Last week, Treasury released yet another warning about New Zealand’s fiscal future. It was the same message they have been delivering for twenty years: population ageing will create spending pressures that the current tax base cannot support.

According to Treasury’s Long-term Fiscal Statement, New Zealand is on track to reach a net debt of 200 percent of GDP by 2065. Unless there are any significant policy changes, that is.

The political response has been silence. The National Party still plans to keep the superannuation age at 65 until 2044. After that, it might then gradually rise to 67. But that is nineteen years away, long after the current government will have left office.

As a German-born economist, I find all this depressingly familiar. I grew up watching German politicians receive similar warnings and ignore every single one of them.

Today, Germany is living through exactly the demographic crisis its experts predicted – the same crisis that New Zealand will likely experience in a decade or two. That makes it worth looking at the German example in more detail, if mainly as a cautionary tale.

The roots of Germany’s mess go back to 1957, when Chancellor Konrad Adenauer revolutionised the pension system. He created a scheme whereby current workers pay for current retirees. You work and pay, then when you retire, the next generation pays for you. It sounds reasonable until you do the sums.

Ludwig Erhard, the economics minister who orchestrated Germany’s post-war miracle, saw the flaw immediately. This scheme would only work with a constantly growing population.

Adenauer dismissed these concerns with a phrase that became historic: “Kinder kriegen die Leute immer.” (“People always have children.”) It was a political bet, not a demographic forecast.

Adenauer’s assumption proved spectacularly wrong. Since the early 1970s, Germany’s fertility rate has been below 2.1, the level needed to maintain the population. But Adenauer got what he wanted politically. His party won its only absolute majority that year. Pensions rose sharply – up to 60 percent.

In any case, Adenauer set the template for what was to come after him: short-term wins over long-term sustainability.

By the early 1980s, social scientist Meinhard Miegel was publishing warnings about Germany’s collapsing birth rate. The workforce would shrink dramatically, and pensions would become unaffordable. The political establishment called him an alarmist.

Yet Miegel persisted for decades. In 2002, he published Die deformierte Gesellschaft (The deformed society), arguing that Germans were living in denial. They wanted prosperity without children and generous pensions without workers. These combinations are not possible.

By 2016, Miegel’s lectures had become increasingly bitter. “Now we pay the price,” he told audiences, “for ignoring demographic questions for decades.”

Throughout the 1990s and 2000s, Germany’s Council of Economic Experts issued similar alerts. These economists, often nicknamed the “Five Sages”, function much like the Treasury does in New Zealand. Their 2023/24 Annual Report explicitly urged linking pension age to life expectancy.

Meanwhile, Germany’s politicians preferred to close their eyes and pretend everything was fine. Famously, in 1986, then employment minister Norbert Blüm launched a campaign declaring: “Die Rente ist sicher!” (“The pension is safe!”) It has become Germany’s most iconic – and ironic – political promise.

After decades of denial, Germany is now waking up to facts it has long chosen to ignore. By 2036, about 12.9 million people will reach retirement age, just under 30 percent of those available to the labour market. Public pension spending already consumes 10.2 percent of GDP and is projected to reach 11.4 percent by 2070.

The ratio of contributors to pensioners tells the whole story. In the early 1960s, Germany had six workers supporting each pensioner. Today, that ratio has collapsed to two to one. With fewer contributors per pensioner, a pay-as-you-go scheme needs either higher contributions, lower benefits, later retirement, or all the above.

Germany’s electorate has become so dominated by older voters that pension reform is politically unlikely without a crisis. The trap Germany set in 1957 has finally sprung shut.

Looking at New Zealand today is like watching Germany in the 1990s. The same warning signs present but the crisis still avoidable.

Treasury’s warnings echo what German experts said decades earlier. In the 1960s, New Zealand had seven people of working age for every person over 65. Today we have four. By 2065, we will have just two – exactly the ratio currently crushing Germany’s finances.

Superannuation costs are climbing relentlessly. Treasury states: “NZS expenditure was 3.9% of GDP in 2006, is 5.1% now, and if current policies are maintained, is expected to grow to around 8% of GDP by 2065.”

Our politicians’ reactions mirrors Germany’s decades of denial. At a debate last October, Finance Minister Nicola Willis and Labour’s Barbara Edmonds agreed superannuation reform needed discussion. But nothing followed from this rare bipartisan agreement.

Meanwhile, because the problem has remained unaddressed for so long, measures to address it would now need to become increasingly draconian. Treasury calculated that stabilising debt by tax alone would require the average income tax rate to rise from 21 to 32 percent by 2065, or GST to 32 percent.

But will Treasury’s strong warnings change anything? Germany’s experience suggests it might not. That is largely because of the political calculus behind any such reforms.

Older people usually vote at higher rates, and politicians need votes. Super payments never get cut; pension ages rarely rise. Each generation makes the same calculation: preserve benefits for current voters and shift the burden to future taxpayers.

Germany had seventy years of warnings, from Ludwig Erhard to Meinhard Miegel to endless expert committees. Every warning proved accurate, yet they were all ignored.

New Zealand has now had twenty years of warnings. But we will ever actually do anything about it?

Ultimately, someone will pay the price for this political failure. This price could mean higher taxes, later retirement ages and reduced pensions. But that is the best case. In the worst case, New Zealand could also experience a full-blown sovereign debt crisis – just as Greece did in 2009.

Future generations will wonder how we could see the problem so clearly and still do nothing. But as Germany’s example shows, New Zealand is not the only country failing to prepare for demographic change.

To read the full article on the Newsroom website, click here.