CHARIOTS OF FIRE: NEW ZEALAND SUPERANNUATION
Amanda Morrall, author, financial educator and wellness advocate was a guest on News Talk ZB Sunday money show on Sunday June 16. An articulate speaker, she spoke about NZ Superannuation, immediately promoting the myth that NZ Super is unsustainable, pointing to the fact some OECD countries had or were changing the age of entitlement upwards, and hinting means testing and universality were areas where change was needed.
No mention was made that the educated camouflage income, using trusts and similar to avoid means testing regimes. If you want to advocate means testing, you must also advocate trusts and asset protection schemes are dismantled and all income is transparent.
Apart from the inherent bias of Amanda being associated with a managed fund company, she never mentioned that NZ Super is taxable, has one of the lowest costs in the OECD both currently and under future settings, and made no comment about future growth, productivity or societal adjustments affecting future costing. She was silent on the NZ Superannuation fund reducing fiscal costs associated with the payment of NZ Superannuation.
Amanda also spoke about many New Zealanders continuing to work, stating most NZ Seniors are healthy, able and wanting to contribute, and now living much longer. She glossed over the reality that again only the educated are likely to find productive work in their senior years, and coupled with the entrenched bias against senior productivity, the work issue for most is highly problematic.
She also misled many, by ignoring the fact, that the senior years are continuing to be dominated by health issues (quality of life) and this issue of life quality is far more important than the possibility of living between 1-3 years longer as each decade passes. A number of research projects are showing senior health problems continues as a huge issue, many people carrying significant problems, and this is unlikely to change over generations. Technology conditions, chronic neck and back issues, for smart phone users, will only add to the obesity, cancer, heart and stroke conditions that always exist. Australian Bureau of Statistics, has recently lowered longevity trends.
Amanda is not alone with her sweeping generalizations, other economic commentator’s e.g. Cameron Bagrie have made similar statements, and NZ talk back hosts are notorious for their crisis rhetoric on the topic. Retired Retirement Commissioner Diane Maxwell has also fallen into the generalization trap
WHAT IS THE REAL SITUATION?
We know that about 40% of those receiving NZ Superannuation have no other income source, a figure which has been constant for a long period, and unlikely to change, even with the advent of Kiwi Saver.
Two of New Zealand’s eminent commentators Martin Hawes and Michael Littlewood have strongly supported the New Zealand Superannuation Model. 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” and Hawes said “NZ Super is a system so simple and cheap that we need to give people certainty and stop playing football with it”.
Little wood repeated his comment in 2018, stating “the net cost of NZS today is 4 per cent of GDP. That’s a lot but it’s among the lowest total public pension spending in the developed world. Our Treasury thinks that in 2060, 42 years away, that net cost will be about 6.7 per cent of tomorrow’s GDP.That’s a sizeable increase but to put that into perspective, the average before-tax public spend on pensions amongst all OECD countries in 2011 was 9.3 per cent of GDP (the net cost will be a little less). The 28-country OECD average spends on pensions today is somewhat more than we expect to spend in 42 years’ time. So not a crisis – again, not even close.”
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. Add in the poor knowledge by many 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.
Roger Hurnard a New Zealand consultant on retirement issues succinctly reiterated, in an excellent paper(2011) entitled ‘Mixed messages: the future direction of New Zealand’s retirement Income policies’, that New Zealand Superannuation has a number of attractive features
- 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 mans 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 workers 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.
The current 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. ”. 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”
Another positive difference for NZ pension affordability is that the future NZ pension fund bill will be partly offset by the NZ Super fund. When projecting NZ Superannuation costs long-term, I have yet to see any commentator off-set their cost projections with an assumption of the likely NZ Super fund contribution. Any improvement in productivity also cuts costs.
To me the issue is simply this. Nobody has been able to present a coherent and viable alternative to the current model, with costs, fairness and political realities addressed. 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. NZ is the smart country re Retirement income.
Chairman of Kaspanz