Investigating pension indexation in an OLG model for New Zealand

Andrew Binning, Christie Smith and Hanna Vu ()
Additional contact information
Hanna Vu: The Treasury, https://www.treasury.govt.nz

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 of three policy reforms that reduce superannuation expenditure pressures: i) changing NZS indexation methods, ii) adjusting the pension replacement rate, and iii) combining changes to indexation with an increase in the age of eligibility. The scenarios presented are hypothetical analytical exercises designed to illustrate the mechanisms at play within the model rather than represent specific policy proposals. The analysis highlights the macroeconomic effects of these reforms on aggregate income, capital accumulation, and labour supply, as well as the fiscal implications for government expenditure and revenue. In our OLG model, reforms aimed at reducing the fiscal costs of superannuation would enhance aggregate labour supply, capital accumulation, and income by alleviating tax distortions. The OLG framework also enables us to examine how alternative strategies affect people with different lifetime income profiles and those born in different years. The results illustrate that different households respond differently to the policies considered, and that the strategies have different consequences for wellbeing, across generations and for people with different income profiles. The distributional impacts are complex. While future generations stand to benefit from lower tax burdens and stronger transitional economic growth, some current generations and lower-income individuals would be made worse off compared to a Baseline scenario where additional taxes fund the existing NZS scheme. The scenarios examined in this paper consider only one dimension of the broader set of policy choices discussed in the LTFS. Governments have a range of potential tools available to address long-term fiscal pressures, including changes to spending programmes, eligibility settings, the mix of taxes used to raise revenue, and policies that influence economic growth and labour force participation. The purpose of this Note is to provide technical insight into how alternative superannuation policies can be used to address some of the fiscal pressures that are expected to arise in future decades.

JEL-codes: H24 H3 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2026-07-30
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.treasury.govt.nz/sites/default/files/2026-07/an26-06.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nzt:nztans:an26/06

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.
Bibliographic data for series maintained by CSS I&T Web & Publishing, The Treasury ().