3.2 Overall effect on incentives to retire

It is possible now to assess New Zealand’s retirement income policies using the analysis in Section 2.1 of how financial incentives affect retirement decisions.

It is important to recognise that the main focus of retirement income policies in New Zealand is social protection rather than earnings replacement. From the point of view of the replacement rate effect, the standard amount of NZS corresponds to a wide range of earnings replacement rates depending on individual earnings. High pre-retirement earnings produce a low replacement rate and a low incentive to retire, while for people with low earnings NZS offers a higher replacement rate and hence a stronger incentive to retire.

Table 1 shows the gross incomes, before and after age 65, of someone with the average weekly earnings of those in each age group who are working full-time or part-time. For a married person aged 64 working full-time and contemplating retirement next year, the relevant measure of the expected loss of consumption possibilities as a result of retiring might be NZS plus leisure next year versus earnings this year. On this basis a representative full-time wage replacement rate is $235 divided by $953, or 25%, although it can be as high as 62% for someone working full-time on the minimum wage.

* Available only if married to an older spouse who is qualified for NZS.

Sources: Average weekly earnings by age group, from New Zealand Income Survey, June 2005 quarter; rates of NZS (married person or non-qualified spouse) from 1 April 2005 from the Ministry of Social Development.

For someone aged 65 or over who is choosing whether to continue working or to retire, however, the relevant income comparison is not NZS versus earnings, but NZS alone versus earnings plus NZS. On this basis, their replacement rate is $235 divided by $1017, or 23%, which is lower than the previous calculation, illustrating how the ability to stay in work beyond age 65 and receive a pension at the same time reduces the incentive to retire.

Where the prospective retiree is single rather than married, NZS is paid at a higher rate than that shown in Table 1 and the replacement rates quoted above are correspondingly higher.[15]

The ‘joint retirement’ option for a couple, mentioned in Section 3.1, is most likely to be financially attractive where the younger spouse (usually the wife) is aged 60-64 and is currently in part-time work. In this case her income replacement rate is $212 divided by $303, or 70%.

To summarise the retirement incentive effects associated with NZS, retiring before the eligibility age for NZS is financially very unattractive (replacement rate is zero) unless one has a private source of income or can access NZS indirectly via an older spouse. Retiring at age 65 with no private income is moderately or highly attractive (replacement rates typically in the range 20% – 50%) depending on wage rate, hours worked and marital status. Continuing in employment beyond age 65 remains a financially attractive option for those who can command a high wage because their NZS entitlement is unaffected. Furthermore, the absence of any mandatory retirement provisions means that there is no restriction on being employed beyond age 65.