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A Paper On Retirement
Hon Sir Roger Douglas
February 2003
Retirement
The system
- Under a PAYGO system, there is no accumulation of funds to pay future
benefits.
- Rather, the PAYGO system simply transfers income from workers to retirees.
- When today's workers retire, they in turn rely on the taxes of the next
generation of workers to pay their benefits.
- The system can survive as long as there is a larger number of workers and
a small number of retirees.
- Benefits from a PAYGO system are normally relatively low.
Problem
- The number of workers to retirees is shrinking rapidly.
- In some countries, the ratio of workers to retirees is already below 2:1
(Austria, Belgium).
- By 2025, most developed countries will have fewer than 2 workers to 1
retiree. Some including Germany will be 1:1
- Result
- A PAYGO system is not sustainable.
How bad is the problem? - New Zealand
- Taxes for superannuation, and healthcare already exceed 50 percent of
direct personal taxes.
- Unless changes are made to current health and benefit programmes they will
have to increase by 6 - 8% of GDP over the next 25 years.
- Unfunded benefits already exceed 100% of GDP.
- Successful
Reform must move away from the PAYGO model towards a
funded system.
Key objectives
- To ensure that all New Zealanders can enjoy a reasonable level of income
and healthcare in retirement (current living-alone benefit).
- To improve incentives for employment, assist and reward effort and, in a
broader sense, self-help, participation and dignity.
- To ensure that income transfers are made efficiently so that any welfare
losses are minimised, economic growth is improved not inhibited and the
changes contribute to jobs.
- To ensure the system is fiscally sound, that is, sustainable.
- To ensure that income distribution between generations is fair and
equitable.
- To help create a structure of incentives that encourages self-sufficiency.
- To minimise transitional costs as much as possible.
- To ensure the new system is as simple and transparent as possible.
How much is enough?
One of the biggest issues in moving from a PAYGO pension system to one based
on saving and investment is whether private capital investment can yield a
satisfactory rate of return.
Example
Retirement Benefit to be70% last years after tax income
With Benefits adjusted for inflation
Assumptions
| Number of
contribution years |
44 |
| Number of
distribution years |
20 |
| Contribution rate
|
10% |
| Real wage growth
|
1.1% |
Real interest rates required to deliver above benefits:
| During
accumulation period |
4.8% |
| During
distribution period |
2.8% |
Source: Cato Institute SSP No. 28
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