7.3.2  NZ Superannuation Fund

A typical OECD country pension model is sometimes referred to as the three-tier system, where the tiers are:

Tier 1: a publicly-provided pension.

Tier 2: mandatory personal retirement savings.

Tier 3: voluntary personal retirement savings.

New Zealand has tiers 1 and 3, with NZ Superannuation being the tier 1 scheme and KiwiSaver being a tier 3 scheme.

Tier 1 schemes cover safety net pensions, which are paid by the state. Some countries, such as Chile and New Zealand, have established funds to partially pre-fund the future costs of pensions. While age pensions are often means tested, NZ Superannuation is universal, being available to all persons over 65 who meet residency requirements. The level of NZ Superannuation is tied to wages, with the post-tax level of pension for a couple being equal to at least 66% of the net post-tax average wage. The level for an individual is set relative to the level for a couple.[20]

Background to the NZ Superannuation Fund

If the current policy parameters for NZ Superannuation are maintained, its net cost to the Crown will rise from the current 3.7% of GDP to about 6.9% of GDP by 2060.[21] This reflects a permanent change to the age structure of the population arising from increasing longevity and declining fertility.

The NZ Superannuation Fund was established to help smooth the impact of this change on the rest of the Crown's finances. It does this by taking capital contributions from the budgets in earlier years, then starting to draw on the Fund as the cost of NZ Superannuation begins to mount up from about 2030 (see Figure 7.2 below).[22]

Figure 7.2: NZ Superannuation Fund contribution rate[23]

Source:  The Treasury

Even with the current break in capital contributions, and with capital withdrawals from the Fund starting in about 2030, the Fund is expected to grow from its current 8.5% of GDP to about 26% of GDP in about 2060, before starting to decline relative to GDP. However, it would stay significantly above its current level well into next century (see Figure 7.3 below).

Figure 7.3: Size of NZ Superannuation Fund assets

Source:  The Treasury

The NZ Superannuation Fund issue is at the core of the debate on whether to pre-fund future superannuation requirements or simply fund them out of current tax revenues at the time payments are made. Funding the Fund out of current tax revenues while maintaining the existing NZ Superannuation system would leave New Zealand with a combination of PAYGO and SAYGO with the mix still heavily weighted to the former.

More generally, there is the argument that forcing the Government to put money into the Fund will create stronger fiscal discipline. When surpluses are being run the funding requirements of the NZ Superannuation Fund will reduce the pressure that governments inevitably come under to return money to the people either by way of tax cuts or increased government expenditure.

Whether current public pension arrangements remain in place, or are changed, the SWG believes there is an arguable case for continuing to pre-fund the state pension based on our preference for an increase in SAYGO.

The NZ Superannuation Fund was funded directly out of tax revenues and, at the time of its inception, was also instrumental in reducing the possibility that the government might feel obliged to re-inject “surplus funds” into the economy thereby exacerbating what was an already overheating economy at the time.

As the fiscal outlook deteriorated in 2008, it became apparent that future contributions to the NZ Superannuation Fund might have to be debt-funded. A decision was made by the current Government to suspend contributions until the fiscal position was such that resumption would be appropriate.

For now, then, the NZ Superannuation Fund is in limbo. As at 30 September 2010, it had assets of $17.2 billion, but the fund is growing only to the extent that it achieves positive returns. The longer contributions remain suspended, the less the fund will be able to offset the burden of future superannuation payments.

Of concern to the SWG is analysis that shows that even with a return to the original method of funding, the level of unfunded liability relative to GDP will continue to grow.

An increased level of funding would be needed to close this gap. One way of doing this may be to introduce a dedicated social security tax (with an offset to ordinary income tax) equal to the new entrant fund rate. A social security tax would create a discipline of continuing saving regardless of the fiscal position, and current anomalies in the benefit formula could more easily be repaired.[24]

Views of the SWG

The questions that need answering now are:

1. Should the fund be continued or broken up?

The SWG believes there is an arguable case for continuing to prefund NZ Superannuation.

2. If it is to be continued, how should it be funded?

A more reliable funding requirement, such as a set percentage of GDP, should be considered, with more limited flexibility for the government of the day to deviate from that. Contributions may need to be raised to ensure intergenerational fairness in light of population ageing.

3. Does the fund have a role over and above its stated intent to pre-fund future superannuation payments?

As a New Zealand based investor that is both large and with a long time horizon, the Fund will make a significant contribution to New Zealand's capital markets.

However, decisions about the Fund need to be considered alongside the wider debate around retirement saving especially decisions made around NZ Superannuation parameters and around KiwiSaver compulsion and incentives.