Always solid reading!
Posted Alec Waugh August 21
Always solid reading!
Posted Alec Waugh August 21
Both are significant contributors on New Zealand Superannuation, and have the knowledge and credentials to remain heavyweight commentators.
This is the stuff Research units (MMP Parties) and the Commission should be looking at carefully, its magnitude and complexity being both a strength and a weakness.
Michael Chamberlain – an Auckland-based actuary and investment adviser.
Michael Littlewood – now retired but an active participant in public policy issues associated with saving and superannuation and a co-founder of the University of Auckland’s Retirement Policy and Research Centre.
Two years ago, Michael Chamberlain and Michael Littlewood published what they suggested was the review of retirement income policies that New Zealand should have received from the Retirement Commissioner in 2016 (The Missing 2016 Review – building trust for life beyond work).
By December this year, the Retirement Commissioner must complete the next triennial review. The terms of reference for the 2019 Review were published earlier this year and listed eight general topics (available here).
Chamberlain and Littlewood have re-cast their 2016 report and have now published Informing the 2019 Review – 133 questions that New Zealand needs answered. This latest report is available online at www.alt- Review.com and is intended to help the 2019 Review by identifying the key issues, detailing what evidence is available (local and international) and then listing the questions that need answering on all aspects related to saving, pensions and retirement incomes, and the review process itself.
In 2017, the authors described the Retirement Commissioner’s 2016 report as an “evidence-free zone”. They now say that “if the 2019 Review is to achieve anything, evidence-gathering should be at its foundation. Unfortunately, the Retirement Commissioner doesn’t have the time and probably won’t have the resources to deliver the review that New Zealand needs. However, the 2019 Review can recommend that we start to gather data to form the basis for future, evidence-led, policy decisions.”
As in 2016, Chamberlain and Littlewood’s report has 22 sections covering the key parts of New Zealand’s overall retirement income framework. All the information has been updated from 2017 and questions have been added to or re-framed to take account of recent developments.
For example, the Tax Working Group’s recommendations for new tax breaks for KiwiSaver are analysed and labelled inconsistent and lacking any evidential basis. Similarly, the May Budget’s unheralded changes to New Zealand Superannuation are also criticised as failing the evidential test.
Chamberlain and Littlewood label the terms of reference for the 2019 Review as “in the same timid mould as its 2016 equivalent” and they do not expect much more than has been produced by the earlier six equivalent reviews . “That will be a wasted opportunity”, they say.
To put their 2019 report into context, the first section lists the authors’ nine top priorities.
Each of the following 21 sections describes one particular issue and there are many more issues than the eight that the Terms of Reference identify. Each of the 21 sections ends with a series of questions that New Zealanders need to discuss before we can settle public policy on that issue. Most require gathering data to inform the issues. Chamberlain and Littlewood suggest that, without the necessary evidence, New Zealand cannot make the robust decisions that are now needed. How for example, they ask, can the Retirement Commissioner examine the impact of “declining rates of home ownership” when there is actually no reliable evidence of that happening?
The authors say that their report’s overarching theme, as in 2017, is about what governments can and cannot do:
– There is a range of things that only the government can do – it should do those things.
– There is another range of things that, based on the evidence, the government seems unable to do – it should stop doing those.
– Finally, there are things that the government is doing but, based on the evidence, seem not to be effective – it should also stop doing those.
“This is evidence-based policy-making – if it works, based on the evidence, then do it; if it doesn’t work, stop doing it. If we do not know whether it works, gather the evidence before deciding what to do. For New Zealand, this approach to policy–making on retirement incomes would constitute a change but it’s time New Zealand tried it. Before that process can even start, there is a lot of data to gather.”
Chamberlain and Littlewood say that the Retirement Commissioner’s 2016 Review did not achieve much more than the preceding five similar reviews. Without a radical change in approach, they do not expect the 2019 Review to make the progress that New Zealand needs to make on a topic that, directly or indirectly, will affect every single New Zealander. They suggest that New Zealand deserves better.
Report accessible at:
Posted by Alec Waugh August 2.
This 2017 article is very applicable. I have just returned from Aussie, where protection of Superannuation Investments by Australians is the current rage, including the regulators and Boards adjusting to the new reality of protecting the consumer, and focusing on fees, regulator performance etc and investors interests
This article takes us back to the basics, the excellent model of NZ Super we operate in this country
The heated discussion about superannuation – age of entitlement, generational fairness, gender equity – is a good one for New Zealand to have now.
