The fragility of superannuation

11/07/2012 § 9 Comments

Matt Nolan over at TVHE picked up a theme dear to my heart: blood-sucking Baby Boomers and their selfish demands for everything. Oops, wait, did I say that out loud? It’s an overstatement, sure, but look at it from a Gen X perspective. Boomers were provided lots of stuff by prior generations, and then decided that those same things would just make the kids soft. They benefited from well-funded infrastructure and education (and healthcare in NZ), and then pulled the ladder up after them. And yes, Millennials have it even worse — go ask Wellygnome.

Nolan suggests that because superannuation will become unaffordable at current levels, it needs reforming. We can do this the easy way or the hard way:

Say that, when they are retired it will be the next generation in charge.  The next generation won’t be willing to increase taxes, and so will cut them off – forcing them to leech off their children or live an impoverished existence.  If the younger generations show this degree of bloody-mindedness now then older generations will definitely cut back on consumption, and start saving for their retirement.

They might even be willing to “make a deal” regarding the retirement age.

But not everyone believes that the younger taxpayers can make the threat credible. The argument is that the Boomers are just too numerous. Janet comments:

It’s an unrealistic threat – no-one will believe it. It’ll get translated as ‘starting in 2035 the rug will be pulled out for Gen X, because there’s less of them’. At least that’s how I’d read it, given there’s so many baby boomers who all have and exercise a vote.

I wondered whether this is true, so I went to Statistics NZ. Here is the percentages in each age group, using a middle demographic projection (series 4):

Projected Population by Age Group
1991–2061 (2009-base)
Population by age group (years)
 Year 0–14 15–39 40–64 65+
Percent
2011 20 34 32 13
2016 20 33 32 15
2021 19 33 31 17
2026 18 32 30 19
2031 18 32 29 21
2036 17 31 29 23
2041 17 30 29 23
2046 17 30 29 24
2051 17 29 30 24
2056 17 29 29 25
2061 16 29 29 26

In no year does the population of those 65+ ever reach more than 50% of the adult population. They are never the majority. They always depend on younger people to maintain their superannuation.

One objection is that older people have higher rates of voting. Yep, we can correct for that. A Ministry of Social Development report tells us that

People aged 65 years and over had the highest reported turnout (94 percent), followed by people aged 45–64 years (89 percent) and those aged 25–44 years (77 percent). Fewer than half of 15–24 year olds (46 percent) said they had voted….

Applying those percentages and some adjustments for voting age, the voters in 2061 will be: 18 to 39 — 25%, 45 to 64 — 39%, and 65+ — 37% (= 101% due to rounding). Retirees are still not a majority of the electorate.

Let’s try a comparison. One line is the percentage of the population 65+, which is a proxy for the cost of superannuation. We could just as well do superannuation as a percentage of GDP or government spending. A second line shows the percentage of voters likely to vote as a block on superannuation. Let’s assume that everyone born before 1960 votes as a block (Boomers look after each other), and anyone 60+ will vote to preserve the superannuation status quo (because they will soon be retired).

A few comments:

  • The voting block I’ve constructed is never a majority. Retirees, nearly-retirees, and Boomers depend on younger voters to maintain the desired level of superannuation. If this does turn into an intergenerational conflict, the superannuitants will lose.
  • The weakest time for Boomers’ superannuation and largest possibility for conflict comes in about ten years, when the voting block is shrinking but the cost is increasing.
  • After that point, the voting block increases at a faster rate than the increase in retirees and the cost of superannuation. This happens for two reasons. First, those 60+ are more likely to vote. Secondly, the voting block shifts from being Boomers to being retirees and nearly-retirees, so its proportion of the population stops falling.

I expect this issue to become more important and more divisive over the next ten years. If Boomers are going to survive with their retirements mostly intact, they need to make nice with some of the rest of us.

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§ 9 Responses to The fragility of superannuation

  • JC says:

    A couple of points:

    The Babyboomers have a good track record on raising the age of Super. In 1990 they voted in National which raised the age of Super to 61 in 1992, and in 1993 they voted National in sufficient numbers to increase the age to 65 by 2001.. so they voted directly against their own personal interests.
    With that track record and a suitable lead in time for implementation there is no reason to expect them to be all that anti a rise to 67.

    But if they did want to make it an issue then they can use their numbers to vote en block for Winston Peters or John Key in 2014 to stop a rise to 67. With an undoubtedly close election it wouldn’t take more than a few percent swing to kill a rise in Super age.

    “If Boomers are going to survive with their retirements mostly intact, they need to make nice with some of the rest of us.”

    Heh.. looks like the kids aren’t going to get the (in Trust) family home and other trust goodies if they go that way!

    JC

    • Bill says:

      I didn’t know that history — thanks for pointing it out. You’re right about 2014. They will be a large enough group that they can swing the election. But their influence is waning for the next wee while, which creates political instability.
      And on the topic of these Boomer trust funds: Treasury tells us that people generally go into retirement without a lot of savings. If I have the choice between more money now from tax cuts, and possibly whatever trust fund scraps are left over in 20 or 30 years, I’m going to choose the former. The interaction between age and income/wealth does change the political calculus, but I’ll leave that for someone who know more on the topic.

  • DetMackey says:

    I hope that 46% of 15-24 year olds is corrected for the 15-17 year olds who can’t vote!

    Have you assumed that the probability that individuals vote increases over time as they age, or that the probability that individuals vote largely stays the same, but that the proportion of those in older age groups is always higher?

    Put another way, are those over 65 voting at a high rate because they are old or because voting was drilled into them when they were young as a civic duty. If that later, might we expect the gap between old and young voting habits to decrease over time – I hope the voting patterns of the young don’t fall much further than 46% – making this issue even less of a problem.

    • Bill says:

      I’ve assumed that age determines participation. Another way to do the calculations is to assume that participation is linked to the people, not their ages. Let us know what you find out! =)

  • DetMackey says:

    Or I could find out myself by clicking the link! Turns out the 46% is not corrected for 15-17 year olds.

    • Bill says:

      No, bizarrely, MSD didn’t correct the 46% for 15-17 year-olds. In my calculation, I applied the 46% to 18-24 y.o. (probably underestimating their participation) and 77% to 25-39 y.o.

  • wellygnome says:

    Does this really hold true under MMP?
    If there ever was electoral gridlock between two generations then New Zealand could end up in a Belgium-like situation with no government.
    Even though baby boomers won’t have the absolute majority, all they need to do is have the balance of power – and they can tinker with the system now to make it harder for any challenges to their boondoggles difficult for younger generations.
    Imagine NZ First with say, 30 seats, either party would have to deal with them…

    • DetMackey says:

      A situation where the right-block wouldn’t offer confidence and supply to a left government, and where the left-block wouldn’t offere confidence and supply to a right government and NZ first not offering confidence and supply to either.

      Possible, I guess, but would elderly voters allow a situation where government can’t pass budgets to pay for health services to occur?

      A game of electoral chicken? Who can survive longest without health care.

  • [...] Bill picks up that the population demographics aren’t in favour of my proposal – while Eric indicates that no-one really is .  [...]

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