PAYGO v SAYGO: Prefunding Government-Provided Pensions

In 2001, the New Zealand Superannuation Fund was created to partially prefund the future cost of New Zealand’s pay-as-you-go superannuation scheme. In 2009, in response to worsening government finances, additional contributions to the Fund ceased.

This note provides a brief overview of the costs and benefits of prefunding New Zealand Superannuation. It argues that if New Zealand Superannuation were prefunded, the same level of pension benefits could be obtained with significantly lower taxes and much lower net foreign debt.

While most future New Zealanders would prefer to live in a society where New Zealand Superannuation was prefunded, current New Zealanders may be less supportive as this situation can only be achieved via a transitional increase in taxes. Nonetheless, finding a way to make this transition may be the key to improving the sustainability of New Zealand Superannuation, to preventing a long-term increase in taxes, and to improving the net foreign liability position.