New Zealand’s economy, known for its innovation and resourcefulness, faces considerable challenges in the coming years . Will the classic No. 8 wire approach be enough this time ? How will we sustain our economy in the long term while productivity stagnates, and demographic shifts put our systems under pressure ?

The State of the Nation

As of June 2024, New Zealand’s population stands at 5.34 million . A significant portion of that is people 65 years of age or older . Over 16% of the population falls within this age bracket, with that figure expected to rise to 20-21% within the next decade . Yes, you read that right; in 2035, a quarter of our population could be over 65 .

On one hand – we’re living longer, so we’re doing something right . On the other, it’s going to cause serious strife for our woefully underfunded healthcare system to support this shift in our country’s demographic topography… not to mention the hike in superannuation payouts .

The increasing number of New Zealanders receiving NZ Super (912,369 and projected to grow) will intensify the fiscal burden on the government . The cost for Super today is at $21 billion, which, if it increases by 6% annually, will reach an eye-watering $38 billion by 2034 .

Healthcare costs are also projected to skyrocket . The Government’s healthcare bill for 2024 stands at $28 billion . Assuming a 4% annual increase, this could reach $42 billion by 2034 . It’s not chump change, and it must come from somewhere .

NZ’s government also faces an annual fiscal shortfall of $15 billion . This must be filled through borrowing, raising taxes, or cutting spending .

Adding to this already simmering pot of fast-brewing issues is New Zealand’s well-documented productivity crisis . Productivity is the key driver of long-term economic growth – we need a positive movement here to foster growth in other areas .

A recent Treasury report[i] highlights a sustained productivity slowdown over the past few decades, with productivity levels stubbornly low compared to other developed countries .

Several factors contribute to this underperformance:

·         Underinvestment in innovation

·         Insufficient capital accumulation

·         Relatively weak management practice

·         Poor infrastructure investment

·         A small domestic market

While limiting in the best of times, these weaknesses have become critical . The global economy is shifting toward knowledge-based industries and New Zealand has been slow to adapt .

With an ageing workforce and higher government spending commitments, the productivity gap becomes even more alarming .

The OCR Debate: Stimulating Growth or Ignoring Reality?

Against this backdrop of demographic and productivity challenges, the Reserve Bank's monetary policy is under scrutiny . Recently there have been calls for a further 0.75% cut in the Official Cash Rate (OCR) by Christmas to stimulate economic activity and mitigate the current economic downturn . [ii]

However, any relief from this would be likely short-term unless the deeper, structural problems in this economy are addressed – particularly the productivity gap .

While the government and Reserve Bank may temporarily cushion the blow of economic stagnation via the OCR, without addressing productivity through policy, they risk merely delaying the inevitable .

 

Looking after yourself and your family

Given the significant uncertainties facing New Zealand’s economy, taking control of your own financial future is more important than ever .

Financial independence, especially in retirement, will increasingly rely on personal savings and investments rather than government support . You can’t assume that there will be enough in the fiscal kitty to pay for super in the years to come, let alone other services you might need for a comfortable life as you age .

Key principles to guide financial planning in this uncertain landscape include:

1. Work Longer if You Can: While it’s not ideal for everyone… if you can delay retirement until you’re 70, this will give you more time to build savings and decrease dependence on NZ Super . The longer you’re accumulating, the better .

2. Build a Robust Nest Egg: By age 70, having a debt-free home and income-earning investments of around $800k (per couple) is ideal . With rising housing and living costs, you don’t want to be paying your mortgage from your retirement savings .

3. Leverage KiwiSaver: Don’t neglect your KiwiSaver once you turn 65 . Keep the account active and utilise the flexibility for over-65s to manage retirement income and your estate planning . Your money will likely do better here than battling inflation in a savings account .

4. Maintain Medical Insurance: As public healthcare becomes more embattled, securing private medical insurance beyond 65 is a must . And if you can, pay the first $2,000 (or $4,000) of any medical event from your own wallet - this will reduce the annual premium cost in future .

5. Downsize Early: The cost of home maintenance, insurance and rates become a larger share of your income in retirement years . Moving early into a more manageable abode frees up valuable capital for investment, or for spending .

6. Plan for Longevity: It’s statistically likely you’ll live longer than the generations before you . Given the likelihood that one spouse could live to 95 or beyond, financial plans should account for extended life expectancy .

 

Productivity Reform: The Path Forward

As New Zealand approaches the middle of the 21st century, the nation stands on the brink of significant fiscal strain if the Government fails to address the growing burden of superannuation and healthcare while responsibly balancing the budget .

Government policies should focus on encouraging capital investment, particularly in technology and education . Improving management practices and supporting small businesses in scaling up could also significantly enhance overall productivity .

What individuals do to future-proof? Start with sound financial planning, delaying retirement where possible, and preparing for rising costs – and consider enlisting the expertise of a financial adviser to keep you on track through it all .

By making prudent choices today and incorporating professional guidance, New Zealand can secure a prosperous and sustainable economic future for generations to come .

Special thanks to Pita Alexander for the inspiration behind this article .

 

·         Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. Article no. 377.

·         The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz

 

[i] https://www.treasury.govt.nz/publications/tp/productivity-slowdown-implications-treasurys-forecasts-and-projections

[ii] 'Economy is cratering': Call for 1.5 percent official cash rate cut by Christmas | RNZ News