A TRIBUTE TO A NEW ZEALAND TREASURE: NEW ZEALAND SUPERANNUATION

Two of New Zealand’s eminent commentators Martin Hawes and Michael Littlewood have recently strongly supported the New Zealand Superannuation Model. Littlewood in a 2013 paper said “New Zealand Superannuation (NZS) is one of the simplest, most effective, and most cost effective Tier 1 schemes in the developed world. We mess with it at our peril” and Hawes said “NZ Super is a system so simple and cheap that we need to give people certainty and stop playing football with it”

The cost of NZ universal public pension is currently 4% GDP, and over the next 20 years will gradually increase to about 5.5%. Not only is this very affordable, but projections out to 2060 or longer are not helpful due to the many variables involved, and what any historian knows, the poor outcomes of such assumptions. Two rules of forecasting. Rule 1. For each forecast, there is an equal and opposite forecast. Rule 2. Both of them are probably wrong.

 

Why then is there such exaggerated rhetoric re pension unaffordability? The answer is the tabloid media approach of headlines rather than article substance, also a lack of research discipline by a number of commentators. Add in the poor knowledge by many of trends over time, limited historical analysis, and denial of the various policy lever options available on retirement income issues, when considering options or redress. Readers, who bother to read some of these articles, should consider the credentials of the commentator on the issue stated, asking what are the author’s formal qualifications and weight of experience. There is no room here for just a slick hair do, regular Botox injections and an open mouth, to gain media headlines

Roger Hurnard a New Zealand consultant on retirement issues succinctly reiterated, in an excellent recent paper(2011) entitled ‘Mixed messages: the future direction of New Zealand’s retirement Income policies’, that New Zealand Superannuation has a number of attractive features

· It is extremely low cost in an administrative sense because it is funded out of general revenue, requires no individual contribution records to be kept and places no compliance cost on employers.

· There is no cost in administering an income test or monitoring changes in financial or employment circumstances.

· The absence of any employment or income test mans that there are no built-in penalties from earning additional income beyond eligibility age. The present value of future pension wealth embodied in the scheme is unaffected by when a workers chooses to retire. This feature helps to explain why New Zealand has one of the highest rates of labour force participation of older people in the OECD.

· Knowing well in advance how much NZS will be worth proves a secure basis for people to judge how much additional income they need to plan for in order to achieve their own desired standard of living in retirement.

· Standard amounts for each person signals fairness and promotes social cohesion.

· The scheme covers longevity risk efficiently by providing a known, fully indexed, gender neutral annuity. This is a critical contributor from New Zealand super as a form of annuity that covers longevity risk, particularly for women

Another positive difference for NZ pension affordability is that the future NZ pension fund bill will be partly offset by the NZ Super fund. When projecting NZ Superannuation costs long-term, I have yet to see any commentator off-set their cost projections with an assumption of the likely NZ Super fund contribution. The trend of encouraging people to work is also one of the most effective ways of reducing costs. The significant increase in NZ over recent years for seniors to remain in the work force in some form makes an enormous contribution to reduction in costs, and that trend is unlikely to reverse. A quarter (25.1%) of men and 14.8% of women aged 65 and over are now in paid work, up from just 8.7% of men and 3.4% of women only 15 yrs.’ ago.

For those that look across the Tasman for comparisons, remember the awkward and complex Australian system of Superannuation is not the model to be adopted, and New Zealand Superannuation is more economically efficient

Let’s get it out there, The New Zealand Super model is a world leader, no alternative system comes within a bulls roar of its overarching benefits across a range of indicators. Any cost saving requirements can be appropriately managed by any number of policy levers, with only minor adjustments, if any adjustment is considered necessary?. What is not required is a continuation of doom and gloom critic headlines, tinkering by political parties, and naïve long term projections, close to useless in their accuracy.

Alec Waugh

Chairman of Kaspanz