This is a global issue that every country is wrestling with and there are no easy answers to the fiscal reality of an ageing population and prudent provisioning for a universal pension payment.
The good news is New Zealand is in an enviably good place – in terms of government finances, the performance of its sovereign wealth fund, which starts making payments to the government in 2036, and strong immigration to address declining birth rates – compared to its international peers.
But you wouldn’t know it to listen to the various voices in the media. I get the distinct impression that Kiwis don’t know how lucky they are.
It’s fair to say there are many Australians who would gladly swap New Zealand’s pension provision for theirs.
To give readers some perspective, I’m going to share some of the faults of the Australian system which are absent from New Zealand’s super scheme.
Australia has one of the most complex super schemes in the world. It features a plethora of electable options that are confusing to the average person. It has provisions for insurance and for disposing of estate property, neither of which is an option in New Zealand.
This complexity is a cost on savings, reducing returns and diverting resources away from retirement income.
Australia features tight pension asset tests, as well as superannuation tax concessions, both of which are proving a bonanza for the financial planning industry, further siphoning resources away from its actual purpose.
If you want to talk about generational fairness, Australia has already implemented a gradual pension age increase to 67 years (for those born after 1 July 1952) and if the current government is returned at the 2019 Federal Election, the pension age is slated to increase to 70 years. Editor note , this last provision has been rescinded
New Zealand’s system, by contrast, is probably the simplest pension scheme in the world. There is no asset testing, you can work and continue to receive the pension, there are no electable options and there’s an absence of fishhooks to indirectly benefit the financial services sector as families struggle to understand and comply with a raft of Byzantine rules.
The government has said it will raise the age of entitlement as life expectancy increases but by international standards 67 years is a generous provisioning and it won’t be phased in until 2037. Set at 65 per cent of the average wage, New Zealand’s pension is higher than many other countries.
The other benefit New Zealand has over other countries is the relative absence of political meddling and 1993’s multi-party accord has delivered real benefits to Kiwis via that policy stability. Changing the age of entitlement in 2037 will be the first substantive change in 44 years.
If there is a blot on Godzone’s retirement landscape, it’s the parlous state of private saving. New Zealand was a late adopter of workplace savings schemes and KiwiSaver, while a good start, will take time to adequately provision its citizens for gradually withdrawing from the workforce.
But that is a minor quibble. When it comes to superannuation, perhaps it’s New Zealand that should be called the Lucky Country.
Alex Malley is chief executive of global accounting body CPA Australia
Posted by Alec Waugh 23 July
2017 Opinion paper
Economist Bill Rosenberg runs the ruler over NZ Super cost predictions, and argues it’s not as scary as we’ve been told; Calls for a proper debate on population policy.
Last month, Prime Minister Bill English announced that his Government now favoured raising the age of eligibility to receive New Zealand Superannuation from 65 to 67 by 2040, a turnaround from its previous denial that any change was necessary. Labour has also reversed its 2014 election policy and now opposes the raising of the age.
The usual reason given for raising the age of eligibility is affordability of the scheme. For example the Commission for Financial Capability (formerly the Retirement Commission) in its 2016 Review of Retirement Income Policies justified it by asserting that in 2015/16 New Zealand Superannuation (NZS) cost 4.1 percent of GDP, and that “Treasury predict that it will rise to 7.1% (net) of GDP in 43 years”.
I have a look at these numbers and find that they are misleading. The picture looks very different if we take into account the tax paid by the New Zealand Superannuation Fund, the contributions both main parties say they will start making to the Super Fund, and the contributions the Super Fund will start making to the cost of New Zealand Superannuation in 2032/33 (according to current plans).
There are further arguments to be considered about the affordability to the public purse of current levels of payment and economic affordability.
The affordability to the public purse is frequently presented as an absolute. But affordability is a matter of priorities, what New Zealand society wants and what it is prepared to pay in the way of taxes. Many other countries are facing the same problem and many have considerably more retired people, and costs, in proportion to their populations than we do.
Economic affordability centres around the ‘dependency ratio’ – the number of people who are working, thereby generating income to be taxed and shared with superannuitants, compared to the growing number of superannuitants. But this does not take into account either other ‘dependants’ such as children, nor Treasury’s most recent long-term projection which did not show a looming economic problem.
