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How a Universal Basic Income for People Over 65 Increased New Zealand’s Labour Force Participation

How a Universal Basic Income for People Over 65 Increased New Zealand’s Labour Force Participation

November 26, 2024

Tatjana Buklijas

In 2022, the New Zealand government launched the Older Workers Employment Action Plan (OWEAP), which outlined a series of actions supporting older workers, their employees as well as the broader environment1.

The key driver of this action plan was the recognition of the future impact of New Zealand’s ageing population, including its labour force. While in 1993 26.6% of the workforce was aged 45-64 and only 1.2% above 65, in 2023 36.7% of the workforce was aged 45-64 and 7% over 652.

This rising proportion of older workforce reflects the population’s changing demographic structure. Although New Zealand’s population is younger than European and Asian countries known for their ageing populations, some regions are already have more than 20% of their populations aged over 65.

Additionally, in 2022, the labour market faced significant pressures. Due to its COVID elimination strategy, New Zealand did not experience the high pandemic mortality and morbidity seen in other countries, indeed it saw a slight reduction in mortality3. However, the protracted closure of country borders meant that the usual replenishment of the labour force through immigration could not happen for over 2 years.

Both unemployment and underutilisation of the labour force decreased between June 2021 and June 2022, with the unemployment rate of those aged over-50 falling by 0.3% (2.1 to 1.8%) and the total underutilisation rate falling by 0.9% (8% to 6.1%)4. This trend continued between 2022 and early 2023, although since then it has seen an uptick across both categories and all demographic categories, caused by recession5.

However, though the demographic and labour demand challenges are like many other countries, New Zealand stands out in one important aspect: a very high rate of labour force participation of older people6. It is understood that the design of the retirement income system is behind this phenomenon7.

Namely, while through the 1970s and 1980s New Zealand followed the general OECD trend of declining workforce participation among people aged 55 and above, the rapidly implemented increase in the age of pension eligibility from 60 to 65 in 1992 reversed the trend.

While in 1993 only 10% of all 65-69-year-old people and 4% of those aged 70-74 were working, in 2021 the percentage was 49% for the former and 27% for the latter group8. New Zealand has the third highest labour force participation of older workers in OECD, after Iceland and South Korea but above Japan. Indeed, NZ Treasury opines that there is little room for further growth among men 65-69, however, workforce participation may grow among older women (as the generations of women who have worked throughout their lives age into this cohort) as well as in the 70-74 age group9.

New Zealand’s public pension system differs significantly from many other countries10. It is, in essence, a universal basic income for people aged 65+, set at 40% of the average wage after tax for single people or 66% for a couple. Every New Zealander, regardless of their past and current work history, taxes they paid, savings and investments or any assets they own, is eligible for the ‘super’ (NZ Superannuation Scheme)11.

In contrast to the pension systems that intend to provide ‘earning replacement’, the primary objective of NZ Superannuation Scheme is social protection. Historically, topping up the basic level of NZ Superannuation through a second pension scheme has been seen as a matter of personal responsibility. The 1997 public referendum proposal to introduce a compulsory retirement savings scheme was defeated12.

In 2007, a Labour Government introduced a voluntary savings scheme Kiwisaver, available to anyone living in New Zealand. In this scheme individual contributions topped up with employer contributions and the government ‘tax credit’ are put into one of the “Kiwisaver approved savings schemes” which in turn invest into managed funds. Importantly, bar a few exceptions, Kiwisaver can only be accessed at the NZ Superannuation age of 65.

The fact that the NZ Superannuation is not income or asset tested; that there is no mandatory retirement age; that the NZ Superannuation is not contingent on retirement; and that there are limited early retirement options (the only public income support for someone leaving labour market before 65 being income-tested benefit system) means that New Zealanders are effectively encouraged to remain in work at least until the NZ Superannuation age of 65, but also beyond, as the receipt of this pension does not affect their ability to participate in paid work. The latter is further aided by New Zealand’s flexible labour laws, allowing people to work part-time, flexible hours, through contracts or in various ways that might suit older people who wish to supplement their pension rather than earn a full income.

Regarding its primary purpose of providing social protection, the NZ Superannuation scheme has been deemed very effective overall. New Zealand has had one of the lowest rates of old age poverty in the OECD13. Because it is very simple, it is also inexpensive to administer. It is widely popular and considered a national ‘taonga’ (treasure).

However, the scheme is not without challenges. New Zealanders tend to hold most of their assets in the form of real estate and proportionally little in financial assets. Decades of appreciating real estate, high levels of home ownership and no capital gains tax meant that although the NZ Superannuation pension is relatively small, combining it with capital released from downsizing a family home and/or part time work, and fully publicly funded hospital care, meant that many New Zealanders could have a relatively stress-free older age. However, with declining home ownership, the next decades are likely to see generations of people who either must pay rent or are still paying off mortgage after 6514. At the same time, with the ageing population, the number of people qualifying for the NZ Superannuation, and especially compared to the falling proportion of younger (“working age”) population that will likely mean lower tax revenue, will create a fiscal pressure. This fiscal pressure will be further intensified through the increased costs of the public health system.

