New Zealand's superannuation system is one of the most generous pension schemes in the world. Dished out at a rate of $25,000 a year before tax if you're single and living alone, or $37,500 for a couple, it virtually single-handedly pulls over-65-year-olds out of poverty and enables a basic standard of living.

But that generosity comes at a price and as the number of New Zealanders aged over 65 grows, that payment will become unsustainable.

Or will it?

Super has been in the news this year after the Commission for Financial Capability issued its latest three-yearly review of retirement income policies.

While it had said in its previous two reviews that the age of eligibility needed to increase – and faster than the National government proposed when it outlined plans to increase the age to 67 – this year's review took a dramatic U-turn. 

Acting commissioner Peter Cordtz said housing costs and job trouble meant too many New Zealanders were approaching the traditional retirement years in poor financial shape. That mean it would be unfair to increase the age.

He said leaving it at 65 was sustainable for the next two to three decades, allowing New Zealand time to address the "pre-retirement" issues to enable a higher pension age.

But does that simply mean the problem  becomes one for the country's 20- and 30-year-olds to deal with, under more intense pressure? Or can we really get our system in order with a more holistic approach to wellbeing, and some tinkering around the edges of our super scheme?

US AGAINST THE WORLD

You probably wouldn't normally think of a payment of a few hundred dollars a week as being overly generous – particularly if you're expected to live the rest of your life on it.

But NZ Super gets that tag because it's one of the few pension schemes internationally that is given to everyone who meets the residency requirements. It doesn't matter whether you've spent your life in unpaid work or are still earning a six-figure salary at 65 – if you are legally resident, have lived in New Zealand for 10 years after the age of 20, including five over the age of 50, you'll get it.

It is not means- or income-tested.

Other countries take a different approach. Many rely more heavily on schemes that are based on compulsory contributions from wages and employers – then the state scheme steps in only to save those who are left without enough.

Cordtz said that made it hard to accurately compare New Zealand's system with other systems.

While universality was generous and superannuation was the "biggest benefit in town", in terms of what other countries paid compared with the outcome they received, New Zealand's seemed cheaper and fairer, he said.

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New Zealand super payments are taxed, while those in many other schemes are not, and the pension also helps to offset the cost of residential care for older pensioners.

New Zealand's government allocated 12.7 per cent of its total spending to old-age and survivors' benefits in 2015. That's compared with 11.4 per cent in Australia, 18.7 per cent in the United States and 14.8 per cent in the UK. Japan spent 23.9 per cent and Ireland 12.4 per cent.

The rate of our pension does a good job of replacing low-income people's wages but, compared to countries with mandatory savings schemes and other programmes into which people are required to contribute money, it provides much less for higher-earners.

If its intended purpose is to keep older people out of poverty, however, it does a good job. Retirees' rates of after-housing-costs poverty are very low compared to the rest of the country. Only 14 per cent of people aged over 65 live in low-income households. There are six times as many people aged under 18 suffering material deprivation as there are people aged 65 and over.

The commission said up to 20 per cent of retirees had experienced significant material deprivation before they started to receive the pension. 

SO WHY WOULD WE CHANGE IT?

Cordtz said the pension was becoming more expensive each year, and the speed at which that increased would grow as the population aged.

Ministry of Social Development data shows there were 774,651 people receiving New Zealand Super in March 2019.  By 2068, that number's projected to be 1,838,100 – by that stage, people over the current pension age will be 28.21 per cent of the population, compared with 15.37 per cent in 2018.

That might overstate the pension burden, Cordtz said, because there was an increasing trend for people to stay in the workforce past 65. "The ratio across a 20-year period is still expected to triple from five-to-one to two-to-one."

In 1996, New Zealand spent $5.1 billion on NZ Super, which had grown to $10.235b by 2012-13 and is projected to hit $16.33b in the 2020-21 financial year. By 2059-60 it's predicted it will cost $125b of total gross domestic product (GDP) of $1586b.

Despite that, he said the system was affordable in its current form at least through to the middle of the century.

"While fiscal sustainability long term is always an issue to be considered, we were also asked to consider the effect of policies on reducing vulnerability and on equity," he said.

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Superannuation currently costs an amount equal to 4.8 per cent of GDP.

