The Investor: Tricky Questions to Ponder on the Beach Walk

I was going to start the next sentence with “Treasury is …”, but I hesitate. I suspect to many people that government department is a big powerful outfit that talks – in a language nobody else understands – about dollars. Yawn.

The fact is, though, that Treasury is looking at stuff that will greatly affect us all over the next few decades. Will our taxes go up, and if so, which taxes? Will NZ Super start later and/or be smaller? Will it be harder to get free health care? Will other government services be cut?

Unlike in the past – and unlike in many other countries - Treasury is seeking everyone’s input on these issues. Already the department has been bouncing its ideas off a panel of academics and commentators (including me) with varying political perspectives. And this week it held a conference to further air ideas.

In the middle of next year, it will issue a report, called Affording Our Future. The report won’t say what we should do, but explain the choices and invite all New Zealanders to help make the decisions.

So what’s all the fuss about? The number of retired people is growing, partly because of the baby boom but largely because people keep living longer than the experts predict. Meanwhile, the birth rate has fallen and is highly unlikely to rise again.

This means the proportion of the population in the work force is decreasing. If we continue the way we’re going, taxes won’t be enough to cover government spending – in large part because of the rising NZ Super bill.

Health costs are also a worry. It’s great to see advances in health care, but they’re not cheap. And given that older people tend to have more health problems, the ageing population boosts health spending. Fewer people are dying from heart attacks and strokes, which is excellent, but someone has to pay for their recovery.

Some controversial questions to ponder on the beach walk this summer:

• Should we just let inflation do its thing?

In New Zealand, income under $14,000 is taxed at 10.5 per cent, from $14,001 to $48,000 it’s taxed at 17.5 per cent and so on. As incomes rise to keep pace with inflation, taxes also rise.

If tax rates remain unchanged, eventually almost everyone will be earning more than $70,000 and in the 33 per cent tax bracket. That, alone, could largely solve our problems.

• Should older New Zealanders worry about the next generations?

Living standards keep rising. Think about the average house 50 years ago, with just one bathroom and one living area, no computer, no microwave, no dishwasher and so on.

The trend is expected to continue. So, if the young will have more – building on what the oldies have passed on to them – why can’t they share that greater wealth with their grandparents?

• How about changing the way NZ Super rises over time?

Currently, increases are linked to wage rises. And wages generally grow faster than inflation – hence our rising living standards.

If NZ Super were boosted each year by inflation only, the living standards of retirees who live mainly on Super would fall behind everyone else. But they could still buy the same goods and services with their money. Would that be acceptable?

• Should the better off pay for more of their own health care?

New Zealanders care a lot about fairness. But what’s fairness? Whether you think these ideas are fair will depend on your perspective.

Expect to hear more about these and other tricky questions in the months to come.