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Fix the super roof while the sun is still shining

Far, far from the troubles at the home front, Prime Minister John Key was visibly enjoying the military honours and his joint press conference with German Chancellor Angela Merkel on his visit to Berlin last week.

A better use of his time would have been studying the effects of delaying superannuation reforms.

Although last month’s Budget once again confirmed the rising costs of superannuation, the prime minister ruled out reneging on his 2008 campaign promise not to increase the age of eligibility. It was not needed, as the system was working well, Mr Key earlier in the week told journalists.

If that sounded so familiar to me, it is because I am German. Germany still provides the best case study for a country that forgot to fix the pension roof while the sun was shining. Now it is trying to weather a demographic storm with a leaky roof.

Demographers have been warning since the 1970s that the country’s pension system was financially unsustainable.

When it was introduced under Iron Chancellor Otto von Bismarck in 1889, life expectancy was barely 40 years, and you had to wait until 70 to be eligible for a small pension.

Over time, German life expectancy almost doubled while the pension age was actually lowered to 65. Pensions became more generous, too.

You did not need to be Einstein, Rutherford or an actuary to see what was wrong with this scheme. Regardless, German governments pretended everything was fine.

A pensions minister of the 1980s famously ran a big advertising campaign under the slogan, One thing is safe: Pensions.

As it turns out, the only thing that was safe was the hole it burnt into public finances. Pensions were originally designed to be an entirely contributions funded scheme.

Today, more than 17% of Germany’s federal budget is diverted to the pensions system to prevent it from collapsing under its obligations. Only in 2006 was the pension age adjusted to 67. Even this won’t come into effect until 2029.

New Zealand should study the German case study carefully. Mr Key is right when he  says superannuation costs are affordable in the short term.

But that’s missing the point. Germany could also afford its pensions in the 1980s – but it should have fixed the system before costs started spiralling out of control.

Once you realise the need to reform eligibility, the earlier you start the better. No election promise is worth keeping if it jeopardises the country’s fiscal future.

Dr Oliver Marc Hartwich is head of The New Zealand Initiative, formed by the April 1 merger of The New Zealand Institute and The Business Roundtable.

More by Dr Oliver Marc Hartwich

Comments and questions
14

Why does no one in NZ politics on the subject of super, mention the obvious and that is we must become a state of Australia. TRansfer our problems to the Aussie taxpayer and politicians. Simple.

Nice to have informed comments on the subject.

There are at least six confounding factors at play which few if any commentators seem to identify properly:

a) the baby bulge when the servicemen returned from WW2
b) the shift to fewer children and older parents from the 1980s
c) gradually increasing life expectancy
d) immigration and emigration trends
e) differing socio-economic sector fertility
f) historic productivity and economic growth

Some of these have short term effects, some long term and some are unpredictable. I am unconvinced there is sufficient good information at the present time to propose well-founded solutions.

If you are asking John Key to consider the longer term good of the nation (in contrast to say the shorter term electoral chances of his party, or his future post-Prime ministerial career) then I think you are barking up the wrong tree. That simply does not enter his thinking - its irrelevant to him.

Crowd pleaser summarises the situation perfectly. Nothing like the man or the prime minister I thought he would be.

What did you think you were getting when you helped elect a multi millionaire fex trader? They didn't call him the "smiling assassin" for nothing.

he is just as bad, if not the same, as Klark......new national...is new labour...is the same thing???

labour/national/greens = deck chairs & titanic. pick the difference anyone?

pick the difference........zzzzzzzzzzzzzzzzzzzzzzzzz

MMM You are not far wrong, but if eveybody that is sick of this same old same old crap voted ACT at the next election then maybe, just maybe .............

"There are at least six confounding factors at play which few if any commentators seem to identify properly:"??
Gee whizz?/ My interpretation was the commentators are discussing exactly those "six confounding factors"!!

Not that I've seen. a) and c) get talked about as though they are the only ones, and as though a) is a permanent rather than temporary issue.

That's because you've basically taken the single issue of "the ratio of old to young" and split it 6 ways. In this case the fragmentation of the whole problem into contributing parts does absolutely nothing to solve the problem at best, and compounds it at worst. i.e. analysis without insight.

the actual symbol of John-key's era and contribution can be summed by the implementation of the Emissions Scam and a cycle way. A scam that he labelled a "hoax" in 2006 to 2008 where NZ's ecomonic future is linked, in part, to attracting tourists who ride push bikes. The "hoax" says it all really.

Key is arguably not the career politician Clark is, so should be in the position to make decisions for the longer-term good more effectively than she was able to.

The question then is whether he will.