Guest Commentator aboard: Welcome Long John

Kaspanz welcomes the ” Long John” contribution to the retirement income debate and issues. Using the non de plume  Long John, he/she  is an experienced operator, and will appear on the Kaspanz site every so often  with pithy comment

The Elephant’s still in the room

 But it seems that not everyone likes to talk about it.

 According to new research reported on the Commission for Financial Capability’s website, “many New Zealanders underestimate how much filling their shopping trolley in retirement will cost them.  But they also don’t realise how well KiwiSaver could help them meet those bills”.

The Commission estimates that between $250-300k would be required to pay for the groceries in retirement, and notes that the study “is already motivating people to join KiwiSaver or add a little bit more to the amount they save each month”.

But hang on a minute.  At current rates, a single person living alone for 30 years will receive $600k from their New Zealand Super.  So that’s the groceries taken care of (plus a lot of other living costs). 

The Commission has it the wrong way around.  New Zealand Super is designed to meet basic living costs like groceries.  KiwiSaver and income from other sources help pay for a better retirement, on top of what NZS can provide.

Incredibly, New Zealand Super is not mentioned in the Commission’s discussion of the costs of groceries in retirement.  In fact, the whole piece reads as marketing for KiwiSaver.  Is this what an independent agency is supposed to be doing?

Contrast the Commission’s approach with, say, Westpac’s Spring KiwiSaver Scheme update.  Westpac references Massey University research, the contribution of New Zealand Super and the top-up that will be needed for a more comfortable retirement. 

Even Westpac’s reporting is a little selective (Massey finds that not everyone is facing an income gap) but at least they’ve shown due respect to the Super pachyderm slumbering in the corner.  Should not the Commission for Financial Capability – aka the Office of the Retirement Commissioner – do the same?

 Long John

 

Annual meeting confirms Kaspanz principles.

                                  Kaspanz Principles

Preamble

Kaspanz  was formed in  February  2013, as a voice  for  consumers  in  the retirement income discussion.  Such  discussions have previously been dominated either by industry groups, or economists,  or on occasions, by political parties seeking a tactical advantage. Consumers are defined as those in receipt of or paying  into  Kiwi  Saver, NZ  Superannuation, annuities  etc.

Kaspanz adheres to the principles of transparency, fairness and reasonableness, attempting at all times to provide balanced commentary. Financial prudence and safeguarding of consumer rights is espoused.

Two primary concerns behind the formation of Kaspanz, continue to feature. Firstly the regular interference by Government in retirement income policy affects public confidence about future retirement conditions. Government changes/intervention in retirement income policy, takes place too frequently. There is a need for consistency and time to digest change.  Serious consideration needs to be given to seeking a cross-party political accord on retirement income policy. This is a trust issue, which political parties need to take account of. Kasapnz is not averse to change, but supports well researched policy adjustments with adequate public consultation: it is wary of ad-hoc amendments.

Where significant change is required Kaspanz suggests long lead in times and/or phased transition arrangements, because not only do people need to adjust saving habits and retirement planning habits, but economic well-being is fundamental to social harmony. A minimum of 10 years is suggested for significant change, with even longer periods of notice or substantial transition elements to be incorporated for changes such as increasing the age of entitlement for New Zealand Super.

Secondly a trend continues of New Zealand media commentators, writing articles about the alleged spiralling costs of New Zealand Superannuation; including negative long-term fiscal projections e.g. out to 2050/2080. Research on the contrary, shows that the New Zealand superannuation model is recognized by many as the best in the world, both simple and low cost in comparison with many OECD countries. Long-term projections are notoriously unreliable; there are unknown factors that occur over time in societies and many variables that can affect economic outcomes.

Kaspanz recognizes the inherent difficulty in projecting a universal voice on key retirement issues, the topic range is vast and the issues often complex and difficult. Accordingly, there will always be differences of approach.

Accepting that there will always be different views, Kaspanz has a role to play through its website in presenting this diversity of viewpoints. The principle however is that Kaspanz wants a voice in the retirement income discussion and, where possible, the topic under examination should take into account research available on the issue, what trends over time periods have applicability, and whether lessons of history have relevance.

KASPANZ SUPPORTS THE FOLLOWING

    • New Zealand Super is internationally recognized as a very sound model, and alternative models/approaches fall far short of being viable alternatives. There is no reason why New Zealand Super should not be available for both current and future generations. Discussion on areas like age of eligibility, residency rules and the spousal component of Section 70 issues (overseas pensions) are important, but in essence the approach should be minor adjustments to the model, rather than any major change in the absence of compelling reasons for such change.
    • KiwiSaver is a voluntary, largely work-based, savings initiative. While relatively new, it appears to be a sound model. A higher contribution level may be warranted, and whether or not to make participation in the scheme compulsory merits further discussion, with Government underwriting the scheme.
    • ‘There is a high level of complementarity between NZ Super and KiwiSaver (or equivalent retirement savings schemes). NZ Super provides for a very basic underpinning of economic welfare in retirement and some form of private savings is essential for a comfortable retirement.’
    • Government insurance or guarantee of depositor funds is required.
    • Retirement income policy needs to take into account gender issues, e.g. what is the impact upon women, when policy is being set.
    • Pension eligibility and portability issues re access to New Zealand Superannuation require attention. E.g. Section 70 of the Social Securities Act needs review. The spousal issue relating to overseas pension deductions and NZ Super is unfair; it is inconsistent with the treatment of other personal income and needs urgent attention. The Social Security agreements NZ has with a number of countries require transparency and monitoring.
    • Means testing of income and/ or assets is a complex issue. The universality of New Zealand Superannuation entitlement has many advantages.

