Submission to Ageing Population strategy

 

KIWI SAVER, ANNUITIES AND SUPERANNUATION PROTECTION ASSOCIATION NZ INCORPORATED: SUBMISSION TO DEVELOPING A STRATEGY FOR AN AGING POPULATION

Introduction

My name is Alec Waugh; I am the chairperson for the consumer organization known as Kaspanz, an incorporated Society with its principal focus retirement income. www.kaspanz.com and evidence based research on material associated with this topic.

Over our 5 year plus existence we have gathered a wealth of information and knowledge, and this submission is based on that evidence related material.

Our submission is principally to highlight a number of key issues, direct attention onto some possibly invalid perceptions and to urge presumptions and assumptions are as validated as much as possible.

“The next generation of older people will live longer, be healthier, more skilled and more educated. They are much more likely to remain in the workforce – and too want to”.

Super Senior Newsletter, June 18

The above statement is highly optimistic; debate circulates re the accuracy of a healthier, skilled/educated, want to work mindset. We urge comparative analysis with other OECD countries.

Germany is an interesting policy study, e.g. John Beard Director Department of Aging and Life Course, World Health organization “the growth of the old age dependency ratio in Germany has far outstripped that in America, but GDP per person has nevertheless grown even faster” and a literature search/research of current thinking on key issues.

NZ SUPERANNUATION AND KIWI SAVER

The twin retirement income models are world -leaders, and New Zealand should be acknowledging this fact.12345

Most OECD countries admire our schemes, their simplicity and their universality, with New Zealand Superannuation being different to most others, being taxed at source, but with overall costs significantly lower than most OECD countries. New Zealand is seen as the smart country in relationship to its Retirement income models, this requires endorsement and reinforcement. No major change is required; when adjustments are required they should be incorporated within the existing model, with no significant change required or needed.  Kaspanz suggests be very wary of single issue commentators and those attempting to forecast the future, there assumptions are frequently invalid.[1][2][3][4][5]

SENIORS IN THE NEW ZEALAND WORK FORCE: ENGAGEMENT/EMPLOYMENT

The trend is for seniors to work longer in the work place. This leads to senior year’s people contributing to the economy and societal well-being, including paying taxes, all positive engagement. However contrary to the headlines, research does suggest this work force engagement is because of necessity, due to marriage failures, poor investment decisions, caught up in the semi-regular pattern of world economic problems,  and the simple reality of requiring  paid work to maintain reasonable  living standards.

Research indicates most of the population do not have the choice of work, let alone the opportunity, they have to find work to sustain a living income, with hurdles every step of the way. Choice is only available for the privileged (educated)

Those that are educated have significantly more choice in the matter, but most people are working because they have too and not because they want to. Rampant bias against seniors in the workforce exists, compounding the problem for those seeking work.

To label seniors workforce participation with the heading (2/3 of those over 65 years want to keep working because of the value and satisfaction) is inaccurate, inadequate and probably misleading.

 HEALTH ISSUES

“The cost of caring for the sick and elderly will continue to grow, as long as the focus is on adding years to life, instead of adding life and dignity to years’”

Overseas research suggests the issue of living longer (possibly 1.1 -2.75 years longer every 10 years, dependent upon  which research source is used) has camouflaged the real issue that senior years quality of life is significantly impacted and impaired by illness and disease. The issue of improving health is questionable with a lot of research suggesting significant and often chronic ill health, diabetes, stroke, bowel, cancer etc., is not decreasing but increasing. Invalid perceptions in this area abound. E.g. The Office for National statistics United Kingdom  noted life expectancy is decreasing in the UK, with older people dying at a rate higher than previous trends, and rising  life expectancy stalling An Oxford professor (Danny Dorling} who analyzed the data , said the figures were alarming, suggesting frail people were increasing, Alzheimer’s and austerity measures possibly contributing? Dorling also said people were somewhat blasé about the situation, “5 years ago such data would have got a lot more attention”.

The NZ Listener Feb 2018 reported “We may be living longer, but those extra years are increasingly likely to be marred by ill health. A study published in Age and Ageing, the journal of the British Geriatrics Society, reports that the number of older people diagnosed with 4 or more diseases will double between 2015 and 2035. A third will be diagnosed with dementia, depression or a cognitive impairment and many also will have severe arthritis

Associated with this issue, is the research stating, that the dominant cost to the NZ Health system, is the amount of money spent at every life stage, in the last 6 months of life, and the focus on dealing with Chronic conditions at all costs, rather than quality of life issues. Whether this is the 3 month old child, or the 90 year old, this is the dominant cost, raising questions about use of resource, options available.