The anticipation of lower tax revenue and increased demands has led some to argue that New Zealand will have to either increase the age of NZ Superannuation (to 67) or introduce some way of means-testing. In contrast to these arguments, a recent report by the independent Retirement Commissioner stated that the current scheme is the 8th least expensive in the OECD (as a proportion of GDP), that the age of eligibility is not high by OECD standards, and that raising the age of eligibility would be inequitable as it would disproportionately disadvantage several groups that already have less wealth and poorer health. In particular, Māori have a much shorter life expectancy yet are overrepresented in younger age categories. In short, “while younger Māori will be funding NZ Super, few older Māori will benefit from it”15. This report recommends leaving the age of entitlement at 65, and (only if needed) introducing income testing and further boosting Kiwisaver.

In summary, the introduction of the “universal basic income” pension system in New Zealand in the early 1990s achieved the intended outcome of social protection of older citizens. Unexpectedly, it also dramatically increased the workforce participation of older people. In future, this second, unplanned outcome might become very important. With more older people in the workforce, not only will they be able to have a better standard of living and contribute to the tax revenue but also help towards building intergenerational solidarity, which may be at risk as the “working age” population shrinks. A further increase in the older workforce will require close collaboration with employers, and supporting a social environment that values the older worker.

For other countries including the United Kingdom, New Zealand’s unintended experiment with universal basic income might provide ideas on how to structure the pension system so that it provides incentive for people to remain in the workforce while simultaneously protecting those who cannot do so. It is, however, important to stress that this policy is dependent on other parts of the system that have made it work: high levels of home ownership, a free hospital public health system, and flexible labour legislation.

  1. The Office for Seniors, “Older Workers Employment Action Plan: He Mahere Mahi Whakawhiwhi Mahi Mo Te Hunga Pakeke” (Wellington: NZ Government, April 2022). See also Monitoring and Implementation Table (July 2023). ↩︎
  2. Ministry of Social Development, “Ageing Workforce: Opportunities and Challenges.” ↩︎
  3. David Hood, “Cumulative Excess Deaths in New Zealand in the COVID-19 Era: Biases from Ignoring Changes in Population Growth Rates: Comment,” New Zealand Economic Papers 0, no. 0 (n.d.): 1–7, https://doi.org/10.1080/00779954.2024.2379781. ↩︎
  4. OWEAP Indicators 2022 https://www.msd.govt.nz/what-we-can-do/seniorcitizens/older-workers-employment-action-plan/reporting-on-the-older-workers-employment-action-plan.html ↩︎
  5. New Zealand tracks unemployment and underutilisation. UnemNote that while unemployment and underutilisation have increased, they are still at lower levels than at any time before 2017. https://www.stats.govt.nz/indicators/underutilisation-rate/ ↩︎
  6. Ministry of Social Development, “Ageing Workforce: Opportunities and Challenges.” ↩︎
  7. Roger Hurnard, “The Effect of New Zealand Superannuation Eligibility Age on the Labour Force Participation of Older People,” Working Paper (New Zealand Treasury Working Paper, 2005), https://www.econstor.eu/handle/10419/205574; Dominick Stephens, “Longevity and the Public Purse: Fiscal and Economic Impacts of Increasing Longevity” (Conference presentation, Queenstown, New Zealand, September 26, 2024). ↩︎
  8. Stephens, “Longevity and the Public Purse: Fiscal and Economic Impacts of Increasing Longevity.” ↩︎
  9. Bernard Hickey, “We’re All Getting Older and Something Has Got to Give: Interview with Chief Economic Adviser at Treasury, Dominick Stephens,” When the Facts Change, accessed October 16, 2024, https://thespinoff.co.nz/podcasts/when-the-facts-change. ↩︎
  10. Hurnard, “The Effect of New Zealand Superannuation Eligibility Age on the Labour Force Participation of Older People.” ↩︎
  11. There are certain residency requirements: only those New Zealanders who had lived in New Zealand, Tokelau or Niue for at least 10 years since age 20 are eligible. Starting in July 2024, this residency requirement will be gradually increasing to reach 20 years since the age of 20, with 5 of those years from age 50 or older. ↩︎
  12. Hurnard, “The Effect of New Zealand Superannuation Eligibility Age on the Labour Force Participation of Older People,” 10. ↩︎
  13. Asghar Zaidi, “Poverty and Income of Older People in OECD Countries,” SSRN Scholarly Paper (Rochester, NY: Social Science Research Network, March 26, 2009), 516, https://doi.org/10.2139/ssrn.1992492. ↩︎
  14. Ministry for Social Development, “Better Later Life: He Oranga Kaumātua 2019 to 2024: A Strategy for Meaking the Future Better for New Zealanders as We Age” (New Zealand Government, 2019), 14. ↩︎
  15. Te ARa Ahunga Ora Retirement Commission, “NZ Super: Issues and Options” (NZ Government, n.d.), 7. ↩︎