Targeting superannuation

The final scenarios deal with income or asset testing around NZS payments. Abandoning universality would complicate the superannuation system and encourage people to shelter income so that it was not included in the pension calculation. It is, however, only in the past 30 years that we have not had some form of income or asset testing, and even then the surcharge from the mid-1980s to the late 1990s was a form of income testing. Targeting is a feature of public pensions in most of the OECD countries such as Australia, Canada and the United Kingdom. A robust abatement regime would provide the opportunity to target payments towards people with more limited resources, or direct more money elsewhere.

In this scenario, those with higher income are paid less NZS. For three-quarters of the people 65 and over, NZS made up more than 80% of their weekly income in 2007.[49] For the remaining top quarter of income earners, NZS was only 20% of their income. Here we model scenarios in which superannuitants in the top income quartile will either have half or all of their NZS payments reduced by an income test. This is phased in over five years, starting in 2017.

Figure 7.13 - NZS spending

Source: The Treasury

Reducing half the NZS of people in the wealthiest quarter of those aged 65 years and over has a similar effect on the basket of publicly-funded services as the CPI + 1% indexing scenario, as the basket is 8% above the 2013 level in 2050. If the wealthiest quarter of retirees were to forgo all of their NZS entitlement, then the fiscal savings could be used to increase the basket by 16% above its 2013 level.

The scenarios show that far greater gains in NZS affordability are achieved in moving indexation to inflation than by the changes to the age of eligibility we have modelled. Conversely, labour market gains (and tax revenue) are likely to be higher with changes to the age of eligibility.

The latest change to the New Zealand pension and savings system, the automatic enrolment KiwiSaver scheme of private individual accounts, may eventually play a significant role in providing retirement income for middle-income earners. By 30 June 2009, it had 1.1 million members, or about half of the labour force under 65. A New Zealand study showed that 23% of workers had private pensions in 1990. By 2004, only 14% of the labour force was covered by private schemes.[50] This fall may be a consequence of the success of NZS at poverty prevention over the past three decades and of changes to the taxation of pensions.

If KiwiSaver ensures that more people have greater private savings (and for some this is debatable), this could allow changes to both indexation and the eligibility age. A greater level of private provision for retirement would provide governments with an opportunity for restructuring NZS to reduce its fiscal cost. This could enable NZS to maintain its role in providing an adequate income floor for keeping poverty in old age at a low level.