New Zealand's superannuation scheme is laudable for its universal and simple approach to ensuring dignity for our elders. However, the system's simplicity obscures unfortunate truth – it will punish our younger generations.

The current superannuation system (and the wider welfare state) is dependent on the taxes of the working population, a portion of which it receives. This system is functional, provided the ratio of working people to retired people does not change dramatically.

However, New Zealand's birth rate has been declining since its peak in 1961. Stats NZ projects that people aged 65 and over will make up 26% of the population in 2060, compared to 16% in 2020 – an increase of two thirds. As the elderly population grows, it requires more tax to pay for superannuation from a shrinking working population, putting strain on the system.

The transfer of wealth between generations also happens in a second manner – through the healthcare system. People of retirement age are much more likely to need healthcare and to need it for longer. Currently, those over 65 use 42% of New Zealand’s public health services despite being only 16% of the population. Because of this, Treasury expects our ageing population to be the driving factor behind a 50% increase in the cost of government healthcare provision by 2060.

Neither of these would be as concerning an issue if productivity were increasing commensurately, expanding the nation’s overall wealth (and if NZ Super was indexed to inflation rather than wages). However, this is not the case, and it appears unlikely to happen in the near future. Statistics New Zealand measured national productivity as having grown at a dismal average of 0.6% per year over the last decade (compared with a healthier 1.9% annually the decade prior). We must play the cards we have been dealt.

New Zealand is left with two problems. The first is financial – members of the younger generations will end up footing a much larger welfare bill than their parents and grandparents. The second is political – as the retired population grows, they are likely to become more and more resistant to reforming the system they benefit from.

This situation challenges our sense of fairness. A key thread in the social fabric of Kiwi society is a tacit promise that one generation won’t willfully make the next worse off. It’s a sort of contract of equity between generations.

Social contracts like this do not exist in a void. They are shaped by context and enforced by policy decisions. The 1977 policy of the Muldoon government to introduce our current universal superannuation scheme was one such decision. So was the referendum in 1997 on the future of superannuation, which rejected a compulsory retirement saving scheme.

While the policy has remained largely unchanged since its introduction under Muldoon, its context has shifted. The ageing population will eventually impose an intolerable financial burden. We need a new approach that restores equity to the contract between generations before we reach the edge of the cliff.

New Zealand needs a new social contract. The generations being handed the short end of the stick under the current system have had no say in its design. They were not even born when Muldoon’s scheme was implemented, and the majority were not of voting age at the 1997 referendum. Yet they will pick up the bill. It is time for a new national discussion to reform our system for the next half-century.

Any new system must retain the better parts of the current system, namely the prioritisation of the dignity of our elderly, while ensuring that a new system will remain fair across generations. Unfortunately, there is no clear and easy way to achieve this.

Nevertheless, we need to begin this search for another method as a nation. Whether that be steadily increasing the age of eligibility, indexing NZ Super payments to inflation, preventing those who do not require it from accessing it, indexing eligibility for payments to life expectancy, making KiwiSaver mandatory, or some other method or combination. Our search for an answer must start now, before the demographic that fuels this issue entrenches it as a permanent feature of our society.

To read the full article on The Post website, click here.