Finally, it will become apparent that the question of New Zealand Superannuation cannot be seen on its own: we need to think about matters like New Zealand’s population and other forms of retirement income. I don’t cover these in detail but they are important to gain a full picture.
How much will New Zealand Super actually cost into the future?
Treasury looked at this question as part of its regular statement on New Zealand’s Long-term Fiscal Position. It released its latest one in November. In it they project current policies into the future to look at the ‘fiscal’ consequences of continuing those policies indefinitely – that is, the effect on government spending and revenue needs.
It shows that it is important not to rely on the headline figures of what the government spends on New Zealand Super. In the year to June 2016, payments to New Zealand superannuitants cost 4.9 percent of GDP or $12.3 billion. The projection shows that by 2060, the period of Treasury’s long-term Statement, it would be costing 7.9 percent of GDP – an increase of over 60 percent, which sounds a little scary.
But New Zealand Super is taxed – so it is actually its net cost after the claw-back of superannuitants’ tax payments that is important. (A Government could easily reduce its apparent level of spending by simply making New Zealand Super tax-free at its current net levels!) Its net cost to the government in 2016 drops to 4.2 percent of GDP or $10.4 billion. In 2060 it would cost 6.7 percent of GDP.
In addition, the Super Fund, set up by the 2000s Labour-led Government to partly fund New Zealand Super in the future, also pays tax. It doesn’t make much of a difference right now (though the $0.5 billion in tax paid in 2016 and $4.6 billion since the Fund started is not to be sneezed at) but by 2060 the tax is projected to be $8.0 billion a year. That brings the net cost by 2060 down to 6.1 percent of GDP.
Then there is the direct effect of the Super Fund. Firstly, both main parties (and the Retirement Commissioner) want contributions to the fund to resume – some earlier than others. The current Government won’t restart contributions until the year to June 2021. From then until the year to June 2033, when withdrawals are started from the Fund, there is an additional cost of up to $3.0 billion (which incidentally isn’t counted in Core Crown expenses because it is regarded as capital spending). In 2021, the total cost to the government of New Zealand Super plus these contributions is projected to be 5.0 percent of GDP. It would have been the same in the year to June 2016 had contributions resumed that year. By 2060, when the Fund is projected to be contributing $4.0 billion to that year’s New Zealand Super costs, the net cost to the government of the day amounts to 5.9 percent of GDP.
So the true comparison of the fiscal cost now and the cost in 2060 is more like this: 5.0 percent of GDP soon, compared to 5.9 percent in 2060. That increase doesn’t look nearly as scary. If it is affordable now (as all seem to agree) then it is likely to be affordable in 2060.
Here’s a table summarising the situation with the total impact on government finances in the bottom line:
Affordability to the public purse It is wrong to present affordability to the public purse as an absolute in the way that English and some others put it: he was raising the retirement age to “ensure the scheme remains affordable into the future” . Affordability is a matter of priorities, what New Zealand society wants and what taxes we are prepared to pay.
The Retirement Commissioner points out that there are other costs that rise as the population ages such as health care. But to draw the conclusion that superannuation should be cut to pay for these is not logical, unless we are moving to a society where each generation is expected to look after itself and not concern itself about younger or older generations.
We do always need to consider our priorities and options, but one option is to raise more revenue. Many New Zealanders would be willing to pay more to maintain the financial security of their parents and themselves in retirement, and for other public services that they value. If the assumption is that the current level of taxation is fixed and can never increase as a proportion of GDP then there are many other problems we cannot address and the outlook for New Zealand is dim.
Some of these problems cannot be addressed by individuals on their own (such as environmental problems, income inequality and poverty). In other cases such as health and retirement income, individuals could pay for it but it becomes inefficient, inequitable and impoverishing (as the US private health system shows). It is much better for everyone if the risks are shared and it is paid from government revenue. It might raise the government’s costs, but from an economy-wide and societal point of view it costs less and is fairer.
We are not a highly taxed country. OECD data shows that we have one of the lowest differences between what an employer pays and take-home pay among the high income countries that make up the OECD – we rank between 28 and 34 out of 34 countries and well below the OECD average. Our tax revenue as a proportion of GDP is low for a small country . We rank 19 out of 35 OECD countries and less than most similar size OECD countries. Our problem is not the level of taxation but its distribution.
