KASPANZ MEMBERS NEWSHEET 12: 2018 Kiwi saver | Annuity | Superannuation | Protection Association of NZ.
KASPANZ www.kaspanz.com was formed in February 2013, and we continue to enhance our reputation with our regularly refreshed website with retirement income articles and comment. The Consumer voice has to be heard, the economist voice, and a limited diet of individual commentators of various worth, needs additional stimulus and Kaspanz tries to provide that through information and influence. Remember to click onto the website www.kaspanz.com on a regular basis to see what’s there, and remind friends and associates. We like supporters to join Kaspanz, and this is easily done on the home page, and you can also get free updates of new website information per e-mail alert. Look for the home page icon.
EDITORIAL
It’s time for a” Retirement Income Working Group”, similar to the current Tax working Group, announced early in Labours 100 day programme. Consumers are always worried by Government changes to Retirement Income policy and schemes, sometimes promoted by a strong Minister, or an idea to generate electoral support. Such initiatives are too often, not matched by strong research and careful analysis. A working party would underpin any changes, and at the very least provide a platform of information.
WHO DO YOU TRUST-We ran this earlier on the website, but if you missed it>>>
The new Coalition Government headed by Labour Prime Minister Jacinda Ardern has announced that the age of entitlement for New Zealand Superannuation will remain at 65 years, and contributions to the NZ Super Fund will recommence.
In May 2017, the then National Party Prime Minister Bill English announced a reset of entitlement age rising over time to 67, contradicting his promise of only a year earlier that it will be sticking to its promise to not raise the pension age. This turn-around was immediately challenged by Labours then Leader Andrew Little, who stated Labour, was “utterly committed “to NZ Super entitlement at 65″. New Zealand First now a prominent part of the new Government has always been committed and consistent, with the entitlement age being 65 years. Labour on the other hand, has not been consistent.
For those who track statements over time, you will recall that on December 5th 2013 then Deputy Leader David Parker announced Labour” would raise the age of eligibility for New Zealand Superannuation to 67”, make Kiwi-Saver compulsory for employees and increase the Kiwi-Saver contribution rate if voted into power”. On 20 August 2014 Labour again announced they were using the latest information on the state of the Government’s books to push its policy of gradually raising the retirement age to 67, stating “If elected on 20 September 2014, Labour would gradually phase in an increased retirement age of 67”. David Parker a key component to those statements remains a key member of our new Government, appointed Attorney General, Economic Development and Trade Minister.
My information is our new Prime Minister wants the entitlement age to rise, but politically holds to the current policy position of 65 years.
The consumer is both concerned and confused over these frequently changing positions (NZ First exempt). Consumers want consistency &certainty on retirement income policy, with long lead in times for any changes that might occur, so saving habits and understanding can take place.
What is needed is a task force report, similar to the Tax Working Group 2010, on retirement income issues.
To my knowledge there has been no extensive review (Commission or Working Party) on retirement policy issues for nearly 30 years. It is long overdue, and any political party making new policy announcement’s on the age of entitlement to NZ Superannuation or Kiwi Saver without such material, is vulnerable to the accusation of making policy on the hoof, and political expediency
MAKE YOUR SAVING LAST
Rule of thumb: At 65 years on top of NZ Superannuation received, every $100,000 you save means you can spend another $100 per week. $200,000 saved = $200 per week, $300,000 saved =$300 per week. This sort of quick reference puts into context all the discussion re how much does one need. Remember don’t take debt into retirement.
RETIREMENT POLICY AND RESEARCH CENTRE (RPRC) https://www.business.auckland.ac.nz/en/about/our-research/bs-research-institutes-and-centres/retirement-policy-and-research-centre-rprc.html
The Retirement Policy and Research Centre (RPRC) is an academically focused centre specialising in the economic issues of demographic change, based out of Auckland, New Zealand. Google RPRC and up it comes. Susan St John and Clare Dale are the substance behind the words and pictures; it’s an absolute must for researchers, MMP Parties and their Research people, and the consumer!
