I. Option: Government responds to demographic change - continued

What if we decreased the relative value of NZ Super payments?

We could make a larger cost saving by raising the eligibility age to 67 and also slowing the rate of growth in the value of NZ Super payments. Currently, payments increase each year to keep up with inflation but also at a pace that ensures that couples receive at least 65% of the net average wage.[84] Because wages tend to grow faster than prices, payments usually grow at the same rate as the average wage. Pegging the rate of increase to price inflation instead would reduce the projected future cost of NZ Super.

This would mean that while the purchasing power of NZ Super payments would remain the same over time, their value relative to average wages would decrease. NZ Super payments pegged to price inflation might not be enough for some superannuitants as a sole source of income, particularly for those who rent accommodation or are still paying off a mortgage. So we might expect to see more take-up of other benefits - like the Accommodation Supplement - if the relative value of NZ Super payments was reduced.

Figure 15 is a revised version of Figure 14, but adds the impact of indexing the value of NZ Super payments to price inflation, again from the 2019/20 fiscal year.

As Figure 15 shows, the fiscal impact of indexing NZ Super payments to price inflation plus raising the eligibility age is considerably greater than the impact of just raising the age.

Figure 15 Three government spending paths - the impact of raising the age of eligibility for NZ Super plus indexing growth in payments to price inflation

How would changing the relative value of NZ Super payments affect living standards?

Adopting a lower growth rate for NZ Super payments would mean that the living standards of superannuitants whose only source of income is NZ Super would decline relative to the rest of the population (although - because their income would grow with inflation - their living standards would not decline in absolute terms). To some extent, this impact might be addressed by the rest of the welfare system, through the use of benefits like the Accommodation Supplement, as stated above. Of course, that would mean that the fiscal benefits of indexing NZ Super payments to price inflation would be reduced, as costs in other areas of government spending would rise.

However, there is a question around the number of people for whom NZ Super will be the sole or main source of income in the future. Currently, NZ Super is the sole source of income for around 40% of superannuitants.[85] But the introduction of KiwiSaver, which has around two million members, suggests that in the future more people will enter retirement with private savings.

This logic only applies, of course, if the amounts saved in KiwiSaver accounts are actually "new" saving, rather than money people would have saved anyway, now using KiwiSaver as a vehicle. One evaluation suggests that around a third of the money currently in KiwiSaver accounts is new savings that would not have been saved otherwise.[86] For those with higher levels of education or who own their own home, amounts saved in KiwiSaver accounts are less likely to be "new" savings.

The same evaluation found that certain people probably would have saved less for retirement if KiwiSaver didn't exist. They are:

• people with more children,
• people expecting NZ Super to be their main source of income in retirement,
• people in poor health, and
• women.[87]

These results were gathered fairly early in the history of KiwiSaver, so further research will be necessary to see if the initial results are borne out over time. But this initial evidence suggests that the group of people for whom NZ Super is their sole source of income in retirement may be smaller in the future.

Reducing the relative value of NZ Super payments theoretically could encourage people to save more, as they will need more private resources to have their desired standard of living in retirement. It could also encourage people to keep working for longer. However, evidence on both these points is scarce.

A proposal to change the rate of growth of NZ Super payments might encounter some resistance. The pegging of NZ Super payments to 65% of the average wage has been part of our retirement income system for some time. Some might view this feature as part of our implicit social contract, so changing the system could be viewed as challenge to our social infrastructure.

However, people's ideas about what exactly NZ Super should do might change in the future. In particular, the uptake of KiwiSaver and accumulation of KiwiSaver balances may mean that people will see the role of NZ Super differently. Also, the increasing costs of NZ Super could influence what people see as the government's role in retirement income provision.