The proportion of GDP New Zealand spends on pensions is also low. The OECD put it at 4.8 percent of GDP in 2013 (a misleading figure but it is just a basis for comparison). The OECD average was 6.4 percent of GDP and only 10 out of 33 countries had a lower proportion, including Mexico with zero and others that also have private compulsory contribution schemes. There were 14 already above 7 percent of GDP. New Zealand’s ratio is low partly because we are fortunate to have a relatively young population.
Clearly affordability is a decision that societies make in terms of their priorities.
Much of the economic debate centres around the ‘dependency ratio’ – the number of people who are in paid work and thereby generating income and tax revenue, divided by the number of older people. This is projected to fall: fewer people will be working to generate the income required for each retired person. Treasury’s population projections show it falling from 7 working age people to every person 65 or over in 1972 to 4.3 in 2017 to 2.1 in 2060. (That’s taking the working age population to be aged 15 to 65. It’s unlikely that adjusting the lower limit of 15 up a little would make a big difference to the analysis. Statistics New Zealand defines it to be aged 15 years and over.) . Of course the effect of the fall in the ratio will depend on how many people of working age are working (the participation rate), and how many of the over 64s are working. The participation rate is currently rising more rapidly in this age group than any other.
But consider this: people over 64 are not the only ‘dependants’ in society (and an increasing proportion of them are not dependent either). Children make up the other main group of dependants. In 1972 children under 15 made up 31 percent – almost a third – of New Zealand’s population and the 65+ age group only 9 percent. The working age population made up 60 percent. The whole ‘dependency ratio’ was 1.5 working age people to every dependant.
The population is aging in two ways: we have a greater proportion of over-64s and a falling proportion of children under 15. In 2017 the children made up only 19 percent of the population, people of working age made up 65 percent and the over-64s 15 percent. The ‘dependency ratio’ is 1.9. By 2060 the projection reduces children to 16 percent of the population, people of working age 57 percent and the over-64s to 27 percent. The ‘dependency ratio’ would be 1.4 – not much lower than the 1.5 it was in 1972. So in 2017 we are in a sweet spot – the highest dependency ratio since 1972 was in 2.0 in 2006 and we are not far from that. Perhaps this is the unusual time rather than 2060!
The effect of this all depends on the cost of raising, educating and looking after the health of children compared to the costs of old age.
It is interesting that Treasury’s economic projections for the size of the economy do not show an economy struggling to pay for New Zealand Super – otherwise its cost as a proportion of GDP would be much higher. It is of course dependent on its assumptions which may be unrealistic. These include a high proportion of people continuing to work, and in particular among the 65+ age group.
It also assumes that labour productivity grows at an annual rate of 1.5 percent and that real wages (the average hourly wage adjusted for rising prices) grow at the same rate. Productivity has been struggling well below that level for a decade. Wages since the early 1990s have failed to keep up with productivity.
However if the link between productivity and wages were achieved, Treasury observes that raising productivity is not the answer to paying for New Zealand Super: raising productivity raises wages, which raises the cost of Super because it is linked to wages, and we are no further forward without more progressive tax rates.
All of this means that this modelling cannot be the final word on the subject. But it is not immediately obvious that there is an economic reason to reduce the cost of New Zealand Super.
This discussion raises many questions: the question of New Zealand Superannuation cannot be seen on its own. What would be the impact on its affordability of increasing our future working age population by encouraging people to have more children or a somewhat higher level of immigration (better managed than now)?
We could encourage more children by paying a universal child allowance, making child care better quality and free, and reducing working hours. Treasury says that if it raised its assumed net immigration rate from an average of 12,000 per year to 25,000 per year in the long run (both much lower than at present), “population ageing slows and the population is younger and approximately 928,000 higher in 2060. The higher net migration lowers the ratio of expenditure-to-GDP” and reduces net core Crown debt. These questions add to calls for a proper think about where we want for New Zealand’s future population to head – a population policy.
New Zealand Super is not the only income retired people rely on. We should be thinking about boosting Kiwisaver, and the Retirement Commissioner recommends raising contribution rates. The CTU has proposed making Kiwisaver compulsory if the employer contribution rate was raised to 6 percent, there was a 2 percent contribution from both workers and the government, the minimum wage was increased at the same time, and the government contribution of 2 percent (of minimum wage or benefit level or another amount) applied to all those of working age who are not earning for a period.