WEALTH DISCREPANCY
In 2015 (NZ Statistics) reported the top 10% of NZ households controlled 60% of wealth, with the top 5% controlling 45%, and the top 1% controlling 22%. Bottom 40% of NZ households controlled 3%. The 2014 OECD research finding found NZ had the biggest income gaps of any developed country between 1985 -2015. For a country based on fairness and give a mate a go, these figures make interesting reading. The recent election campaign had little discussion on a wealth tax, a cone of silence on this topic remains. Chief Executive Salaries remain as obscene examples of wealth excess, with short and long term bonus components of remuneration, not required with Harvard University Research saying they probably reduce performance. Interesting to note this comment on the Remuneration Authority of NZ, printed in the Business Herald October 6, 2017 “The remuneration Authority was given the task of setting MPS salaries partly as an attempt to depoliticise the process. To make it even simpler, the authority can now only increase MPS pay by the changes in earnings in the public sector. Between 2016 and 2017 this was 2.46%. So it was not a tough decision to come to. But after making the decision on August 25th, the authority waited more than a month to make it public. Of course only a cynic would say it was deliberately delayed until after the election. This was an improvement in past performance, when pay hikes would be announced days before Xmas. Even further back, the authority would never publicly announce its decision and journalists would rely on a MP topping them off. Even then the authority would require people to go to its offices to pick up the details, and refused to send out the information”
All Tax payer funded salaries should be available; transparency is a key to accountability, and some research suggests is a pre-requisite to control excessive salaries
KIWI SAVER SUGGESTIONS
Kiwi Saver development continues and the money pot grow bigger for many. Some possible changes could include.
- Currently savers can only select one provider. Kiwi Savers should have the right to split their Kiwi Saver money into 2 different funds. E.g. 80% growth, 20% conservative
- Default fund membership should be based on age bands
- Kiwi Saver savings could be Government guaranteed with a range of investment option’s e.g. 1%, 4%, 8%, 12%.
- Government should be involved with an annuity scheme! (Great to see Simplicity provider announce a form of annuity available to Kiwi Savers on retirement)
- Full auto enrolment
- Fees should all be below 1% with mandatory disclosure of total fee/admin costs. Kiwi Saver is a wealth industry for fund managers.
- Management fees as a percentage of assets, is a gravy train. Change is required
PENSION POT DRAWDOWN SPARKS WORRY-FINANCIAL CONDUCT AUTHORITY UNITED KINGDOM
Robert Jones in the Economist wrote “The Trades Union Congress has warned that millions of workers risk being plunged into insecurity in old age, after an official report revealed a surge of people grabbing their pension cash without taking advice. More than 2 years after the Government brought in a range of pension freedoms, the Financial Conduct Authority conceded that accessing pension pots early had become the “new norm”. The regulators warned that early intervention may be needed to ensure this multibillion pound market worked well. The FCA study of the retirement market, also found that in more than 50% of the cases where all the money was taken out of a pension pot, the cash was not spent on cars or holidays, etc., instead it was moved into other savings or investments.
The 2015 freedoms effectively abolished the requirement to convert a pension pot into an annuity, a product that provides an income for life. Instead older people are free to do whatever they like with their retirement cash. Earlier this year it emerged that the reforms had raised 5 times more tax for the Treasury’s coffers than was originally forecast, suggesting that people were withdrawing larger sums than expected. The FCA found that 72% of the pots accessed since the freedoms came in were held by people under 65. Most are choosing to take lump sums rather than a regular income. Meanwhile more than half 53% of the pots accessed had been fully withdrawn.
Editor Comment: Not a good sign. The 2015 decision was greeted with dismay by many financial advisors, and there is a message here for Kiwi Savers, big Pots at 65, but can you use it wisely. Little evidence to show people do so! The Tax working group will hopefully address annuity tax issues
PRIVATE HEALTH INSURANCE
What’s happening in Australia and what applicability does this have for NZ? The answer is a lot, with raging debate in Aussie over rising health costs, the value of insurance policies and the affordability of policies.
Private Health-care Australia is warning that private health insurance is heading towards being unaffordable. Specialist gaps and out of pocket costs ( the difference between what a procedure costs and what an insurer reimburses) is one issue, and the maze of different health plan offerings to the public , including some with complex variations and many small print exclusions, make a number of those policies practically worthless.
Health care and the issue of private health insurance and the linked issue of access to public hospital service is front page discussion in Australia, here in NZ the issues are similar, but there is a cone of silence operating, masking concern about health issues and the affordability of both private care, and the rising costs of public health services.
