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|
|Population by age group (years)|
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.