 

Posted by Alec Waugh

Who Pays for What: Kaspanz submission to the 2016 Retirement Income review

NEW ZEALAND SUPERANNUATION

The cost of NZ universal public pension is currently 4.1% GDP, and over the next 20 years will gradually increase to about 5.5% [1] . We note that most reviews conducted to date start from an assumption that taxpayers 2060 will be paying an expected 6.7% of GDP for NZS, and this figure is probably unacceptable. We challenge the presumption that the cost is unaffordable, and maintain it’s reasonable and cost effective.

We note that New Zealand Superannuation is taxed at individual source, different to most other countries, and this difference is frequently misunderstood in comparative tables with other countries. Great care needs to be taken on this point, particularly with statistical tables. NZS is taxable income to recipients; the after-tax cost is the only one that matters. Estimated costs ten years out, then twenty years out, should be utilised much more, and where a projection past those time periods is used, qualifying comment on the accuracy should be mandatory

We  support and understand the rationale for  long term projections, but urge caution in the use of these figures in the context that the variables are significant, and forecasting into the future has so often proved to be wrong[2]. Even local commentators, question strongly the ability of experts to get things right[3].

Even for the gloomiest of predictions for costs associated with New Zealand Superannuation e.g. 7% of GDP by 2060, we suggest that this cost will still be one of the lowest in the OECD group, and due to the quality of our two major retirement instrument models (NZS& Kiwi Saver), costs at that level remain reasonable.

Despite the dire prediction around affordability, Treasury’s modelling shows NZ Super as a proportion of GDP has actually dropped during the past decade, “Even if the net cost of NZS increases by more than 60% to 6.7% by 2060, it will be a lot less than today’s OECD average” [4]. This is because GDP is growing rather than the actual costs diminishing[5]. Enhanced economic performance reduces NZ Superannuation cost, something the doom and gloom brigade rarely comment upon.

New Zealand is the smart country in relation to retirement income issues.  When considering who pays for what from a public policy approach, the simplest and most reasonable policy formula should be accepted.

Some form of means testing. This may be logical in theory but impractical in practice; administration costs, and the significant use of trusts and similar schemes to camouflage income is a significant issue. Universality is also great for women.  The case for having a universal, flat-rate NZS pension remains very strong. It provides efficient longevity risk protection by guaranteeing a minimum real level of income for as long as a person lives. It avoids the disincentives to save and to continue earning and employment beyond eligibility age (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… Finally NZS, together with a range of other supporting programmes, provides a really effective safety net and is the means by which New Zealand has achieved the lowest rates of poverty among older people in the OECD5 (even while poverty remains noticeably higher among younger age groups”) [6].

Two of New Zealand’s eminent commentators Michael Littlewood and Martin Hawes both recently strongly supported the New Zealand Superannuation Model. 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” with Hawes agreeing[7] “NZ Super is a system so simple and cheap that we need to give people certainty and stop playing football with it”. NZ Super is too good a scheme for the country to abandon. It should be protected and treasured”. Susan St John, from the Retirement Policy and Research Centre, Auckland University Business School  emphasizes the gender fairness of New Zealand Superannuation,” it’s an equalizing force for women upon retirement” [8].

What are the comparative costs?

The following extract from Littlewoods paper (2015) on Superannuation costs, refers

Table: Projections of public expenditure on pensions 2010 & 2060 (as % GDP)

  2010 2060   2010 2060
Austria 14.1% 16.1% Korea 0.9% 6.5%
Belgium 11.0% 16.6% Netherlands 6.8% 10.4%
Canada 5.0% 6.2% Norway 9.3% 14.2%
Denmark 10.1% 9.5% Portugal 12.5% 12.7%
France 14.6% 15.1% Spain 10.1% 13.7%
Germany 10.8% 13.4% Sweden 9.6% 10.2%
Greece 13.6% 14.6% United Kingdom 7.7% 9.2%
Ireland 7.5% 11.7% United States 4.6% 4.7%

Source: OECD Pensions Outlook 2012, p.210. The table shows gross costs which in many cases are the same as net costs.  It ignores countries for which 2060 information was not supplied. Of the 31 countries reporting for 2010, only Australia (3.6%), Iceland (4.0%) Korea (0.9%) and Mexico (2.4%) reported a cost less than New Zealand’s net 4.1%.

