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New Zealand Top 5 Retirement Income issues:2018

Each year Kaspanz produces the years Top 15 Retirement Income issues.

This year we have decided to highlight the top 5.

Kaspanz   TOP 5- RETIREMENT INCOME ISSUES NZ -2018

  1. New Zealand Superannuation is the safety net for all retirement income planning. The model is very sound, efficient, effective, reasonable costs, excellent for women, and keeping the elderly from poverty. The costs of New Zealand Superannuation over time are often exaggerated. The simplicity of the current model of NZ Superannuation, and its universality is acknowledged as a world leader.  Minor adjustments only are required, as and when they surface. The evidence clearly shows New Zealand has got it right. Consumers want consistency in retirement income issues, and the first Parliamentary party to accept this, will harness good will and ballot box support.
  2. Kiwi Saver schemes supports New Zealand Superannuation, and is also a sound savings model. Consideration should be given to Government guaranteeing the scheme. While fees for each scheme are now more transparent, fees remain a “Golden mile “for many providers and well above OECD norms. Default schemes should align each account to an age formula. The scheme is a retirement income provision, and any trend for early withdrawal increases requires policy attention.
  3. Longevity and aging of the population is a demographic reality. The topic requires careful analysis and cautious assumptions. Longevity is increasing, but note the last few years  of life may be impaired health, with a probability of  a critical illness ( e.g. cancer, stroke, heart, prostrate, Alzheimer’s ) affecting many, and the ability to work an issue. Different implications for different groups apply when longevity is discussed. Longevity for some groups is lower than others. Health topics require both transparency and discussion. Increasing health costs due to technology and supplier fees and products, (price gouging) elective surgery options and increasing the take up of private insurance requires attention and public education.
  4. Pension eligibility and portability issues e.g. Section 70 of the Social Securities Act needs review and the Social Security agreements NZ has with a number of countries require transparency and monitoring. The spousal issue relating to overseas pension deductions and NZ Superannuation is unfair and needs urgent attention.
  5. New Zealand is one of the few countries that neither insures nor guarantees bank deposits, instead adopting the moral hazard principle, “make wise choices”. This is poor policy and needs to be changed.* Note it appears the Government is heeding the call, and will review the issue in 2019

