The cost of NZ Super and associated health and housing costs are expected to rise strongly as the population ages. Photo: RNZ
Providing NZ Super as a tax-free basic income grant and putting recipients on a higher tax rate for other income, may be a better solution than increasing the age of eligibility, or reducing the amount paid, one researcher says.
Associate professor Susan St John has updated earlier work on how the proposal could work, based on new information from Treasury and the recent tax changes.
She noted that the cost of NZ Super and associated health and housing costs were expected to rise strongly as the population aged. There are now nearly 1 million NZ Super recipients.
"When you look at the difficulties that other transfer recipients are in, the disabled, children, the poor design of Working for Families and the accommodation supplement, you have to ask what our priorities are," she said.
"It looks to me when I look at that picture that our priorities are to pay universal pension at 65 to everyone who qualifies on residency grounds, without regard to whether they are millionaires or in very well-paid full-time work. That seems to be the priority over and above fixing child poverty, for example."
She said a number of well-off older people were in a position to donate their NZ Super but there needed to be a broader approach to turn around the problem.
Associate professor Susan St John has updated earlier work on how providing NZ Super as a tax-free basic income grant, and putting recipients on a higher tax rate for other income, may be a better solution to the pension problem. Photo: RNZ / Cole Eastham-Farrelly
"Which is an intergenerational perception problem - families at the bottom end of town trying to work - they work and earn an extra $1 and get all the different clawbacks … but at the top end we're doling out this money which is probably not even noticed, it goes into the bank account and they might not even be able to tell you how much it is."
But at the same time, hardship among older people was becoming a concerning issue again, she said, driven by expensive and insecure housing.
Raising the age of eligibility would disadvantage some groups and costs would increase elsewhere, such as in the social welfare system.
"Besides, a long lead-in time would be necessary while the fiscal pressures are immediate."
St John said indexing NZ Super to CPI rather than wages would also mean NZS fell from 66 percent of the average wage for a married couple to about 50 percent by 2060.
"While the 2.4 percent of GDP saved means that the gross cost of NZS relative to GDP returns to its early 2020s level of around 5 percent, there would be a profound risk of creating older person poverty levels not seen since the early 1970s."
She said that left a third option to consider - some sort of means test or claw back for people who did not need it.
She said while few people would want to contemplate a means test based on joint income and assets as was used in Australia, or a welfare-type means test as is used for other welfare assistance in New Zealand, there were other options.
She suggested a basic income system could be a straightforward solution.
This would have NZ Super paid as a non-taxable grant to those who were eligible.
They would then be taxed at higher rates on their other income from those who did not receive NZ Super.
That would create a situation where there was a breakeven point beyond which people would be better off, on a net basis, not claiming NZ Super and instead being taxed at standard rates.
She said the tax scales she had modelled were less harsh than the abatement that applied to people receiving a benefit.
Modelling of a scenario with all superannuitants on the married pension rate and a flat tax for them of 40 percent, showed 5.1 percent of eligible people were unlikely to apply because there was no gain for them under that system.
"Over time, as the baby boomers continue to swell the numbers over age 65, some still in work and others with high financial assets, savings will likely increase."
Even if the net pension rates were not changed, she said, the costings showed 15 percent to 20 percent or $2.8 billion to $3.8 billion in savings of net NZS under the three tax scenarios she examined.
"It is likely these figures are very much understated as many would find it not worth the bother to ask for the [super grant] especially if they are in well-paid work. It is also likely that others would be deterred if more income in the future, such as PIE income and deemed housing income are included."
St John said she wanted to put the time and effort into the work to provide reputable background research, costed by Treasury, that would mean there would not be a knee-jerk reaction to the problem.
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