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Sir Roger Douglas

Unfunded Liabilities

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For too long now, a succession of Labour and National governments has hidden behind our Pay-As-You-Go system of providing welfare benefits. Leaders like Helen Clark, John Key, Bill English, and – more recently – Jacinda Ardern, have used it to avoid making the hard decisions demanded by New Zealand’s looming welfare crisis, secure in the knowledge that when that crisis hits, it will be someone else’s problem.

Instead, they have merely tinkered with welfare policy at its edges, their focus not on New Zealand’s long-term future but rather on the short-term imperative (for them) of re-election.  In the meantime, huge future costs are being incurred that will have to be carried by New Zealanders yet to be born.

Significantly, we have begun to enter a 30-40 year welfare maturity period, where the costs of delivering pensions and healthcare for the retired is going to rise dramatically, year on year. For the next 40 years, the number of beneficiaries will grow rapidly, whilst the number of workers, in relative terms, will decline (from around 3 workers to every 1 beneficiary now, to around 1.66 workers to every beneficiary by 2060).

Inevitably, this change will leave an enormous gap between government revenue and government expenditure, so much so that the economy will, at some point, reach a point of collapse, our unfunded liabilities for government healthcare and pensions placing such unsustainable pressure on today’s young (our future workforce) that they will be unable to bear their costs.

A great deal of attention in New Zealand has recently been focused on the huge increase in government debt as a result of Covid-19 and whether the government has handled or mishandled this situation. Whilst this increase in debt is massive by New Zealand standards, it is in fact small (around 20%) when compared to the accumulated mountain of unfunded welfare liabilities we have, which amount to some $1,100 billion.

That is the size of the promises successive governments have made to New Zealanders and on which many are relying as they head into retirement. Offsetting that mountain of debt, or unfunded liabilities, we have about 5% put aside in the New Zealand super fund.

If a public or private business were to mislead the public about the size of its financial obligations, as governments have done for years, the officers of those businesses would end up in prison for fraud. Unfortunately, we operate under a system that not only allows our government to deliberately exempt itself from sound accounting practices, but also abrogate its responsibilities to future generations, systematically misleading the public about the nature of our debt and shifting today’s costs and obligations onto future taxpayers.

Sadly, instead of taking responsibility for the proper management of our welfare systems (and securing a stable future for our youngest generations) our governments have, over the years, found it easier to incur costs and then pass them on.

But there has to be an accounting. As much as short-term policies might appeal to politicians who place re-election above their democratic duty (the basis of our democracy is government that works for the benefit of the people, not government that operates for the benefit of itself), you can’t hold back the future forever. Indeed, somewhat inconveniently for our current crop of politicians, the future has already arrived.

Every year for the next 30-40 years, an extra 30,000 people will be added to New Zealand’s retired population, meaning the government’s costs for providing healthcare, pensions and housing for the retired will increase by $1 billion, every single year. This will cost taxpayers earning $50,000 or more an extra $12 a week (or $600 a year), year on year, for at least the next 3 decades.

Clearly, this is an untenable situation. Without owning up to our looming welfare crisis, and without taking action, our already parlous position will soon become unmanageable.  

All is not doom and gloom however. It is possible to institute policies – based upon dedicated savings schemes for both retirement and health – that will help us work out from under our mountain of debt, and put extra money in the hands of all New Zealanders. Although the scope and detail of those policies is for another paper, if we started now, our youngest generations could look forward to retiring with $1 million in their hands (in today’s terms) and all their health costs met.

As an added bonus, such policies would also help place responsibility for our future back into the hands of individuals and serve to empower disadvantaged groups like Māori & Pasifika, who have suffered too long at the hands of misguided, and mismanaged, state paternalism.

Of course, such policies will require a fundamental realignment of the way our democratic system currently operates. Governments will need to remove the blinkers of self-interest, own up to our debt crisis, acknowledge the responsibility they have to future generations, and look to implement imaginative policies that are focused on the medium to long-term, rather than the toxic desire to hold onto power for three more years.