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3  New Zealand’s public pension system

This section discusses the features of New Zealand’s public pension system[5] that are most relevant to labour force participation decisions and goes on to describe the policy changes that led to the turnaround in this country’s participation trend seen in Figure 1.

3.1  Structural differences

New Zealand’s public pension system differs significantly from those in many other countries in several important respects. Four key features are discussed below: an emphasis on social protection; having no mandatory retirement age; pensions not being contingent on retirement; and limited early retirement options.

Emphasis on social protection

In its recent review of pension systems across OECD countries, the OECD (2005b) used a typology for classifying pension systems that is based on the two main goals of public pension systems: first, the prevention of destitution in old age by redistributing income towards low-income pensioners (social protection) and, second, helping workers to maintain their living standards in retirement (earnings replacement). Within these two main goals, systems can take several possible forms, which entails a further level of system classification.

This typology differs somewhat from the well-known “three-pillar” classification of pension systems originally developed by the World Bank (1994).[6] That classification has been criticised as being unsuitable because it is prescriptive rather than descriptive, although the recent revision and extension of it by Holzmann and Hinz (2005) has gone some way to addressing accusations that the World Bank’s prescriptions were too inflexible.[7]

The OECD notes that most countries pursue both goals (social protection and earnings replacement) in their overall pension policy, but there is a large variation in the balance of emphasis between the two. New Zealand is at one extreme because it has historically placed a heavy emphasis on the objective of social protection rather than earnings replacement. For example, the influential 1972 Royal Commission of Inquiry into Social Security in New Zealand concluded:

The community’s first responsibility for income maintenance is to give benefits which will enable its dependent sections to reach an adequate standard of living. This can best be done by a system of selective flat-rate benefits and allowances. Adopting an earnings-related benefit system would not help those sections of the community to whom it owes its first responsibility. On the contrary their interests would most probably be prejudiced. However desirable it may be for individuals to maintain their customary earnings and status, the community is not, and should not become, responsible for securing this status, particularly by imposing a compulsory scheme.
Royal Commission of Inquiry (1972: p181).

This view that a mandatory savings scheme is undesirable can also be seen expressed in the Report of the Todd Task Force (Task Force on Private Provision for Retirement, 1992), the Multi-party Accord on Retirement Incomes Policies (Accord Parties, 1993), and the heavy defeat in 1997 of a public referendum proposal to introduce a compulsory retirement savings scheme. Topping up the basic level of NZS by means of a second pension to achieve a high rate of income replacement continues to be viewed as a matter of individual responsibility and decision, with the government’s role being focused on encouraging work-based savings, providing education and information services, minimizing tax distortions on saving and reducing compliance costs.[8]

A result is that almost all older people meet the eligibility requirements and receive the basic amount of NZS.[9] At the same time, voluntary saving in private superannuation schemes has not been particularly high. A survey by Statistics New Zealand (2002) reported that 21% of working age couples and non-partnered individuals had private or employer-sponsored superannuation assets, with a median value of only $25,000. The report commented that:

New Zealanders tend to hold most of their assets in the form of real assets and hold proportionally low amounts in financial assets… There also does not appear to be a culture of wage and salary earners investing a large part of their savings into the share market or in managed funds (as is more common in the United States).

This pattern of heavy reliance on NZS as the major source of retirement income has reinforced the strong link between retirement decisions and the age at which people become eligible for NZS. Planned early retirement options are limited both by the absence of a trade-off between the timing and amount of NZS, and by the relatively low incidence of private pension arrangements that might offer that option.

Mandatory retirement is outlawed

Many countries allow employers to set a mandatory retirement age and eligibility for company pensions is often linked to this age. Under New Zealand’s Human Rights Act 1993, however, it has been unlawful since 1999 for an employer to require the retirement of an employee solely on the basis of his or her age, even at and beyond the NZS eligibility age.[10] Through the 1990s retirement became increasingly a matter of individual employee choice, or a consequence of demonstrated poor job performance, rather than determined by a standard age provision in an employment contract.