Did you want to know the 2017 top 15-See Below

  • New Zealand Superannuation is the safety net for all retirement income planning. The model is very sound, efficient, effective, reasonable costs, excellent for women, and keeping the elderly from poverty. The costs of New Zealand Superannuation over time are often exaggerated. The simplicity of the current model of NZ Superannuation, and its universality is acknowledged as a world leader.  Minor adjustments only are required, as and when they surface. The evidence clearly shows New Zealand has got it right.
  • Longevity and aging of the population is a demographic reality. The topic requires careful analysis and cautious assumptions. Longevity is increasing, but note the last few years  of life may be impaired health, with a probability of  a critical illness ( e.g. cancer, stroke, heart, prostrate, Alzheimer’s ) affecting many, and the ability to work an issue. Different implications for different groups apply when longevity is discussed. Longevity for some groups is lower than others!
  • The surging upward trend of New Zealanders over 65 in paid work continues, probably due to the fact most cannot afford to retire. However it’s the educated that benefit mostly from this trend, and the hurdles to find work post 60 years, are considerable. Those most likely to need work later in life are the least likely to find it.
  • Consumers want consistency in changes to retirement income issue policies, and long lead in time to any proposed changes. The first Parliamentary party to accept this will harness good will and ballot box support. A task force similar to the Tax working Group 2010 would assist all political parties to make sound public policy choices re retirement issues.
  • Kiwi Saver supports New Zealand Superannuation, and is a sound savings model.  The default schemes should strongly consider an age related asset bias. Consideration should also be given to Government guaranteeing the scheme.
  • Fees and costs for Kiwi Saver schemes are more transparent. This trend must continue.
  • Passive and index funds, generally produce similar returns to active funds. When lower fees for passive funds are factored in, schemes following this approach should be a favoured option.  Predicting in advance the performance of active managers is impossible, and with their fee structure normally higher and effecting returns over time, the client aware principal applies.
  • Buying an annuity or similar product upon retirement or following receipt of post Kiwi Saver lump sums and drawing an income from it, makes sense. A Kiwi Saver provider has recently introduced the first Kiwi Saver annuity product.
  • Rental accommodation issues need review. Housing needs are changing and the standard length of term and the issue of short term leases is just an example of matters requiring attention. A national Housing symposium or similar would be helpful.
  • Future projections for calculating pensions and health costs must recognize the inherent adjustment factor that occurs in society, and the error factor in long term assumptions is very high!
  • Failure to Launch. The trend of parent’s supporting adult children with financial assistance continues unabated,  yet this is severely affecting retirement years savings
  • Current trends are parents subsidising children in various way, including significant child care for under 5’s, housing loans and early inheritance gifting. Parents homes are becoming, a place of return by siblings 20-45yrs following divorce or early work experience. These costs are carried principally by parents.
  • Health topic requires both transparency and discussion. Chronic illness across all age groups, and the end of life costs (last 6 months all age groups) dominate costs. Increasing health costs due to technology and supplier fees and products, elective surgery options, and increasing the take up of private insurance require public debate.
  • Senior year people need help in making better use of the wealth tied up in their homes, to support their living options. Conversations on retirement village issues, reverse mortgages /house equity issues and inheritance approaches, need visibility and increasing discussion.
  • Pension eligibility and portability issues e.g. Section 70 of the Social Securities Act needs review and the Social Security agreements NZ has with a number of countries require transparency and monitoring. The spousal issue relating to overseas pension deductions and NZ Superannuation is unfair and needs urgent attention.
  • New Zealand is one of the few countries that neither insures nor guarantees bank deposits, instead adopting the moral hazard principle, “make wise choices”. This is poor policy and needs to be changed. This is one occasion when we should follow the Australian example

*Editor comment 2017: Media commentary on retirement income issues, remains traditionally superficial with little historical trend analysis, or comparative research. Full marks to Mary Holm, Susan St John, Rob Stock, Martin Hawes, Brian Shearer, and Brian Gaynor for their thoughtful approach. Awareness of Scandinavian approaches, and approaches adopted in countries like Canada, Chile and South Africa would be useful additions to the discussion. A task Force on Retirement Income is a must!

 

 Posted Alec Waugh 12 January 2019

 

Report on NZ Superannuation by the NZ Initiative Group

This group based in Wellington are a “think Tank” which looks at future proofing issues. They came into being from the old business round table group, do they have a conservative business lean ? Not sure about the link to the health statistics, I don’t believe they are robust enough, specific or up to date enough  with current research. While 65 is an arbitrary age, it is in the public mindset and financial thinking. Reading this article one can easily conclude, no system or model is perfect, but New Zealand  may have got it close to right.

The New Zealand Initiative is a public policy think tank and business membership organisation. Based in Wellington, New Zealand, this non-partisan think tank was formed in 2012 from the merger of the New Zealand Business Roundtable (NZBR) and the New Zealand Institute.[1] The Initiative acts as a conduit between the different levels of government, the business sector, and the people of New Zealand. The Initiative’s main areas of focus include economic policy, housing, education, local government, welfare, immigration and fisheries.

Economist Dr Oliver Hartwich is the executive director of The Initiative.

EMBRACING A SUPER MODEL: THE SUPERANNUATION SKY IS NOT FALLING

Jenesa Jeram
4 December, 2018

New Zealand is one of a handful of countries to offer a universal non-means-tested benefit, payable from the age of 65 until death.