Health costs are exploding, with obesity and alcohol/smoking issues contributing to rising health costs, and in Australia individual one off treatment cost applications for a specific ailment, at huge cost appearing regularly. Technology improvements e.g. latest knee prosthesis, micro-invasive surgical techniques or drug-eliciting stent are enormously expensive. Excessive fees charged by some doctors are always an issue and profit gouging by pharmaceutical companies is ever present. How these issues are monitored and addressed is a key. What is good value for money? Who is tasked with regulating standards and ensuring both the cowboys and those that impinge civil and criminal codes are brought to heel?
The public /private balance to Health is the corner stone of the systems both in Australia and NZ, with good public health policy requiring both funding and monitoring of what services will be provided. As always many will end up in public hospitals, but others will go to private hospital and use their insurance. The public/private balance is the strength of both New Zealand and Australian health systems. Nearly 70% of elective surgery in Australia is private. The public system would collapse overnight without the support the private system affords universal health care. In NZ the percentage of those with private insurance is less than Australia (30% NZ, 60% Australia), but the issues are remarkably similar. It’s time to start educating New Zealanders on the importance of this topic, most know Health care is important but few have an appreciation or knowledge about the public/private partnership.
GETTING TO GRIPS WITH LONGEVITY
Ageing populations could be a boon rather than a curse. But for that to happen, a lot needs to change first, argues Sacha Nauta
“NO AGE JOKES tonight, all right?” quipped Sir Mick Jagger, the 73-year-old front man of the Rolling Stones (pictured), as he welcomed the crowds to Desert Trip Music Festival in California last October. The performers’ average age was just one year below Sir Mick’s, justifying his description of the event as “the Palm Springs Retirement Home for British Musicians”. But these days mature rock musicians sell: the festival raked in an estimated $160m.
There are many more 70-somethings than there used to be, though most of them are less of a draw than the Stones. In America today a 70-year-old man has a 2% chance of dying within a year; in 1940 this milestone was passed at 56. In 1950 just 5% of the world’s population was over 65; in 2015 the share was 8%, and by 2050 it is expected to rise to 16%. Rich countries, on which this report is focused, are greying more than the developing world (except for China, which is already well on the way to getting old); the share of over-65s in the OECD is set to increase from 16% in 2015 to 25% by 2050. This has knock-on effects in older age groups too. Britain, which had just 24 centenarians in 1917, now has nearly 15,000.
Globally, a combination of falling birth rates and increasing lifespans will increase the “old-age dependency ratio” (the ratio of people aged 65 or over to those aged 15-64) from 13% in 2015 to 38% by the end of the century. To listen to the doomsayers, this could lead not just to labour shortages but to economic stagnation, asset-market meltdowns, huge fiscal strains and a dearth of innovation. Spending on pensions and health care, which already makes up over 16% of GDP in the rich world, will rise to 25% by the end of this century if nothing is done, predicts the IMF.
Much of the early increases in life expectancy were due not to people living longer but to lower death rates among infants and children, thanks to improvements in basic hygiene and public health. From the start of the 20th century survival rates in old age started to improve markedly, particularly in the rich world, a trend that continues today. More recently, life spans—the estimated upper limits of average life expectancy—have also been increasing. Until the 1960s they seemed fixed at 89, but since then they have risen by eight years, thanks in part to medical advances such as organ replacements and regenerative medicine. The UN estimates that between 2010 and 2050 the number of over-85s globally will grow twice as much as that of the over-65s, and 16 times as much as that of everyone else.
Warnings about a “silver time bomb” or “grey tsunami” have been sounding for the past couple of decades, and have often been couched in terms of impending financial disaster and intergenerational warfare. Barring a rise in productivity on a wholly unlikely scale, it is economically unsustainable to pay out generous pensions for 30 years or more to people who may have been contributing to such schemes only for a similar amount of time.
