 Investigating parametric pension reform in New Zealand using an OLG modelAndrew Binning,
Murat Özbilgin,
Christie Smith and
Hanna Vu ()
Treasury Analytical Notes Series from New Zealand Treasury Abstract: In this paper we use the Treasury’s overlapping generations (OLG) model to describe the macroeconomic, fiscal, and distributional effects that arise when New Zealand’s superannuation scheme is amended to moderate increases in superannuation expenditure. In this Note, we focus specifically on changing the age of eligibility from 65 years of age to higher ages. We also consider automatic rules for adjusting the age at which people become eligible for superannuation. We illustrate the macroeconomic effects of these changes for income, capital accumulation and labour supply, and consider the fiscal implications for expenditure and revenue. Lastly, we describe the welfare (wellbeing) implications of these alternative pension policies for people of five different income types, encompassing low-, median-, and three higher-income levels. This welfare analysis allows us to trace out how such policy changes would affect people born before and after any policy change, including those born in the more distant future. Our analysis shows that policy changes to reduce the fiscal costs of NZS would increase aggregate labour supply, capital accumulation, and income by moderating the tax increases required for fiscal sustainability and reducing the distortionary effects of taxes on private behaviour. We also show that the distributional outcomes of these policies are fairly complex: generations several decades ahead would benefit but some earlier generations and some people with lower incomes would be better off under a baseline fiscal strategy in which additional taxes fund the current NZS scheme. The magnitude and timing of policy changes also affects the costs and benefits of such policy change. We show that pre-announcing policy changes and spreading changes out over time reduces the burden felt by people from these changes because they have more time to adapt their lifetime behaviour, including consumption, saving, and labour supply. Our analysis implies that the age of eligibility would need to be raised to very high levels to stabilise pension expenditure as a share of gross domestic product, raising the possibility that other policy adjustments might be needed to support changes in the age of eligibility. Additional policy changes would also be required to meet the expenditure pressures affecting health expenditure. Governments have a range of potential tools available to address long-term fiscal pressures, including means-testing of pension eligibility to target support, changes to the magnitude of pensions, changes to other spending programmes, the mix of taxes used to raise revenue, and policies that influence public productivity, economic growth and labour force participation. This Analytical Note and the other background papers released alongside the LTFS contribute to the evidence base underpinning public discussion of New Zealand’s long-term fiscal sustainability. JEL-codes: H3 H55 (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:nzt:nztans:an26/05 Access Statistics for this paper More papers in Treasury Analytical Notes Series from New Zealand Treasury New Zealand Treasury, PO Box 3724, Wellington 6140, New Zealand. Contact information at EDIRC. |
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