Monthly Archives: December 2014

Auckland University Retirement Policy & Research Centre Decumulation Report

Link is HERE

As I can’t find a definition of ‘Decumulation’ in my limited search of these proceedings, and I think the term is being used in a specialised mode, I will kick off with my own stab at its meaning, and welcome others to correct or refine it.

“The process of channeling assets for retirement into ‘investments’ that will provide enough income for the years of remaining life.”

Stephen Wealthall

DOING THE NUMBERS ON OUR RETIREMENT SAVING PLAN : NZ SUPERANNUATION

The Maths does not support warnings of a looming retirement crisis.

Jo Doolan: Partner EY: Printed Sunday Star Times, 9 November 2014

According to the OECD, New Zealand has one of the lowest rates of poverty in the world for those aged 65+.

So are the calls for increasing our retirement age or means-testing NZ Super based on fact or fiction? This was a hot topic during the election campaign with then ACT Party leader Jamie Whyte saying National lacked courage and Labour’s finance spokesman David Parker accusing it of pretence and dishonesty.

But there are concerns for our future, given we currently have five people working for every person over 65. By 2060, this move to two workers for everyone over 65 and translates to NZ Super costs of 7.9% of GDP by 2060, up from 4.8% now.

In 1898 the aged pension was introduced and paid to 65+ people when their life expectancy was only 65. Since then the average life expectancy has increased by at least another 20 years. In 2012 it was estimated that 130,000 of the 65+ group were still working and this is expected to climb to 15% of the work force, or 500,000, by 2036. The last time the eligibility age was increased from 60 to 65 there was a huge increase in the labour force participation rate for the 65+ group.

An update to the report from the Ministry of Social Development, The Business of Aging, shows the 65+ group are projected to:

• make up 12% of the labour force by 2031, up from around 5% in 2011

• have a 31% labour market participation rate by 2031, up from 19% in 2011

• receive employment earnings of about $13.38 billion by 2051, up from $2.16b in 2011

• pay tax on employment earnings of $1.65b by 2051, compared with $270million in 2011

• contribute $25.65b in unpaid and voluntary work in 2051, up from $6.58b in 2011

• spend about $60.28b in 2051, up from $13.48b in 2011.

The total spend on NZ Super by 2050/51 is projected to be $64.329 billion. Personal tax from employment earnings is 2.5% of this total, and then we have taxes on investment earnings and GST on money spent. So our 65+ group is a major contributor to our economy, productivity, competitiveness and living standards.

Despite the dire prediction around affordability, Treasury’s modelling shows NZ Super as a proportion of GDP has actually dropped during the past decade. This is because GDP is growing rather than the actual costs diminishing.

The fall-back position is ensuring KiwiSaver contributions are compulsory and NZ Super Fund contributions are resumed. But because our average wages are low, this would add to the financial pressure on people who are struggling to pay off student loans, repay mortgages and deal with the costs of breeding future generations of taxpayers.

The concept of borrowing to contribute to a future fund is an oxymoron. Pre-funding through the NZ Super Fund is only a band aid; its contribution to NZS costs is likely to peak at around 11% of the total costs of NZ Super. And because KiwiSaver funds are not government guaranteed, they are susceptible to the fortunes of the markets.

While the main aim of retirement income policy should be to reduce poverty in old age, a subsidiary concern is around lifting public and private savings. NZ’s private savings are low, meaning our net international indebtedness position is high (approximately 65% of GDP, close to the PIGS countries) although government debt is low.

When it comes to savings, advances in behavioural economics have shed more light on the difficulties and challenges individuals face in trying to determine and act consistently with their own longer term interests.

Many people do not save for their own old age even where it would improve their overall lifetime wellbeing to do so. This was in part recognised in the introduction of KiwiSaver, which seeks to make use of behavioural factors such as inertia to overcome individual barriers to long term savings.

Giving people a nudge, and soft compulsion such as auto-enrolment, have proved to be more effective than people would have foreseen a decade ago, with KiwiSaver’s take up more than double the original projections.

But compulsory retirement savings are not the magic answer. Despite Australia’s long record of compulsion, it has one of the highest rates of poverty among those over 65.

Then we have the concept of means testing. The question is whether its administration would seriously deplete the associated benefits. There could be some form of voluntary means testing with the incentive being those who do not collect their entitlement become eligible for an equivalent deduction from their taxable income.

There are also measures in place to reduce health costs and those of other welfare payments. So to predict problem in 2060 and accuse the government of rash financial management is, at best, political opportunism and scaremongering.

But these issues must be on the agenda and monitored closely as any changes will take decades to implement.

Joanna Doolan is a partner with EY joanna.doolan Research assistance from David Snell, an executive director in EY’s tax policy group.