Exempting the elderly

New Zealand and Christchurch having been a bit depressing lately, other than last night's rather nice 77-44 vote in favour of allowing same sex marriages in addition to civil unions, it is sanity-enhancing to look a bit at lunacy elsewhere.

While New Zealand funds education from general taxation revenues and ensures that schools in needier areas receive enhanced funding, Manitoba, and much of North America, mainly funds its schools out of local property taxes. There are potentially good Tiebout reasons for doing this as some people prefer paying more in taxes for better schools, it also makes it harder for schools in poor areas to provide decent services.

From 2015, Manitoba seniors will be exempt from the education portion of the property tax bill. Says Finance Minister Stan Struthers, "These seniors who paid a lot of taxes over their working careers as they raised families, I think they deserve a break."

Let's leave to one side for now the obvious equity problem here that letting the relatively wealthy elderly off the hook for a bundle of services that they don't currently consume might well invite relatively poorer young people to request exemptions from the portion of their taxes that go to pay for government services never consumed by young people: the Canada Pension Plan, Medicare coverage for Altzheimers', government-funded old folks' homes, the Royal Canadian Air Farce... I'd be pretty surprised if net government funding didn't already strongly favour the wrinklies.

The bigger problem is the long-term fiscal outlook when the political incentive is to pull back from taxing the wealthy elderly. Now there are reasons why property taxes on the elderly can be politically unpalatable. Suppose that you've owned your house for 60 years, its value is bid up by a bunch of families coming in because of the local school, and you suddenly can't cover the property tax bill. This will be a problem for any land tax system, any capital gains tax system that taxes unrealised gains on the family home,* or systems supporting local education out of local levies on property values.** There are plenty of ways that the elderly homeowner could re-optimise: reverse mortgages could tap the equity, or the homeowner could sell to someone who values the local amenity and move somewhere else in town.

But if policy should be moving towards a tax base that can withstand a large proportion of taxable-income poor but asset-rich individuals with strong demand for government services, Manitoba's move isn't encouraging.

New Zealand at least has been making some moves in the right direction. We've been shifting the tax base from income to consumption. We don't tax capital gains, and for good reason. But whenever retirees cash out some of their portfolios to fund current consumption, they pay the 15% GST. I'd also expect that we'll be scheduling increases to the age of superannuation eligibility after the next election.

* Systems taxing only realised gains have other problems. And systems exempting the family home entirely have still other problems. Seamus has a rather lengthy series of posts on the topic, some of which are here indexed.

** Note also that we can also get big problems in rural school districts: townies are income rich but have less land wealth; farmers are land rich but will have incomes that fluctuate a lot year to year. If the school levy is a fixed proportion of the land value, the farmers bear a very large share of the school district's costs. I have no particular view as to what's fair here other than a generalised view that a progressive consumption tax would be rather better than all of this mess.

Good news and better news

Treasury today released two bits of good news.

There has been a lot of handwringing over the last decade or more about savings rates in New Zealand. I've never been sure that it's all that much of a problem except inasmuch as it would make it hard for a later government either to raise the age of superannuation eligibility or to cut superannuation rates in a hurry if nobody got around to slowly raising the age of eligibility on a fixed future schedule.

Emma Gordon, Grant Scobie, and Yongjoon Paek find household savings are higher than we had previously thought, and even more so when we consider the savings held in the NZ Superannuation Fund. They also find that we've overstated the current account deficit by a couple of percentage points.

Upshot:

The consequence of these is that some of the very extreme levels of household dissaving seen between 2004 and 2009 have been revised such that the current estimates of negative saving by households from the household income and outlay account are very much more modest. Over this period the annual average change was an improvement in the saving rate of households of over 7 percentage points of disposable income. These revisions underscore the importance for the policy debate to be grounded in solid evidence, and for full cognizance of the limitations of the underlying data.

The second bit of good news: the long term projections aren't as bad as we might have thought. John Creedy and Kathleen Makale have built some probabilistic projections on social spending. The baseline case is below.

Those are mean estimates with a lot of uncertainty, as you can see from the relatively wide bands around the mean in the figure above.

If we can manage to increase the age of superannuation eligibility to 70 and keep people in the labour force for longer, social expenditure as a fraction of GDP will max out at around 24% of GDP in 2040 rather than around 29%.

I'm not sure how much of the work in the mean projections around less growth in social expenditure comes from increasing the age of superannuation eligibility and how much comes from assuming people will work longer rather than self-fund retirement before Super kicks in (in combination with pushing back some age-related health care expenditures). And all the central tendency numbers seem to depend on maintaining recent relatively higher immigration rates, which likely in turn depends on fixing land use planning so that Green-style xenophibia-via-housing-prices doesn't get entrenched. And they also might depend on an assumption that mortality rates only decline through the next 15 years and are flat thereafter: a Superannuation age of 67 or 70 could be a lot more costly if retirement duration keeps lengthening. If we set the age of superannuation eligibility to increase to 70 over a medium term, then automatically increase it with life expectancy to give a fixed expected retirement duration, that would help a lot. And it's still not good: those are the kinds of numbers I'd like to be seeing for total government expenditure rather than just social expenditure, though that's more of an aesthetic preference. But I was scared it was going to be worse. So that's the better news.

War of ages

So it's all about the intergenerational conflict and how the old are sucking the life out of the young, and how the young might cut the oldies off. Nolan makes some threats. Bill shows that the oldies will never have the numbers to outvote the young folks so they'd better behave themselves. Nick Gillespie figures the same thing's set to happen in the States.

But there's a problem. Young people generally support giving money to old people. Or at least every bit of US evidence I'd previously seen suggested that young people would rather have the state take care of their aging parents and inlaws. support transfers to the elderly.

What does the New Zealand data say? This is just a 5 minute cross-tab. But the 2008 New Zealand Election Survey has an age variable, and it has a question: "Should the government be responsible for the old?".

If you run a straight correlation between the age variable, zage, and the "should the government support old people" variable (zgovold), where higher numbers mean "shouldn't", I get a -0.0462. So older people are slightly less likely to support giving lots of money to old people.

Let's break things up. Split the age cohort variable into the under 40s, the 40-64 year olds, and the 65+ folks. Not correcting for anything else. What do I get?

47% of the young think the government "Definitely should" be responsible for the old.
52% of the middle aged also say "Definitely should". Their parents are in that cohort, if alive.
49% of the oldies say "Definitely should".

What happens when we just move down to "Should" instead of "Definitely should"?

46% of the young, 43% of the middle aged, and 48% of the old say the government "Should" be responsible for the old.

If we add up the "Should" and "Definitely should", we get just about everybody regardless of age wanting the state to take care of old people.

If we add up the "Shouldn't" and "Definitely shouldn't"? 5% of the young, 4% of the middle aged, and 3% of the old fall into that category.

Among the cohort of respondents aged 18-39, 37 of 712 people giving a response said either "Shouldn't" or "Definitely shouldn't".

If there's some incipient revolution against the elderly, I'm not seeing it in the data. But maybe things have changed since 2008.

Every young person who's below the median income will prefer that the state pay for their parents by taking money away from richer people. And a lot of folks would prefer that the government pays for a nursing home (or give the money that can be used to rent a small flat, or help support a reverse mortgage) than that they wind up hosting their parents or inlaws in their own home.

Things will get worse as the effects of the massive burden of transfers to the elderly becomes more apparent. And there's a fantastic case for raising the retirement age. But intergenerational warfare is far from the radar.