We should also be thinking of fair ways to pay for the increasing cost. Susan St John in the Auckland University Retirement Policy and Research Centre has made proposals for a progressive tax on those receiving New Zealand Super but more universal solutions may be less contentious given our history.
There will never be a last word on this subject. We should continue to review the situation, keeping a watch on both the adequacy of our people’s retirement income and the cost of it. But New Zealand is lucky enough that we don’t have to make urgent decisions to manage the cost of New Zealand Superannuation.
Posted Alec Waugh 5 July 2019
16 April 2015
A survey of people in advanced age has shown that for most people (89 percent), New Zealand Superannuation is the main source of income.
The University of Auckland study, funded by the Ministry of Health, also shows a significant difference between Maori and non-Maori people reporting that the NZ Superannuation (NZS) pension is their only source of income.
Twice as many Maori (41 percent) as non-Maori (21 percent) reported the NZS as their only income.
These findings are from a population-based sample of 937 people – Māori (aged 80 to 90 years) and non-Māori people (aged 85 years) – living in the Bay of Plenty and taking part in a longitudinal study of advanced ageing.
The study is called ‘Life and Living in Advanced Age: a Cohort Study in New Zealand – Te Puāwaitanga O Ngā Tapuwae Kia Ora Tonu’, (LiLACS NZ).
The latest LiLACS NZ short report presents key findings about the main sources of income, how people felt about their money situation, and the entitlement cards they had in advanced age.
“People receiving only the NZ Superannuation were more likely to feel they could not make ends meet, “ says study leader, Professor Ngaire Kerse from the University of Auckland. “ And fewer Maori than non-Maori felt comfortable with their health situation in advanced age.”
Almost all the people in advanced age surveyed had a SuperGold Card, but fewer Maori than non-Maori had a High Use Health Card.
Significantly fewer Maori (six percent) received superannuation from other sources as well as the NZS, compared with 14 percent for non-Maori.
It was the same pattern with income from investments (Maori 28 percent/non-Maori 65 percent), but as would be expected, more Maori (32 percent) received tribal land trust money than non-Maori, (two percent).
NZ Superannuation was the only source of income for more women than men, and significantly fewer non-Maori women received NZS or other pensions. Non-Maori women were also more likely to receive financial assistance from family than non-Maori men.
The majority of people in advanced age (75 percent) were comfortable with their money situation with 25 percent saying they had just enough to get along and one percent saying they could not make ends meet.
These perceptions were significantly related to source of income and all of those who could not make ends meet, had NZS as the only source of income.
More people who felt they had just enough to get along, relied solely on NZS for income (50 percent) than those who reported that they were comfortable (30 percent).
For media enquiries email email@example.com
This article is courtesy of “Life time Income” NZ website” http://www.lifetimeincome.co.nz
Why interest rates refuse to rise…
Nowhere in the Reserve Bank of NZ (RBNZ) official policy objectives is there any mention of making life easier for retirees.
That was made clear once again in May when the RBNZ, in a surprise move, dragged the official cash rate (OCR) down another 0.25 per cent from its long-held historical low of 1.75 per cent.
Term deposit (TD) investors – many of whom are retirees – no doubt experienced a familiar sinking feeling on the latest OCR news.
Deposit interest rates have been in freefall since the 2008 global financial crisis (GFC) as central banks around the world cut furiously to avert a financial system meltdown.
We are a long way from the heady pre-GFC heights where TD returns hit 8 per cent or more in New Zealand.
New Zealand interest rates, in fact, fared better post-GFC than many other developed world countries where respective counterparts of the OCR tumbled close to zero; some central banks effectively took rates into negative territory via modern ‘money printing’ techniques known as ‘quantitative easing’.
But our relative good fortune holds little cheer for retirees pondering how to make a lifetime savings pot go a little further each week.
More than 10 years out from the GFC, most central bank interest rates – and with them bank deposit returns – remain depressingly low. The RBNZ downward move in May was in tune with offshore sentiment where our nearest neighbour, Australia, is expected to cut – perhaps up to 0.5 per cent – this year from its current 1.5 per cent level.
