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Superannuation

  • Spending on NZS was $7.7 billion in 2009.
  • Demography is a key driver of superannuation spending. There are 522,000 people receiving NZS now. This is projected to grow to 1.3 million in 2050, causing the cost to rise from 4.3% of GDP in 2009 to 8% in 2050.
  • Much of this shift occurs in the next 20 years.
  • Our public pension system is unique in the OECD, particularly in its universality.
  • NZS's present structure has focused on preventing poverty in old age. A couple receives 66% of the net national average wage (33% each = $14,229 each before tax); there are variations around this depending on a person's circumstances.

Compared with publicly-funded retirement schemes internationally, NZS is simple and easy to understand and efficient, with a low administration cost. The flat rate aspect of NZS means that lower-income earners are assured of post-retirement incomes comparable to their pre-retirement earnings. For higher-income earners, it provides a certain baseline from which they can plan further saving. It is a protection against lack of income due to increased longevity: if you outlive your savings, you will still receive a base income.

NZS differs from public pension schemes in almost all other countries in several ways:

  • paid to all residents aged 65 and over (subject to a relatively short residency test)
  • indexed annually, effectively to average weekly earnings
  • taxed along with all other income
  • no income test
  • no requirement to retire from paid work
  • no asset test
  • unrelated to past earnings' history
  • not contributory, and
  • almost impossible to access before 65.

Most importantly, given long-term issues about the labour market, a person can receive superannuation and still remain in work. Since the late 1990s, NZS has not been income - or asset-tested, which means there is no extra tax on earnings beyond age 65. As a result, NZS tends to discourage early retirement, and since 1999, it has been unlawful for an employer to require the retirement of an employee solely on the basis of age. Participation rates of those older than 65 rose through the 1990s and have continued moving upwards to among the highest in the OECD. Nevertheless, while there are few formal impediments to working beyond 65, participation rates for both males and females tend to halve at 65.

The main issue with NZS is its long-term affordability. Shortly after the present pension system was introduced in 1977 (accompanied by a lowering of the eligibility age from 65 years to 60 years, and a rise in the payment from 65% of the average wage to 80%), the fiscal cost rose to around 8% of GDP. The subsequent lowering of the relativity with wages and raising of the age of eligibility through the 1990s, fewer retirees and a growing economy have brought the ratio of total payments of NZS to GDP closer to 4%. But the accelerating ageing of the population suggests that by mid-century the ratio will return to 8%, or more. Unless there is policy change or an acceptance that this would mean increasing public debt, funding this would require cutting other expenditure, or lifting tax rates.

Role of the New Zealand Superannuation Fund

In 2001, the government created the New Zealand Superannuation (NZS) Fund, and until this year had added about $2 billion a year to the NZS Fund. The Fund was designed to help smooth the future cost of NZS over time. Current tax dollars have been placed in the Fund, where they earn investment returns. The Fund will eventually be used to help cover some of the cost of paying NZS - about 8% of the net cost of NZS in 2050. The Government's decision to suspend contributions to the Fund (as outlined in the 2009 Fiscal Strategy Report) does not change the level of NZS payments. The contribution holiday means that when payments to the Fund resume they will likely be larger, the point where the Fund is drawn down starts a few years later and more of the NZS payments will need to be covered by tax at the time it is needed. Without the contribution holiday, the Fund would have covered about 11% of the net cost of NZS in 2050.[43]

For many New Zealanders, NZS (along with the similar Veterans Pension) is the major source of retirement income, so the adequacy of this income also needs to be considered. International and national reports rate NZS highly in achieving the objective of the prevention of poverty in old age. Using the 50% of median threshold, Figure 7.10 shows that the poverty rates for New Zealanders aged 65 years and older are lower than other OECD countries. This is because the 50% median is below the value of NZS.

Figure 7.10 - Poverty rates[44]
Figure 7.10 - Poverty rates.
Source: OECD - Society at a Glance, Social Indicators (2005)

Based on this measure, the OECD has noted that New Zealand has "successfully erased poverty among the elderly".[45] A more comprehensive assessment, however, requires comparisons at other thresholds. With poverty rates using a 60% threshold for 20 European countries and New Zealand, New Zealand goes to the opposite end of the spectrum, reporting the highest poverty rate at 34% for those aged 65 and over.[46]

A 2007 report released by the Ministry of Social Development suggest that older people in New Zealand generally have adequate incomes that provide them with a reasonable standard of living.[47] This assessment varies with population subgroups and is not so positive for older Maori and single people, especially single women. The adequacy of NZS payments is reflected in the low levels of poverty and hardship among the older population. The report says this conclusion also depends on the high levels of mortgage-free home ownership among current retirees. It is important, the report notes, that future generations of older people enter retirement as home-owners – either mortgage-free or with small mortgages – because mortgage-holders and those who live in rental accommodation are among the most disadvantaged.

Notes

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