Commentators insist that with an ageing population, New Zealand Superannuation (NZS) is unsustainable. There are rising concerns that New Zealand is sitting on a fiscal time-bomb, and that urgent reform to NZS is needed.

Contrary to the doomsayers, this report offers a more positive story. Not only is NZS arguably one of the best pension models in the world, but the best evidence does not point to a looming fiscal crisis.

Any changes to NZS ought to preserve the best parts of the model, while ensuring NZS adapts to a changing environment.

There is a lot to like about the NZS model:

  • Low poverty rates: The material hardship rate for the elderly is low compared to other groups in New Zealand and is one of the lowest compared with European countries. The standard hardship rate for superannuitants is 3%, compared with 11% for the whole population and 18% for households with children.
  • Relatively affordable: NZS is more affordable than public pension schemes in many OECD countries, both today and in 2050. At around 8% of GDP, the projected public expenditure on NZS in 2050 is still lower than what many OECD countries are spending today. These include oft-acclaimed systems like in Denmark, Finland, Norway and Sweden.
  • Simple and efficient: NZS does not distort incentives for employment and savings as much as means-tested systems. When an NZS surcharge was introduced from 1985 to 1998, people went to great lengths to avoid paying it by hiding their assets. The simplicity of a universal benefit also lowers administrative costs.
  • Safeguard against debt: The Public Finance Act 1989 is a safeguard against the spiralling debt seen in other countries with ageing populations. If governments were not required to manage prudent debt levels, debt financing costs alone could rise from 1.6% of GDP in 2015 to 11% in 2060.

The sky is not falling

• The cost of NZS will rise from around 5% of GDP in 2015 to 8% in 2060, but that does not necessarily mean that NZS (even NZS at current settings) is unaffordable.

• Changes will need to be made to spending and/or taxes but the size of the adjustment is not yet known.

• Expected tax revenue is still unknown, including future taxes paid by superannuitants. Premature tax increases to address the future fiscal burden can cause harm if policymakers get the estimates wrong.

• There is still uncertainty regarding future social expenditure, ranging from 22.5% of GDP to 35%. Much of this uncertainty is due to unknown future unemployment rates, labour force participation rates, and productivity growth.

• Future rates of productivity growth are not only unknown, but also have a significant effect on the affordability of NZS and every other component of government spending.

Taxing the working poor to pay the relatively wealthy

• Just because we can afford NZS now does not mean it will be the best redistribution of resources in the future.

• Unnecessary increases in taxes could cause harm, as could cuts to essential public services.

• In the face of ageing voter demographics, governments will face more difficulty convincing the electorate to make changes to NZS.

• Public spending on NZS could increasingly become a tool for regressive redistribution, transferring funds to the relatively well-off. The opportunity cost must be considered where other groups face greater hardship and/or need.

• According to one calculation, by 2060 the net fiscal impact of having more net recipients of public spending (predominantly superannuitants) than net taxpayers, could be around negative $15 billion.

• Changes to NZS should preserve the best parts of the model, while ensuring that NZS does not distort the welfare system’s overall progressive redistribution.

Recommendation 1: Link the pension age to health expectancy

• The efficiency of NZS relies on the assumption that the pension age and actual retirement age are closely linked. But the pension age has not adjusted for people living longer and staying longer in the workforce.

• The pension age should rise, but a one-off rise that with a long lead-in time is likely to already be out of step with labour force trends by the time it is implemented.

• Linking the pension to health expectancy gives flexibility for future adjustments.

Recommendation 2: Index NZS to CPI only rather than both CPI and wages

• NZS is indexed to both inflation and the average ordinary time wage. Decoupling NZS from rises in wages is a way of ensuring productivity gains reduce the costs of NZS. The real purchasing power of NZS should remain the same while the real purchasing power of wages would increase.

• This report makes this recommendation with the assumption of continued real median wage growth, which is why this report also recommends focusing on productivity growth.