Professor McDonald Massey University, recent critique of the NZ Health system would be an excellent starting pint:  http://www.massey.ac.nz/massey/about-massey/news/article.cfm?mnarticle_uuid=768A5722-CC4F-8753-D88C-88414FDBBF61

The issue of Private health insurance coverage and Public health services interface needs considerable discussion, noting New Zealand has a low level of private insurance cover compared to other countries, and this balance requires investigation and public discussion.

Health costs are exploding, with obesity and alcohol/smoking issues contributing to rising health costs, and in Australia individual one off treatment cost applications for a specific ailment, at huge cost appearing regularly. Technology improvements e.g. latest knee prosthesis, micro-invasive surgical techniques or drug-eliciting stent are enormously expensive.  Excessive fees charged by some doctors are always an issue and profit gouging by pharmaceutical companies is ever present. How these issues are monitored and addressed is a key. What is good value for money? Who is tasked with regulating standards and ensuring both the cowboys and those that impinge civil and criminal codes are brought to heel?

The public /private balance to Health is the corner stone of the systems both in Australia and NZ, with good public health policy requiring both funding and monitoring of what services will be provided. As always many will end up in public hospitals, but others will go to private hospital and use their insurance. The public/private balance is the strength of both New Zealand and Australian health systems. Nearly 70% of elective surgery in Australia is private. The public system would collapse overnight without the support the private system affords universal health care. In NZ the percentage of those with private insurance is less than Australia (30% NZ, 60% Australia), but the issues are remarkably similar. It’s time to start educating New Zealanders on the importance of this topic, most know Health care is important but few have an appreciation or knowledge about the public/private partnership.

 ANNUITIES

New Zealand does not yet have a deep and established market of annuities and similar product insurance/annuities to help people manage their retirement income, or convert their retirement savings (Kiwi Saver) into a steady stream of income fortnightly or monthly. The arrival of the product” Life time retirement Income product” on the local scene has been a tremendous development in this area; more competition will assist visibility and retirement. A progressive Government should give careful thought to what role it could play in this area

TASK FORCE APPROACH TO RETIREMENT INCOME: AGING POPULATION ISSUES

It is many years since a working group like the current Tax review chaired by Michael Cullen, has looked at aging population strategy. The 1991-92 Task Force on Private Provision for Retirement (1991) was probably the closest and that’s over 25 years ago. A  Task force Commission or similar would provide a benchmark of evidence based knowledge, useful for future Public Policy decisions.

[1] David Harris (Managing Director TOR Financial Consultant NZ is the smart country for its approach too pension policy “.

 

[2] The NZ scheme is one of the cheapest schemes in the OECD group of countries, “The projected NZS expenditure appears modest, especially if net rather than gross spending is counted, and when compared to current pension spending in other countries. Susan St John and Clare Dale  2016

 

[3]   NZ has one of the lowest rates of poverty in the world for those aged over 65, thanks to NZ Superannuation, Jo Doolan

 

[4] Martin Hawes. Author and Financial commentator  says “it must be protected and treasured

 

[5] Martin Littlewood the Guru of NZ retirement income research repeatedly states “Tinker with it at your peril”.[5]

 

Retirement Income Policy NZ/AUST

NZIER final report to Chartered Accountants Australia and New Zealand March 2018

Couple of papers coming up over the next few weeks, which require detailed reading. All adds to the knowledge base , hope the Research staffers in each of our MPP parties and of course our Retirement Commissioner and her team, wade through this material and similar!

https://nzier.org.nz/static/media/filer_public/4e/8d/4e8dab15-38eb-42b3-b90e-0c8d1ee44c9e/retirement_income_policies_march_2018.pdf

The case against Raising NZ Superannuation age of entitlement

This 2017 article is a timely reminder re both the substance and complexity of New Zealand Superannuation. Contains some excellent references,  and always be aware of the single issue commentator and those who adopt crisis rhetoric on the topic. Its a worry when you hear Larry Williams, Mike Hosking, Heather du Plessis Allan and Cameron Bagrie talking on this  and similar issues. Limited knowledge and loud voices!

Here is hoping the Retirement Commissioner is developing an extensive body of knowledge on the topic she and her team must be research experts on NZ Super and comparative analysis  details, aware of what’s sound and what’s unsound in OECD countries , Chile, Scandinavian  and similar.

