This report to the Government arises from a triennial Review of retirement income policies, held during 2012 and 2013.
The overarching challenge faced by this Review, as with all those preceding, was to identify ways in which New Zealand’s system of retirement income can remain socially, economically and politically sustainable for many decades to come.
New Zealand has an excellent retirement income framework which achieves good outcomes for the majority of people aged 65 and over. Rates of poverty are relatively low for this group, thanks to a combination of New Zealand Superannuation (NZS), high levels of home ownership and a raft of other government policies and programmes. However, there are signs that in the near future outcomes may be more unevenly spread, with some people arriving at retirement in poor financial shape while others continue to do well.
Private savings are also important, and since 2007 the New Zealand Government has encouraged saving through the KiwiSaver scheme. KiwiSaver has been a great success and its continued growth should be promoted, but on current trends, outcomes for members at retirement will be variable and some inequities and gaps in knowledge about the scheme need to be addressed. Neither is there any obligation for KiwiSaver balances to be used for retirement income, so the scheme is not explicitly linked to the overall retirement income framework. The recommendations at the end of this executive summary propose ways to enable such a linkage to be made.
In common with many other countries, New Zealand’s retirement income policies are subject to stresses from permanent change in the age structure of the population because of increases in life expectancy and lower birth rates. There is also a global trend towards the shifting of risks and responsibility for the funding of retirement income, from states and corporations to individuals. As individuals become more responsible for their own financial futures, more focused strategies will be required to boost levels of financial literacy.
NZS is a relatively inexpensive scheme but, due to population ageing, fiscal pressures are coming to bear. One way to solve the problem is through economic growth but this is unlikely to be sufficient on its own. A few policy changes will be needed to ensure that our system of retirement remains sustainable. Policy decisions should be made within the next 4 years, followed by a long period of notice (5 to 10 years) before changes are actually implemented. This timeframe will allow New Zealanders to confidently plan for their retirement. Changes will need to be made with care, so as not to jeopardise the best features of the current system. The case for having a universal, flat-rate NZS remains very strong. NZS provides efficient protection against the risk of outliving savings by guaranteeing a minimum real level of income for as long as a person lives. It doesn’t disincentivise either saving or working beyond the age of eligibility (unlike most overseas pension designs). It is simple to administer because it does not require lifetime earnings or contributions records to be kept. Its clear set of individual, unconditional entitlements by virtue of citizenship, fosters social cohesion and is part of our sense of national identity.
However, there is an increasing gap between the standard of living that NZS can provide in retirement and the standard of living to which many aspire.
Currently, a high proportion (60 per cent) of those aged 65 and over depend entirely or largely on NZS for their income. At lower income levels, those who still have significant housing costs to meet in retirement struggle to make ends meet on NZS alone. Decreasing levels of home ownership and affordability of housing are likely to worsen this situation, and measures need to be taken to increase the supply of ‘age-friendly’ housing.
Even at higher levels of income, there is often still a gap between what NZS provides and what is expected in terms of a retirement lifestyle.
Various attempts have been made to estimate the size of the gap between desired levels of individual income and what NZS can provide. The findings of three separate pieces of research, and some industry advice, have been combined on pages 57 and 58 to give a ballpark figure of the sorts of target amounts that New Zealanders need to save for their retirement. For most people these targets are achievable with planning, but for those who are unable to save, NZS is still available as a back-stop.
NZS can be topped up in a number of ways, either separately or in combination, through:
- • Increased private saving
- • Increased income from other sources, e.g. wages and salaries from working longer
- • Greater targeting of public expenditure on retirement income and associated policies to areas of greatest need
New Zealand as a country doesn’t have a great record of saving. The picture is mixed as to how good at saving individual New Zealanders and households are, but increased levels of private saving can happen through contributions to KiwiSaver or a range of other savings vehicles. There are a number of anomalies in our tax system, which discriminate against some desirable forms of saving and these anomalies need to be addressed.
The costs of NZS can also be partially met by saving through collective means such as the New Zealand Superannuation Fund (NZSF). Whether individual or collective, Saving As You Go (SAYGO) has some advantages in comparison to Paying As You Go (PAYGO) out of taxes, as is the case with NZS. For example, because SAYGO requires each generation to save for its own retirement, it is fairer to future generations than PAYGO. SAYGO can also potentially be a cheaper approach. On the face of it, a switch from PAYGO to SAYGO makes a lot of sense, but would require a ‘transition generation’ to pay twice – once for its own retirement and once for the previous generation. The issue of what is a fair balance between PAYGO and SAYGO, and the rate at which that balance is achieved, has to be borne in mind when considering the recommendations of this Review.
The NZSF has a particularly important role to play in ensuring intergenerational equity, and it has performed well in the 10 years since its inception in 2003. However, the requirement that the NZSF pay tax in its home jurisdiction is unusual among its peers in the sovereign wealth fund community, and it is recommended that this requirement be removed.
There are many advantages to be gained from older New Zealanders continuing to participate in the workforce when they are able and want to do so. Older workers contribute to economic growth, pay taxes which help fund retirement income, and stay connected and healthier. The assertion that they displace younger workers is not supported by any evidence. Policies should aim at increasing New Zealand’s high rates of workforce participation by removing ageist barriers.
Greater targeting of expenditure to areas of greatest need is linked with questions of fairness and the affordability of NZS.
Retirement income policy needs to be seen to be fair, so that the potential for resentment or envy is diminished and the system is more politically stable and sustainable. Fairness is needed not just among retirees, but through different life stages (family formation, raising children, working life and retirement) and across generations of taxpayers and retirees. Notions of what is fair are dynamic rather than fixed, and culturally determined. New Zealanders’ understanding of ‘what is fair’ will ultimately determine the decisions that are made.
Section three of this document describes a way of keeping fair each succeeding generation’s access to NZS. It proposes a schedule and review process that will keep constant the average proportion of adult life through which NZS will be paid. Under this proposal, NZS will still be paid for as long as a person lives, but because average life expectancy is increasing, the age of eligibility for NZS will gradually increase. This change will have to take into account the needs of those unable to continue working into older ages, or groups with lower-than-average life expectancy.
As well as increasing fairness between generations, the proposed schedule and review process will ease some pressure on the cost of NZS, which is otherwise projected to nearly double by 2060. However, the effect of schedule and review alone will not be enough.
There is also a need to consider changes to the rate at which NZS grows over time (i.e. indexation), whether or not a small increase in Government revenue through taxation might be needed, and whether contributions to the New Zealand Superannuation Fund should be resumed earlier than currently planned.
A new method of indexation of NZS would generate savings but also risk increasing levels of poverty among older New Zealanders. Such a change should be made only if at the same time an adequate proportion of savings were applied to:
- Continuously measuring the impacts of change on the living standards and wellbeing of older New Zealanders (so that indexation can be readjusted if necessary), and
- Maintaining the living standards of less-well-off older New Zealanders at acceptable levels
Most of the feedback on the discussion document was positive, but the proposal to change the method of indexation was a cause of concern for many, due to the risks that had been identified. As a consequence, the Commissioner has decided that more work is required to establish whether or not a change in the indexation of NZS is a viable course of action, and will report further in due course.