The removal of any mandatory retirement provisions from employment contracts has opened up a wider range of employment options from both employers’ and employees’ points of view and has no doubt facilitated the rise in employment rates among those above NZS eligibility age.[11]

Pension not contingent upon retirement

A third significant difference from many other systems is that NZS is not subject to any income test or other means test, nor is it contingent upon retirement from paid employment. Provided they are age-qualified for NZS, people receive the same amount whether or not they remain employed in the labour market.

This has important implications for analysing the work incentive effects of public pension entitlements. In models of retirement behaviour involving decisions based on changes in net pension wealth or the implicit social security tax on work, the present New Zealand structure is an outlier. This is because one can choose to stay an extra year in paid employment and still receive the same flow of pension payments as if one had retired; the discounted future value of pension entitlements is essentially independent of the age of retirement.[12] Alternatively, one can say that the implicit social security tax on work is zero.

Limited early retirement options

A fourth feature is that the fixed age of eligibility for NZS means that there are limited options for someone wishing to retire before that age. Public pension schemes in other countries commonly offer early retirement options whereby one can choose to take a lower pension from an earlier age. In New Zealand, the only public income support for someone leaving the labour market before age 65 is through the income-tested benefit system. That support is at a lower rate than NZS and is subject to a tight income test and to meeting certain qualifying conditions, such as continuing to seek full-time employment, being medically unfit for employment, widowhood or having to care for a sick relative.[13]

One partial exception to this conditionality arises in the case of the non-qualified spouse of a NZS recipient. The age-qualified partner may receive the standard amount of NZS for themselves or instead choose for the couple to receive a higher amount in recognition of their non-qualified spouse but which is subject to abatement against their combined incomes. It is possible, therefore, for a non-earning younger spouse (typically the wife) of a recipient to receive some NZS.[14] This option enables couples to choose to retire at the same time once the older partner reaches the qualifying age for NZS. It also explains why the tendency for early retirement of females, reported later in this paper, is financially feasible.


  • [5]The relevant legislation is the New Zealand Superannuation and Retirement Income Act 2001.
  • [6]The World Bank recommended that countries should seek to develop a three pillar old age financial security structure, comprising (1) a tax financed publicly managed pillar for income redistribution and old age poverty alleviation, (2) a mandatory, fully funded, privately managed pillar for individual income smoothing (saving), and (3) a voluntary, fully funded pillar for additional personal saving. 
  • [7]“[From this reassessment comes] … an appreciation of the diversity of effective approaches, including the number of pillars, the appropriate balance among the various pillars, and the way in which each pillar is formulated in response to particular circumstances or needs.  Some pension systems function effectively with only a zero pillar (in the form of a universal social pension) and a third pillar of voluntary savings…” (Holzmann and Hinz, 2005).  This is essentially the New Zealand structure. 
  • [8]The most recent review, by the Periodic Report Group (2003), proposed no change from the current voluntary approach to private provision and reported no strong interest in departing from the current voluntary model among the submissions it had received. It should be noted, however, that government encouragement of work-based saving through the recently announced, optional Kiwi Saver scheme will include an element of subsidy.
  • [9]Take-up rates of NZS are estimated to be in excess of 95% of the age-eligible population.  A relatively small number of people fail to meet the New Zealand residence test for NZS, which is to have spent at least 10 years of working age life in the country, and at least five years since age 50.
  • [10]Prior to 1999, the Act made it unlawful to use age as the basis for dismissal or retirement, but only up to the standard age of eligibility for NZS.
  • [11]It might be argued that not being able to set a mandatory retirement age might discourage employers from employing older workers in the first place.   However a recent review of age discrimination legislation across a number of countries concluded that while it may have made employers a bit less likely to hire older workers, there is no evidence that this has been a major disincentive –  see Hornstein (2001).  
  • [12]There is a small marginal income tax effect.  NZS is a component of taxable income and so can be thought of as attracting a higher effective tax when combined with earnings than when it is the sole source of income.  However there was a period of 12 years between 1986 and 1998 where NZS was effectively income-tested, thereby reducing its net value more substantially than the marginal tax effect alone.
  • [13]For example, a widow aged under 65 and living alone may receive an income-tested benefit that is about 69% of the NZS she would receive from age 65.
  • [14]The additional amount is equivalent to about 91% of the NZS rate for a qualified, married individual.
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