But this special report will argue that the longer, healthier lives that people in the rich world now enjoy (and which in the medium term are in prospect in the developing world as well) can be a boon, not just for the individuals concerned but for the economies and societies they are part of. The key to unlocking this longevity dividend is to turn the over-65s into more active economic participants. Making longer lives financially more viable requires a fundamental rethink of life trajectories
This starts with acknowledging that many of those older people today are not in fact “old” in the sense of being worn out, sick and inactive. Today’s 65-year-olds are in much better shape than their grandparents were at the same age. In most EU countries healthy life expectancy from age 50 is growing faster than life expectancy itself, suggesting that the period of diminished vigour and ill health towards the end of life is being compressed (though not all academics agree). Yet in most countries the age at which people retire has barely shifted over the past century. When Otto von Bismarck brought in the first formal pensions in the 1880s, payable from age 70 (later reduced to 65), life expectancy in Prussia was 45. Today in the rich world 90% of the population live to celebrate their 65th birthday, mostly in good health, yet that date is still seen as the starting point of old age. This year the peak cohort of American baby-boomers turns 60. As they approach retirement in unprecedented numbers, small tweaks to retirement ages and pensions will no longer be enough. This special report will argue that a radically different approach to ageing and life after 65 is needed.
The problems already in evidence today, and the greater ones feared for tomorrow, largely arise from the failure of institutions and markets to keep up with longer and more productive lives. Inflexible labour markets and social-support systems all assume a sudden cliff-edge at 60 or 65. Yet in the rich world at least, a new stage of life is emerging, between the end of the conventional working age and the onset of old age as it used to be understood.
Those new “young old” are in relatively good health, often still work, have money they spend on non-age-specific things, and will run a mile if you mention “silver”. They want financial security but are after something more flexible than the traditional retirement products on offer. They will remain productive for longer, not just because they need to but because they want to and because they can. They can add great economic value, both as workers and as consumers. But the old idea of a three-stage life cycle—education, work, retirement—is so deeply ingrained that employers shun this group and business and the financial industry underserve it.
WHAT’S IN A NAME?
History shows that identifying a new life stage can bring about deep institutional change. A new focus on childhood in the 19th century paved the way for child-protection laws, mandatory schooling and a host of new businesses, from toy making to children’s books. And when teenagers were first singled out as a group in America in the 1940s, they turned out to be a great source of revenue, thanks to their willingness to work part-time and spend their income freely on new goods and services. Such life stages are social constructs, but they have real consequences.
This report will argue that making longer lives financially more viable, as well as productive and enjoyable, requires a fundamental rethink of life trajectories and a new look at the assumptions around ageing. Longevity is now widespread and needs to be planned for. The pessimism about ageing populations is based on the idea that the moment people turn 65, they move from being net contributors to the economy to net recipients of benefits. But if many more of them remain economically active, the process will become much more gradual and nuanced. And the market that serves these consumers will expand if businesses make a better job of meeting their needs.
The most important way of making retirement financially sustainable will be to postpone it by working longer, often part-time. But much can be gained, too, by improving retirement products. The financial industry needs to update the life-cycle model on which most of its products and advice is based. Longer lives require not just larger pots of money but more flexibility in the way they can be used.
As defined-benefit pension schemes become a thing of the past, people need to be encouraged to set aside enough money for their retirement, for example through auto-enrolment schemes. It would also help if some of the better-off pensioners spent more and saved less. They would be more likely to do that if the insurance industry were to improve its offerings to protect older people against some of the main risks, such as getting dementia or living to 120. Many people’s biggest asset, their home, could also play a larger part in funding longer lives.
And for the oldest group, increasingly there will be clever technology to help them make the most of the final stage of their lives, enabling them to age at home and retain as much autonomy as possible. Perhaps surprisingly, products and services developed mainly for the young, such as smartphones, social media, connected homes and autonomous cars, could also be of great benefit to the older old.
But the report will start with the most obvious thing that needs to change for the younger old: the workplace. Again, there are parallels with young people. Working in the gig economy, as so many of them do, may actually be a better fit for those heading for retirement.
HOMES ARE MORE AFFORDABLE
There continues to be a large number of media articles talking about the “housing crisis” and people being tenants for life. I’m sure that the people saying that home ownership is unachievable for young people are doing this with the best intentions, but they are giving these people the wrong message. Ironically, by trying to stand up for first home buyers they are likely putting them off even trying to achieve their first home.