• Though the benefits of enhanced productivity growth will not be shared under this setting, it is down to value judgments to determine whether NZS should provide for these enhanced benefits or whether private savings should be expected to fill this gap.

Recommendation 3: Contributions to NZ Super Fund should not be at the expense of paying down debt

The Super Fund should not be relied on to reduce the future costs of NZS (it cannot do that), and contributions to the Fund should not come at the expense of paying down debt.

Recommendation 4: Productivity growth will make NZS – and everything else – more affordable

Faster rates of productivity growth relative to increases in the real interest cost of government borrowing can allow increased government spending without falling into a public debt spiral. Raising productivity growth is a way of making NZS (and everything else) more affordable, and gives future governments more options and flexibility to adjust to changing economic and political circumstances.

Not a new problem, not a bad problem

Since its inception, the New Zealand public have debated the purpose of the public pension and who should receive it.

Policies today cannot bind the taxpayers of 2060. Ultimately, the taxpayers of 2060 will vote on the pension system they prefer and can afford.

But signalling small changes that can make a measurable difference, and signalling these changes well in advance, increases the likelihood that the policies made today will stick.

Click here to download the two-page summary of Embracing a Super model: The superannuation sky is not falling.

About the author
Jenesa Jeram is a Research Fellow at The New Zealand Initiative focusing mainly on social issues, welfare and lifestyle regulations. Since starting at the Initiative as a research assistant in 2013, Jenesa has written and co-authored many reports on a range of topics. 

She has a Bachelor of Arts with first class Honours from the University of Otago, majoring in politics, philosophy 

NEW ZEALAND SUPERANNUATION

Retiring with dignity-see headline below

https://www.pressreader.com/new-zealand/new-zealand-listener/20181105/283107070023062. This was the best I could find re a link

Headline was: With pension costs set to treble, calls to restrict eligibility are growing. Though many are willing and able – or financially forced – to work past 65, what happens when we want to stop? By Sarah Catherall.

Susan St John replied

The Listener is manipulating NZers over retirement  November 9, 2018

The latest Listener (Nov 10) proclaims “Fresh moves to raise the age of super to 67”.  I like the Listener but this article is at best misleading.

The Labour-led Government has given no indication that it is considering raising the qualifying age. In fact it has locked itself into promises not to raise the age. The Listener points to the NZ First’s private member’s bill just drawn from the ballot.  Yet this bill has nothing to do with raising the age. It is about raising the residency threshold required for NZ  Super to prevent people coming from overseas and getting the full age pension after only 10 years.

The Listener highlights the “growing  number of pensioners who struggle to live on NZ Super alone” and in a non sequitur seems to suggest that the answer is to raise the age to 67.  Many low income pensioners eke out NZ Super with part-time work, and cannot and probably should not work full-time. If there is no basic age pension income until 67, many more will reach the higher age even more impoverished.

In spite of the hype of the age going up already in selected countries, the OECD report cited actually says that by 2060 the average age will be 66.  In Ireland, where the age is already 66, there is real anxiety about it going up to 67 in 2021 and 68 in 2028  as old age poverty is already a problem there and women are especially affected.

The Listener article claims that we have one of the most ungenerous pensions in relation to the average wage. To support this proposition the article cites the Netherlands as having a pension over 100% of the average wage. However, that happy outcome is for a person who has not only fulfilled the 50 years of residency for a full basic pension but has made contributions to an occupational scheme for  a full-time, 40 year career at the average wage.

The OECD actually shows that New Zealand has one of the highest basic pensions (see Figure) at 43% of the average wage for a single living alone recipient. Because of low residency requirements and its universal character, NZ Super is one of the most generous basic pensions in the OECD.

There are very important social aspects to having a basic income for everyone at age 65. In this simple visionary idea New Zealand leads the world, allowing many of those over 65 to contribute to the critical voluntary unpaid activities such as caregiving, mentoring, and support of NGOs without which society would not function.  Perhaps Labour’s well-being budgets will properly value this contribution?