By 2060, of the 25 OECD countries reporting, only Canada, Korea and the United States expect public pension expenditure to be less than New Zealand’s 6.6%.  In fact, of the 31 countries reporting for 2010, 23 of them already pay more in 2010 than the net cost New Zealand expects to pay in 2060.  The OECD 28 country average for 2010 was 9.3%.This is not to diminish the challenge of a 61% increase in the net cost of NZS over the next 50 years but rather to place that in an international context.New Zealand may conclude today that a net 6.6% of GDP will be acceptable to 2060 voters, in which case the NZS pension itself doesn’t need to change.  However, if those 2060 voters decide that, say, 5.5% was preferable; the benefits can be cut relatively quickly to bring that cost down.  A one-sixth reduction in the annual pension would do the trick and that could happen overnight…  If today we expect that a net 6.6% might be too much then pensioners who will be alive in 2060 need as much notice as practicable.  While they are working, they can save to replace the shortfall in their total retirement incomes[9].

Our comment on the above table would be the Australian cost appears to be understated, it is higher in a number of other projected and current tables, but it’s the overall comparative analysis which we find interesting.

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. More than a few of today’s media commentators base their views on perception, adopting a world view based on a pack mentality among journalists commenting on NZ Super who have read what their peers say, but who appear to have done little in-depth research. It appears fashionable to start from a position critical of the status quo, by asserting NZ Super is unsustainable, without any demonstration of what economic pressures might make it so!

Add in the poor knowledge by many writers 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. Perceptions and opinion is everywhere, much without rigour!  We have yet to see a sustainable and coherent alternative to New Zealand Superannuation

We endorse the approach adopted by Hurnard[10]; commenting on New Zealand Superannuation

  • 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 means 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 worker 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. Women in particular are protected by NZ Super.
  • 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 Superannuation Fund. When projecting NZ Super costs long-term, we note few commentators off-set their cost projections with an assumption of the likely NZ Super Fund contribution. Current assumptions are somewhere between 8%-10% of future costs will be covered, not an insignificant amount.

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 workforce that stays employed for longer, whether or not the state pension age increases, is likely to produce more, save more and pay more taxes. It may also reduce the costs of ageing as older people who work may stay healthier for longer.  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 years ago.

Let’s get it out there. The New Zealand Super model is a world leader, no alternative system comes within a bull’s 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

Alec Waugh: Chairman Kaspanz

[1] Tetlock P, Superforecasting: The Art and Science of Prediction, September 29, 2015

[2]  Op. cit.

[3]  Fisher C, Managing Director Fisher Funds, “Experts put in their place” March 24, 2016,The Herald

[4]  Littlewood M , page 3

[5] Gascoigne JH, National Superannuation…affordable and sustainable National Grey Power Mag, June 2016

[6] Focusing on the Future, Report to Government, 2013 Review of Retirement Income, Commission for Financial Literacy and Retirement Income, Executive Summary page 6

[7] Hawes M, The Great Gift of Super, Sunday Star Times, October 19,2016@ NZ Super: The $500,000 Gift, October 20,2013

[8] Susan St John, e-mail communication to writer , 21 July 2016

[9] Littlewood M

[10] Hurnard Roger, Mixed messages: the future direction of NZ retirement income policies,(2011) page13

 

Submissions to the 2016 Retirement Income Review

Kaspanz input to the 2016   Commission for Financial Capability, Review of Retirement Income . Kaspanz has been making submissions on each of the monthly review topics, and will continue to do so, as the year progresses.

Three submissions to date have been lodged: the first is shown below, Kiwi Saver will be posted later and submission 3  covers the area of “Who pays for what”

SPENDING THE RETIREMENT MONEY!
Please if possible don’t use the word ‘decumulation’. Consumers don’t understand it, and it is an instant turn-off

Consumers want some products available at retirement; a mixture or blend of insurance, annuities, and lump sum. We are pleased to see the re-emergence of an annuity based product in recent months–a range of product /tools providing choice for retirees is required, and we note with concern the lack of competition in this area. Perhaps trans-Tasman partnerships could be explored.

Kaspanz notes the different groupings in the retirement income phase, those on low wages 50-65yrs, and the general age groups 60-75 years, 75-85, and the 85 plus group. These are not homogeneous groups, with each having different needs. We note the recommendation of the 2009 Capital Development Task Force on the taxation situation in relation to annuities, and this needs prompt action.

Spending patterns of the retired need more examination, which raises the question of the importance of research. The Retirement Policy Research Centre of the Auckland University Business School plays an important role in this regard, but funding and other resource restraints limit what it can reasonably attempt, and more research is needed. The traditional inheritance approach adopted by parents is rapidly changing; helping siblings/families earlier and in different ways is occurring now and evolving. This adjustment needs to be factored into policy development.

Our members have a feeling of unease in the retirement income sector. Will the money last? Who can we trust? Retirement income is vulnerable to shocks. Political interventions on a regular basis are of concern; many of the Parliamentary groups including the current government appear to promote new policy on a whim or on a poorly researched platform.

Kaspanz notes that in 2015, a number of the Parliamentary parties all proposed significant retirement income policy changes; none were comprehensive, each was somewhat ad hoc, all were less than ideal. Some sort of Parliamentary accord on retirement income, would assist trust and confidence issues.

Alec Waugh: Chairman
Kiwi Saver, Annuities and Superannuation Protection Association NZ Incorporated