - means test - is applied the first very big problem is where, and why, to set the limit. Close on the tails of that problem comes the second; those who you wish to disentitle from super are far more likely to be able to find ways and means of meeting the means test when many less wealthy are barred from super because they are over the limit.

Personally, I have little difficulty with universal super. That is not the problem. If you took the top 5% or even 10% out of the equation, it would still have comparatively minimal impact on the cost of the super.