People are quoted in the Listener article saying that they love working into older age as it gives them a sense of pupose. There is nothing intrinsically better about paid work and many people find a freedom and satisfaction in doing the work they love if they can do it without having to worry about not being paid.

The underlying issue the Listener raises is whether we can we afford New Zealand Super. As Michael Littlewood says, New Zealand spends only around 4% of GDP on NZ Super and while this will rise, at its peak it will be still well below the pension spending of many other countries today. We don’t spend very much in subsidising private provison either. KiwiSaver subsidies are very minor compared to other countries’ expensive tax breaks for private saving.

To think that raising the age is some kind of fiscal saviour overlooks so many qualifiers. Importantly, as National discovered when they tried to do this, it needs to occur gradually over a long time period for poltical accpetance and to give people enough time to adjust.  National’s plans would have seen 67 years reached only by the year 2037. Fiscal savings would be miniscule for the first decade and even then the savings needs to be tempered by the additional spending in the welfare system for the many unable to work full-time.

What is the actual problem to be solved? Perhaps it is a simple one of social equity. Many of working age have little chance of accumulating a supplementary nest egg that will cover the needed extra $270 a week the article claims is needed for a good retirement.  All the while, these same working age people are taxed to pay for NZ Super for today’s wealthy superannuitants who may also still be working in highly paid jobs. Today’s taxes also contribute to the New Zealand Super Fund for a pension that may be harder for todays’ working age to access especially if the age is raised.

For most wealthy superannuitants NZ Super is a drop in the bucket. They don’t notice it. They certainly didn’t need the  expensive Winter Energy Payment. It is possible to devise a higher tax rate for the very well-off that could provide useful saving of at least 10% of the total NZ Super cost without causing anyone hardship. A   Retirement Policy and Research Centre paper shows how NZ Super could be changed to a basic income, the same non taxable grant for each person over 65, with a separate tax scale for other income. Around $1 billion a year could be saved very easily.  But this is just one potential option. First we need to agree what the problem is that we are trying to solve.

Raising the age a little is perhaps inevitable over the long term as people live longer, but it is no answer to actual problems ordinary people face.  Let’s hope the promised retirement incomes review in 2019 does justice to examining all the options for sustainability, fairness and affordability without just relying on the chimera of raising the age of entitlement.

 

*Kaspanz also replied to the Listener, but only the adjustment factor component got printed

Retiring with dignity by Sarah Catherall, was a sound and balanced article, particularly when compared to the crisis rhetoric from a number of commentators on this topic. New Zealand Superannuation is very good for women, because it is not linked to work or paid income. New Zealand Superannuation is also taxable, different to most other OECD countries. It is also very affordable, in both a comparative and future terms, only at risk for the next generations if our political parties do something silly. The model is a world leader, and along with Kiwi Server provides a stable foundation for retirement income planning. The longevity issues touched upon in the article, require careful analysis. The issue is not whether  one will live a number of years longer than anticipated, remember many  will not get the opportunity to grow old, but it’s the quality of life that’s important. Overseas research is appearing which centers on the ravages of illness and disease for those of senior years, technology may save some, but for the majority the last few years of life will be a struggle with illness and wear and tear. Finally we often forget the “adjustment factor” in looking into the future. Generations adjust to their circumstances, the good and the bad normally balancing each other, have faith that our young will cope as resiliently as we have with life challenges.

Posted Alec Waugh November 30

Good to see someone praising the NZ superannuation model

HI

On line from BUDAPEST. John has been around the  business scene for a long time.


From: John Gascoigne <johnkiwi123@hotmail.com>

NZ Super: The World’s Best Pension

We have more than a highly successful government retirement programme in New Zealand. Sir Robert Muldoon’s National Superannuation Scheme is a world leader. National Superannuation ( NS ) which provides all New Zealanders with retirement income security is vastly superior to compulsory or privatised superannuation for these reasons.