But Cordtz said that might not rise as sharply as earlier predictions had indicated. A calculation by the Council of Trade Unions included in its submission to the review said the cost would rise to only 5.9 per cent net of GDP in 2060. Treasury predicts a net 6.6 per cent.

"The updated projection from Treasury in 2020 will provide more certainty but the accepted trends confidently look to be less than 7 per cent net of GDP by 2060," the review said.

While it was undeniable that the cost of NZ Super would increase, Cordtz said, even at 7 per cent it would be a smaller percentage of GDP than some other countries were already dealing with in sustainable pension systems.

"It's sustainable for at least another 30 years. There is time to address that sustainability issue.

"This means that we still have the advantage of adequate lead time to undertake the extensive modelling that we believe is required to know with more certainty what the effect of raising the age of eligibility would likely be, including on those New Zealanders who are most vulnerable to poor outcomes in retirement, and before taking decisions that risk the stability and positive impact of NZS in the meantime, or that increase stress for younger New Zealanders who already worry they will miss out on NZS.

"The next reviews of the retirement income system should be resourced in order to lead this work."

There were two to three decades, he said, to start addressing some of the inequity in the pre-retirement system that meant some people were hitting 65 in worse shape than others.

While this might be a surprise to New Zealanders who've been told a change to the age is urgently needed, New Zealand is not out of step with other countries.

People who entered the workforce at 20 in 2016 can currently expect to retire at 65 in most OECD countries, including Canada, Chile, Estonia, Germany, Poland, Spain, Sweden, Japan and Latvia.

They would retire at 67 in Australia and Iceland. In Finland, Ireland, Portugal and the United Kingdom, it would be 68. In Netherlands and Italy it would be 71 and in Denmark, 74.

Cordtz said there was widespread understanding that if the age were to increase it would need to happen gradually.

But even if the age is left where it is for the time being, there are other changes that could be made.

Susan St John, of the Retirement Policy Research Centre, has called for the pension to be given as a tax-free grant. Beyond that, any income earned by people aged over 65 would be taxed on a different scale so that those at the top end of earners had their pension effectively clawed back.

"Extra income is not unduly discouraged. The attraction for using this approach for NZS is that it retains simplicity and universality while reining in the expenditure at the top end and providing some useful additional revenue to balance intergenerational concerns and to reduce the inequality within retirement."

Under her models, it would require a six-figure income before the pension was materially reduced.

The commission highlighted it as an idea in its review but said fiscal sustainability of the superannuation system was not the priority – helping people in the pre-retirement phase was.

It said that if the Government was concerned, a progressive tax rate for high-income pensioners was an option, or it could extend the residency period required.

WHAT DO WE MISS OUT ON IF WE KEEP PENSION AT 65?

St John said a change to the age of eligibility was often rolled out as a panacea but there were wider problems that needed to be fixed.

A simple age increase would not save as much money as people thought, she said, because there would still need to be support for people aged 65 to 67 who could not work.

"It only affects those coming into retirement and doesn't do anything about the real problem of competition for resources."

She said people over 65 getting a greater share of public spending meant there were deficits elsewhere. There was an opportunity cost to spending money on the pension instead of on other social needs.

"It's wrong to talk about it in terms of being able to afford it because we can afford anything we choose to do but there's always something else that could be done."

Changes needed to be planned for and fiscal pressures managed or there could be an ad hoc, ill-thought-out change introduced in response to a perceived crisis.

Economist Shamubeel Eaqub said a move now would have allowed a more gradual change, before a crunch really hit mid-century.  "When you have to make changes with a gun against your head, it's much more extreme. It may be unpalatable for this generation but what happens for the next generation; it's going to be so much worse."

Eric Crampton, chief economist at the NZ Initiative, agreed reluctance to act now could backfire.

"Waiting to increase the age of superannuation eligibility is not prima facie crazy. There are reasonable arguments that uncertainty about the growth of tax revenue, for example, means that there is value in waiting.

"But I worry far more about providing certainty for retirement planning. Announcing today, for example, that the age of Super eligibility in 2030 will be 67 rather than 65, and that it will subsequently rise in line with health expectancy, lets people better plan for their retirement.

"And while it feels like doing nothing is in some sense neutral – as it doesn't change policy – failing to move will mean that there will be a big shift in the proportion of government spending that goes to retirees. Our hardship and deprivation statistics do not suggest that that is where help is most needed."