Treasury released this week New Zealand’s Long-Term Fiscal Statement. These are required to be done every four years.

They are a projection, not a biblical prophecy. Treasury often doesn’t even get the one year projection right, let alone the 40 year one. That is not a criticism of Treasury – it is hard enough to estimate profits for an individual company, let alone for an entire country.

However the opening line from the Treasury Secretary is startling:

This document shows we simply can't keep doing what we have done without significantly increasing taxes or debt.

The first long-term fiscal statement was done in 2006, and they projected that in 2030, New Zealand would move from surpluses to deficits. Sadly, that move into deficit has occurred 20 years early. We have lost that 20 – 25 years of headroom to make adjustments easily.

Public debt is projected to reach 223% of GDP (in 2006 projection was 106%), and Treasury warns that we have to control the growth in new spending each year unless we want higher taxes and debt.

Michael Cullen put a $1.75 billion contingency into his budgets for new spending each year. And as surpluses grew, there were also one-off boosts such as interest free student loans, KiwiSaver subsidies etc.

Bill English has reduced the provision for future spending to $1.1 billion. That may seem like a lot but pressures in the health vote alone will chew up over half of that. Tony Ryall has managed to find some savings this year, to help reduce spending pressures, but he won’t be able to do that every year.

But even $1.1 billion a year of extra spending is too much in the long-term. It would see us return to surplus in a few year, but fall back into deficit eventually.

Cutting spending can be quite painful, and most people would agree that it is better to increase economic growth. And it is quite right that for New Zealanders, higher economic growth will deliver higher incomes. But it does not entirely solve the long-term fiscal problem for the government. You see higher economic growth will increase tax revenue, but it also will increase the cost of superannuation and public sector salaries.

In other words at some stage New Zealand will have to not just lift economic growth, but also reduce spending, and superannuation payments especially will come under pressure.

By 2050 the number of over 65s will have increased by 150% and the over 85s by 400%.

We already spend 25% of government spending on the over 65s, despite them being 12% of the population. When they are 25% of the population, then they may account for half of government spending.

One obvious solution is increasing the age of entitlement. Life expectancy is growing at around two years a decade, so the retirement age will have to increase at some stage.

It won’t happen under the current Government. To neutralise National’s legacy on superannuation, John Key promised not to increase the age of eligibility (or decrease the level) while he was PM. He signed a pledge he would resign as PM and an MP if he broke his word. The age will not go up while Key is PM – his political career would be finished.

But John Key will not be PM forever, despite Labour’s best efforts to help him. And New Zealanders should be aware that it is almost inevitable that the next Prime Minister will follow Kevin Rudd, and increase the age of eligibility from at least 65 to 67.

The other issue is the pegging of superannuation to the average wage, instead of inflation – as other benefits are. Many people do not realise this, but New Zealand has arguably the most generous superannuation scheme in the world – universal, no means test, no asset test, at age 65 and a couple get 66% of the average wage.

Over the next 40 years, the purchasing power of someone receiving superannuation will grow by 66%. Again, taxes will have to increase if we wish to continue to be that generous. By 2050, Government spending is forecast to reach 49% of GDP, compared to just over 30% today.

The ration of over 65s to working age under 65s is currently 18%. So we have five “workers” funding each retired person. In 2050 it will be 42%, so almost every two workers will have to fund a retired person.

To cover the costs of our aging population will mean either an increase in income tax rates of 5.5% or an increase in GST to 20%.

That is a future I would rather avoid. I don’t see why the state should pay me any pension in 25 years, as I will have saved enough by then to support myself. Welfare should be directed towards those who need it, and not be an entitlement.