 

Posted b y Alec Waugh 6 July 2018

 

 

https://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11814349

Bonus Bonds

Did you know that New Zealand savers biggest investment is in Bonus Bonds. Apart from the fact the provider ANZ creams 1.28% management fee, it should be about .50 or less. Bonus Bonds as a sound investment decision raises many issues.

Bonus Bonds – are they an investment worth having?

Updated: March 2018

TLDR Review Summary of Bond Bonds

  • Despite the marketing, each Bonus Bond has a 1 in 3.4 billion chance each month of winning a $1m prize
  • If you hold under $1,000,  it’s more likely than not you’ll win nothing over one year
  • With inflation running above 2%, Bonus Bonds erode the value of your money as the after tax return in prize money is 1.4%
  • ​We believe it’s best to cash them in and put the money in a term deposit.

Bonus Bonds – An Introduction

  • If you asked everyone with $1,000 or more invested in Bonus Bonds if they won anything in 2017, most people would tell you no.
  • And of that “lucky” bond holders that did win something, 98% of them would have won just $20 or $25.
  • Bonus Bonds fully discloses that 99.91% of all prizes awarded are worth $50 or below. And further to that, their website confirms that “we expect that the chance of any Bonus Bond winning a prize will range between 1 in 20,000 to 1 in 35,000” as the government limits the chances of winning a prize to no better than 1 in 9,600.
  • In March 2017, Bonus Bonds revealed there are 3.4 billion bonds issued (meaning $3.4 billion dollars). And in the most recent 12 months, it paid $48m in prizes, representing a post-tax 1.4% return on all money invested (and only a 1% return post-tax if you eliminate the twelve $1m winners).
  • Bonus Bonds paid itself $46m to manage the scheme, and confirmed you had a 1 in 25,003 chance of winning a prize had you had an investment.
  • Given you can currently earn 3.5% per year (pre-tax) in the bank, are Bonus Bonds a bad investment?
  • MoneyHub uses comprehensive statistical methodology to challenge if Bonus Bonds deserve your hard-earned money.
It’s a Lottery first, and an investment second

​Bonus Bonds are an investment, and the interest or return you receive comes down to luck, as it does with any lottery. You can invest or withdraw without penalty, and each bonus bond is worth $1. A bonus bond will not increase or decrease in value, so if you invest $1,000 you buy 1,000 bonds, and will receive $1,000 when you withdraw your investment. Each $1 bond has the same chance of winning a prize. As it is a lottery, the more bonds you hold, the higher chance you have of winning. It’s important to know that a bond has the same chance of winning in another draw if it has already won, so a winning bond is still relevant for future prize draws.

What you need to know:

  • Minimum investment $20
  • Anyone individual of any age can buy a bond.
  • Prizes are paid in cash into your bank account, or you can choose to have bonus bonds issued for the value of your prize, i.e. $50 = 50 bonus bonds, which then increases your odds of winning for the next draw.

It’s heavily regulated, and offers a risk-free investment.

​Bonus Bonds is run by ANZ via their “ANZ Investment Services (New Zealand) Limited” company, and it’s heavily regulated by the government. The government determines the return on investment by setting the maximum odds of winning. Bonus Bonds are mandated to invest your money into cash deposits, and currently invests all its funds in deposits with New Zealand registered banks (50%), bonds issued by New Zealand registered banks (45%) and New Zealand Government debt (5%). Together, this represents a risk-free investment – your money sits with banks and the government.

 

The odds of winning a prize are not good

​The exact number of prizes award each month does vary; here is November 2017’s distribution which is typical of an ordinary month.

Prize Level Number Drawn Odds of Winning this amount with one Bonus Bond Odds of Winning this amount a $1000 Bonus Bonds holding
$1,000,000 1 1 in 3,400,000,000 1 in 3,400,000
$100,000 1 1 in 3,400,000,000 1 in 34,00,000
$50,000 1 1 in 3,400,000,000 1 in 3,400,000
$5,000 26 1 in 130,769,231 1 in 130,769
$500 45 1 in 75,555,556 1 in 75,556
$100 32 1 in 106,250,000 1 in 106,250
$50 2,720 1 in 1,250,000 1 in 1,250
$20 118,750 1 in 28,632 1 in 29
$0 3,399,878,424 Virtual certainty A very high chance

The table makes one thing clear – the odds are not great. With a $1000 investment, you’re looking at a 1 in 3.4 million chance every month of winning a prize above $5,000. 99.996% of bonus bonds return $0 to their owners.

