NEW ZEALAND SUPERANNUATION

IT’S TIME TO REVISIT THAT WONDERFUL MODEL: NEW ZEALAND SUPERANNUATION.
Funded out of Tax revenue, no compliance, low administration costs, no penalties for extra income earned, and no income avoidance issues (e.g. trusts), providing both a known amount and a secure base for people to plans their retirement income around. As David Harris, retirement income Guru and managing director of TOR Financial Consulting said in 2014, “New Zealand is the smart country in the manner it has set up the retirement income framework”.” 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”
Those in the know recognize the New Zealand model for providing universal Superannuation and the associated Kiwi Saver scheme is world class, a primary example for overseas policy makers to follow. In the New Zealand context we know that current fiscal costs are low, and realistic projections, (no more than 15 years out to be useful) show the fiscal cost is very manageable and will always remain low compared to most other OECD countries. The cost of NZ universal public pension is currently 4% GDP, and over the next15- 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

Presently New Zealand seniors are remaining in the workforce for much longer than previously anticipated, this galloping trend means the work force tax contribution is increasing, and the spending power of seniors increasing. This economic activity participation throws out many of the assumptions of earlier modelling on the fiscal costs.

We also know that the senior population of New Zealand has suffered the burden of a number of financial crises over the last 30 years, the changes from defined benefit schemes to defined contribution schemes and the loss in many cases of work place Superannuation has severely impacted on retirement income capacity and life style assumptions. During this period, senior year people have coped with raging inflation and high mortgage costs, and in the last decade modest interest on savings accounts.

A close examination of today’s senior life styles also shows Mum and Dad, helping out their children with deposits to buy houses or paying grandchildren’s school fees. Day Care provision within the Family home is often Mum and Dad looking after their children’s off-spring, remembering current child care subsidies don’t kick in until children are 3 years old. Others are saddled with the so-called boomerang generation-children who leave home only to come back again in their adult years. Perhaps the most burdened are those sandwiched between housing their own grown up children and caring for elderly parents, or paying someone else to do so. This unpaid contribution to society by the retired group must be factored into the debate.

The NZ Superannuation Fund set up in 2003, is also the contribution by the current generation, to help offset future costs of retirement income. Rarely mentioned by those who indulge in the “crisis rhetoric” of the retirement income debate e.g. Fran Sullivan, Brian Fallow and Bernard Hickey, it’s another element within the fiscal costing debate.

The Universality of NZ Superannuation is strongly supported by this paper. Universality has a soothing intergenerational affect, something which the economic statistics don’t measure, but like the Policeman wearing a helmet, it provides a calming effect. From a social policy perspective the comments of Dr Charles Waldegrave, NZ Longitudinal Study of aging report are worth noting

The high level of reliance on superannuation for the majority of New Zealanders also means there is a large proportion of older New Zealanders (65+) sensitive to any policy changes around this universal entitlement. ‘If older people drop below the poverty threshold in larger numbers in the future, it can be expected that their quality of life will reduce and their health will deteriorate.’

Let’s enjoy the reality of what we have in New Zealand and salute the universal model of NEW ZEALAND SUPERANNUATION

*Who is David Harris is well known in the financial services industries in the UK, USA and Australia as an expert on wraps and pensions systems and reform. Prior to founding TOR, he was a senior consultant with Watson Wyatt & Company, in the UK and Watson Wyatt LLP in Washington DC. David has worked for the financial services and consumer protection regulators in Australia and the UK. David has testified several times before the United States Congress on international social security and pension reform. He was awarded the AMP Churchill Fellowship to study “What influences public confidence in the life insurance and retirement industries”.

*New Zealand Superannuation (NZS)

New Zealand Superannuation (NZS) is a universal, taxable pension, funded largely on a ‘pay-as-you-go’ (PAYG) basis from general taxation. It is paid to nearly all New Zealanders who are age 65 and over and who have completed relatively modest residence requirements (10 years after age 20 with at least five of those being after age 50).

The net married couple’s rate is set between 65-72.5% of net average ‘ordinary time’ earnings.

Posted by Alec Waugh

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