DISCUSSION : AN INCOME STREAM IN YOUR RETIREMENT YEARS

From “Time to Act” Susan St John and Claire Dale 2019

The development of decumulation products in New Zealand is slow and fragmented. Drawdown products of various kinds are becoming more readily available, but they, and home equity release products, do not provide protection against the risk of outliving savings.

The need for safe, fair, affordable decumulation products is clear.

The risk is that, rather than engaging with the complexities of decumulation, the Government will sidestep the issues by putting its faith in better professional advice or guidance, further individualising the problem of decumulation.

 Given the serious market failure in the voluntary annuities space, most pension experts and economists would argue for state intervention. State provision of longevity bonds to allow providers to take on the risk of increasing longevity, and long-dated indexed government bonds to protect against inflation, are the stock in trade recommendations for correcting market failure.

Typically, the discussion stops at this point. The New Zealand experience shows that the state needs to grasp a much bigger vision for there to be meaningful annuity options. The state can act as a catalyst in five important ways:

First, the state must provide more resourcing to retirement policy development with much more attention to overseas experience. New Zealand seems behind especially in its awareness of the looming crisis in LTC. It is difficult to see how three yearly reviews can ever be an adequate response. A dedicated on-going well-resourced Commission on Ageing63 is required as is the collection of more, appropriate and reliable data on income and wealth, and on behaviour and attitudes.

Much more effort is needed to find political consensus around long-term issues of policy.

Second, debate must be more inclusive. We rely on poor surveys and one-sided opinions too much. For example, New Zealand has little information on the benefits provided by the certainty of annuities. While anecdotally, access to an inflation-linked pension enhances the retirement experience for those fortunate to still have one, and is very good for their families too, the annuitant population is fast diminishing in New Zealand and time is running out to explore this. For many women, managing money after retirement, often when they are on their own, is daunting. Knowing how much they can spend each year and not run out of money is critical. A change in culture is needed if annuities are to become a trusted part of the decumulation framework.

Third, the bias towards using property as a retirement asset requires radical reform. Under current tax rules, property wins every time: returns are hedged against inflation 63 Alternatively, the Commission could be named the Commission for Intergenerational Equity, or the Commission for the Future.

The critical point is the focus on the issues created by demographic and environmental change. 45 and the asset generally grows in real terms. But there are so many downsides to middle income people using this vehicle as a defacto or synthetic annuity, especially as they age and the management of rentals becomes problematic. For society it is really undesirable as well as home ownership and affordability of housing worsen because of investor demand. The catalyst is to remove this advantage with wide housing tax reform perhaps along the lines of the McLeod Review in 2001 to tax total net equity over a base amount held in housing (McLeod, 2001). Furthermore, the use of equity in homes to help pay for the costs of ageing (for example a contribution to the capital cost of Kiwi Spend as described here) requires a strong government lead.

Fourth, the state could grasp the huge opportunity it has to build on the success of KiwiSaver and the KiwiSaver provider infrastructure. What is needed is a limited-value, gender-neutral, annuity product with generic branding, with oversight by the Financial Markets Authority (FMA), and default provisions. Here we have called such a product Kiwi Spend and in time it could be an accepted part of the retirement incomes mix. Using the experience of KiwiSaver, members could be defaulted into Kiwi Spend with an opt-out provision for a limited time. There is widespread, if reluctant acceptance, that to offer a life annuity product requires a strong role for the state that may also include provision.

A public education campaign for Kiwi Spend, similar to the KiwiSaver promotion, could enable a similar adoptive and adaptive response. Fifth in contrast to tax incentives for accumulation common in most OECD countries, subsidies for decumulation for a limited annuity can be well-designed with clear social benefits in sight. The cost of subsidies would be limited by a cap on the size of annuity that could be bought. High income people generally benefit disproportionately if there are traditional subsides to the accumulation phase.

Finally, in the New Zealand context the point that Barr makes about political sustainability cannot be stressed enough: Reform does not end when the legislation is passed, but needs continuing commitment from government, both for technical reasons, to ensure necessary adjustments to reform proposals as events unfold, and for political reasons, to sustain continuing political support. Reform which is regarded as a single, once and-for-all event runs the risk of neglect, discredit and eventual reversal. A third element is the depth of political support. It is not enough for the top echelons of government to understand the reform proposal. The idea and its implications must be shared and understood throughout government and administration. Without that depth of shared understanding, the original plan risks being implemented badly or, at worst, actively subverted by lower levels of government or administration. (Barr, 2000, p. 25)