Similarly, the US Federal Reserve, which sets the tone for the rest of the world, reversed direction this year from a rate-hiking mode (it raised four times in 2018) to hold, with many observers expecting cuts ahead.
The current downbeat positioning of the RBNZ and other central banks is linked to a forecast slowing in the global economy over the year ahead.
In summing up the rationale for the May cut (and hinting at more to come), RBNZ governor, Adrian Orr, said “a lower OCR now is most consistent with achieving our objectives and provides a more balanced outlook for interest rates”.
Until recently, the RBNZ’s only monetary policy target was to keep inflation in a range of 1-3 per cent over the medium term “with a focus on keeping future inflation near the 2 percent mid-point”.
Following a series of reforms last year, the RBNZ now must also formally consider “supporting maximum sustainable employment” when setting the OCR.
While the employment requirement has muddied the OCR waters somewhat, the inflation part of the equation still dominates.
Inflation has remained stubbornly low since the GFC – for reasons economists are yet to fully decipher – with few expecting its rapid return.
For example, the May OCR statement notes “it was agreed that inflation expectations remain well anchored at the mid-point of the target range” with some risks that it could go higher… or lower.
As the RBNZ notes: “A period of lower inflation may then have a persistent effect on pricing behaviour, dampening inflationary pressure for a prolonged period.”
In short, don’t expect interest rates to revert to the pre-GFC historical patterns any time soon.
The low-rate trend – while beneficial to borrowers now – leaves risk-averse savers, which includes a large chunk of the retiree population, in a quandary.
Following the May OCR, for instance, term deposit rates fell again: according to online publication Interest, New Zealand’s major banks are offering TD rates of between 2-3.25 per cent stretching out at almost the same level for all periods up to five years.
Of course, tax could wipe up to a third off those meagre TD returns for many retirees.
With TD yields shrinking, a growing number of other investment products – such as forestry, commercial property and mortgage funds – have launched aggressive marketing campaigns offering higher, but still single-digit, returns. But as survivors of the 2006 New Zealand finance company collapse will recall, higher returns carry higher risks.
Others are using the OCR doldrums to promote the virtues of shares.
A recent Stuff article, for instance, notes that “while our bank accounts slow to a halt and run out of steam, the return on investment on the share market is continuing to provide a good return”.
“The OCR decrease is one way the Reserve Bank encourages Kiwis to get investing…,” the article says.
While the argument has its merits for those with a long investment time horizon, retirees have good reason to be cautious about chasing the seemingly-endless bull market run.
Clearly, it’s getting tougher for retirees to manage solely through a DIY investment of TDs. In this low-rate era professionally-managed solutions, such as the Lifetime Income Fund, which carefully balances income and investment risk over time frames appropriate for retirees, look increasingly attractive.
And unless the government adds a new clause requiring the RBNZ to consider the retirees, the OCR won’t be riding to the rescue in a hurry.
Posted by Alec Waugh 21 June
Diane stepping down this month, as Retirement Commissioner, from what could only be described as “unsatisfactory performance” (can anybody forget the 2 name re-branding exercises,) has left the building with a few comments, shown below.
The age of eligibility for New Zealand’s superannuation must rise, says outgoing Retirement Commissioner Diane Maxwell.
“For all of us, for our children and our grandchildren, we need to do it.”
On TVNZ1’s Q+A, Ms Maxwell said changing the age of NZ Super should not be thought of as going up from 65 to 67, instead, “we need to think 50 to 70”.
“People get into their fifties in very different shape, physically and financially. We need to be investing in people in their fifties, raise the age of eligibility for Super.
“It’s not the retirement age. Forty-four per cent of people keep working past 65, so invest in people in their fifties, give them what they need for another however many years of work.”
Ms Maxwell thought “we will get there in the end” on means testing for NZ Super.
“Raising the age is a no-brainer. I think we should leave indexation alone, and I think we will get to means test.”
However, barriers to raising the age included politicians “looking down the barrel of vulnerability” and needing the voter to “take some responsibility”.
“The Government gets caught up in today, voters get caught up in today.”
“It takes a step of courage to say, ‘This might not look pretty, let me explain it, let me explain why it matters’… for all of us, for our children and our grandchildren, we need to do it.”
Susan Edmond’s replied to the comments as shown below
Posted by Alec Waugh June 14