An NZPIF study shows that while it is hard for first home buyers to get into their first home, it has always been this way. Now another study, this time on home affordability from Massey University, shows that it isn’t impossible for first home buyers to enter the market.
Massey’s latest study was recently released and showed that housing affordability in New Zealand had actually improved. Not only over the last quarter, but over the past seven quarters since the middle of 2015.
I thought this was really interesting and told a friend about it. They were a little skeptical as this went against everything they had heard in the media. “Affordability might have improved nationally” they said, “but what about the hot areas, like Auckland?”
According to Massey University, Auckland’s housing affordability has actually improved slightly more than the national average over the last seven quarters. Nationally, housing affordability has improved by 15.8% while Auckland’s affordability has improved by 16.1%.
The improvement has been caused by flattish house prices, slightly lower mortgage interest rates and higher
Some commentators have stated recently that potential first home buyers are being forced from the market. Their reasoning is that the ratio of incomes to house prices has increased from 3.4 in 1985 to 7.3 in 2014. Similarly they point to the ratio of rental prices to house prices, which has nearly tripled since 1985.
However these ratios are simplistic in that they don’t take into account changes to mortgage interest rates over the years; the past few years the ability to borrow at historically low rates has made it so easy to borrow large amounts cheaply., or that new homes have increased in size from 125sqm in the 70’s to 200sqm plus today day.
The NZ Property Investors’ Federation (NZPIF) has researched changes in Housing Affordability from 1985 to today, to examine if home ownership has become unattainable for young New Zealanders. Results are in the table below.
While the average cost of housing has increased since 1985, mortgage interest rates have fallen from 18% to 6.3%. As a percentage of income, the amount spent on a mortgage has barely changed over the last 30 years. It actually requires less of the average household income to own a home today than it did in 1985.
“New Zealanders have more or less maintained their spending on home ownership and to some extent have sacrificed potential cost savings, obtained through interest rate reductions, to buy bigger homes,” says NZPIF Executive Officer, Andrew King.
Massey University’s Home Affordability Index backs this up. The index shows that housing is actually more affordable in 2014 than it was in either 1995 or 2005.
Additional information from the study shows that it is cheaper to rent now than it was in 1985, which should make it easier for aspiring home owners to save for a deposit.
“New Zealanders deserve better information on something as important as housing affordability” says King. “This study doesn’t say that housing in New Zealand couldn’t be cheaper, but it does show that it is just as hard to get into your first home today as it was in 1985. This is important, as misleading information may put people off trying to buy their own home and lead to law changes attempting to address a problem that doesn’t exist. This almost always leads to unintended consequences”.
| 1985 | 1995 | 2005 | 2014 | |
| Property value | $ 80,000 | $ 140,000 | $ 260,000 | $ 430,000 |
| Deposit (20%) | $ 16,000 | $ 28,000 | $ 52,000 | $ 86,000 |
| Mortgage value | $ 64,000 | $ 112,000 | $ 208,000 | $ 344,000 |
| Interest rate | 18.0% | 10.8% | 9.0% | 6.3% |
| Annual Mortgage Cost | $ 11,654 | $ 12,979 | $ 21,015 | $ 27,231 |
| Household incomes | $ 23,542 | $ 32,220 | $ 43,720 | $ 58,614 |
| Rental prices (pw) | $ 190 | $ 220 | $ 260 | $ 360 |
| Mortgage as % of income | 50% | 40% | 48% | 46% |
| Rent as a % of income | 42% | 36% | 31% | 32% |
| Massey Affordability index (A high number represents lower affordability) | 24.0 | 28.8 | 21.2 |
SNIPPETS
- A recent OECD report “Today’s young adults have a significantly higher disposable income than previous generations had at the same age. OECD citizens now in their early 30’s have 7% more than members Generation X had at that age and over 40% more than baby boomers enjoyed when they were young. Youngsters may sigh with impatience when an old codger tells them how life was tougher “when I was your age”. But it was
- Also noticed a UK research report saying in 1971, 80% of 7 yr. old children walked to schools. By 1990 it was 9%, and in 2015 2%. Children don’t change, it’s what parents allow that do! The advent of TV in the lounges of the family home, has increased the perception of danger and safety, mostly unjustified?
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alwaugh@xtra.co.nz. Chairman Kaspanz