Firstly, NS has successfully eliminated poverty if not hardship in old age, something the market does not do.

Secondly, NS insulates all superannuitants against the risks of inflation and stock market downturns or collapses. A future resurgence of inflation can never be ruled out. And capital markets do not always work well. Again, the market does not provide this kind of insurance.

Thirdly, governments can manage superannuation schemes far more effectively and efficiently the  private sector.

NS’s universality ensures  everyone is covered in retirement. Privatised superannuation does not cover those outside the workforce even if their contribution has been substantial, such as women for example. The unemployed, marginalised and so on are not covered.

Governments through large scale computerisation are highly efficient in managing superannuation schemes. The private sector, which charges fees, simply cannot match the very low administrative costs – typically below 1% of budget – characteristic of publicly funded, government managed pensions.

Fourthly, because NS is administered by the Government it is highly responsive to its “clients”, that is, the thousands of New Zealanders who, without other income, depend on it for retirement income. The Government’s recent payment to superannuitants for winter heating costs illustrates NS’s responsiveness. A need was identified and the Government could respond  immediately. Such ameliorative public action is foreign to the market.

Finally, NS achieves a modicum of national income redistribution which ensures even our least fortunate – whose number is growing – receive a basic level of subsistence. Privatised superannuation would only increase New Zealand’s already grotesque inequality.

But the greatest shortcoming of privatised superannuation – and this applies equally to kiwisaver – is how will future retirees support themselves who, either through profligacy, inflation or stock market collapse – outlive their savings ?  The result would be widespread destitution. Again, NS avoids all these problems.

Despite its success critics unrelentingly charge NS is “generous and unsustainable”. It is neither.

NS is hardly generous given that it is tied to a modest percentage ( 66% ) of the average wage of a low wage nation. Accordingly, those solely dependent on NS for retirement income are reduced to a fairly frugal, spartan existence. But hardship is far preferable to poverty in old age.

But the greatest criticism levelled at NS is that with the impending demographic bulge it will prove unsustainable in its present form. Again, the facts do not support the claim.

Some history. In the 1980’s critics claimed Sir Robert Muldoon’s  “generous” NS would become unaffordable by 2010. They were wildly wrong. NS’s gross cost in 2010 was $10 billion, or 4% of GDP or national income. The net ( after tax ) cost was just 3.7% of GDP. It proved very affordable.

Treasury projects NS’s gross cost in present form will peak at 7% of GDP by 2050, then decline. But some perspective is required. Presently, the average cost of public pensions across the EU is 12.9% of GDP, well above NS’s projected cost at the height of the demographic bulge. Accordingly, the EU nations are faced with three grim choices: raise the retirement age, increase taxes or reduce pensions.

Treasury’s projections, it should be noted, are based on the continuation of New Zealand’s suboptimal economic performance.

Fortuneately, New Zealand’s situation is vastly different from the EU nations. As superannuation expert Michael Littlewood recently wrote the critical factor in NS’s sustainability will be our future economic performance.

New Zealand is an under-developed, low national income, low wage nation in relative economic decline. Unlike the tiny, high income nations we simply do not have the massive productive sector ( relative to population ) which gives those tiny nations the world’s highest living standards and unmatched quality of life.

The Retirement Commissioner, Diane Maxwell, has cautioned economic growth will not suffice. She is correct. The solution is economic development. The greater the gap between our national income and population by 2050 the higher New Zealand’s living standards will be, including all superannuitants.

Achieving rich-nation status will require the appropriate development institutions, a permanent immigration stop and a massive expansion of our productive sector. Like Singapore and the Nordic nations we must become an export powerhouse. With rich-nation status New Zealand will have the best of everything, including extraordinarily generous NS. Its all very straightforward.

John H. Gascoigne2 Dallas Place,Leamington,Cambridge.Ph; 0221953160