Every prize is paid out tax-free

​Bonus Bonds pays all tax on the prizes (the interest), which means whatever you win won’t be treated as income. For bond holders who pay tax, that gives some advantage to the investment. However, despite the overall return on investment being 1.5%, those with average luck won’t win cash prizes anywhere near that rate.

 

Bonus Bonds states the annual return is around 1.5%, but for an individual investor its much lower.

The median prize is $0, which accounts for 99.96% of all bonds. The median cash win is $20, which accounts for 98% of all cash prizes awarded. So, almost every bond wins nothing or at best, next to nothing, with their investment . For every lucky bond that wins $1m, there are 3.4 billion bonds that win nothing.

ESTIMATED CASH PRIZES WON OVER ONE YEAR WITH AVERAGE LUCK

Number of bonds held Median average winnings Adjusted for Actual Prize Distributions
100 Nothing $0
1,000 Nothing $0
10,000 $96 $80
15,000 $144 $140
30,000 $288 $280
40,000 $384 $380
50,000 $480 $480

Assumptions:
(1) Chance of winning: 1 in 25,003 per draw (source: Bonus Bonds November 2017 disclosure)
(2) Annual chance of winning: 1 in 2084 (i.e. 25,003/12)
(3) As 98% of prizes distributed every year are for $20, we’ve made the assumption that an investor with average luck will only win $20 prizes rather than $1m or other cash prizes.

You can increase your odds…by buying more

  • The only way to increase your chances of winning is buying more bonds – the more you hold, the lower the odds.
  • Despite rumours and urban myths, newer or older bonds have equal chance of winning in a monthly cash draw. Each bond has the same chance, irrespective of when it was purchased.
  • And, a Bonus Bond is only eligible to be included in the monthly prize draw after you have owned it for at least one calendar month. For example, if you buy a Bonus Bond in March, that Bonus Bond won’t be in the monthly prize draw in April, but it will be in any monthly prize draws from the first day of May onwards. This means that your investment sits earning nothing for up to two months.

 

Bonus Bonds markets its cash prizes as “winning” – it’s in fact only a return on your investment.

The marketing talks about the wonderful things “Bonus Bonds $1 MILLION winners” do, and the impulse is to invest to “win” big. Yet the cash prizes are merely the interest paid on everyone’s investment. We all know a friend which says “I win with my Bonus Bonds quite often”.

But if they’ve got $10,000 invested and “win” $75 in a year, the same investment in a bank would “win” $300, and that “win” is guaranteed. Despite this, everyone loves to win things, so there is a strong psychological pull towards keeping money in Bonus Bonds even if the return is relatively poor.

Bonus Bonds are unlikely to beat the inflation rate

Consumer prices in New Zealand increased 1.9% year-on-year in the third quarter of 2017, meaning general goods and services cost 1.9% more today than they did this time last year. Bonus Bonds, unlike a term investment, don’t pay a guaranteed amount of interest. This means that as inflation increases, your money loses value in real terms. What you could buy for $1,000 last year would cost a lot more next year. Most saving and term investments beat inflation levels, but Bonus Bonds do not.

 

If you hold Bonus Bonds for the long term, inflation will eat your investment!

If Inflation averages 2.5% over 10 years (since 2000 inflation has averaged around 2.7 percent in New Zealand), in the most simplest terms your investment will be worth 25% less if you don’t receive any interest on the principal.

For example, if you invest $1,000 in Bonus Bonds for 10 years and don’t win anything, you’ve lost in real terms $250. This can add up the more you invest, eating away at the value of your savings.

How Bonus Bonds compare with other savings and investments

Bonus Bonds compete with other low risk investments such as term deposits and cash saving offers. It’s easy to compare the overall rate of return of Bonus Bonds to other savings. Firstly, the Bonus Bonds cash prize fund rate is currently 1.4% (although this can change at any time, for better or worse to bond holders). Compare this to:

  • Top easy-access cash (anytime access): 2.10% with Rabo Premium Saver
  • Top six month term deposit: 3.35% with Rabobank
  • Top 12 month term investment: 3.50% with Kiwibank
  • Top five-year term deposit: 4.25% with Rabobank

Our table below presents the estimated “return” on Bonus Bonds for differing investment amounts – we know that Bonus Bonds prizes are awarded in set amounts ($20, $50 etc) so we’ve used some assumptions in our calculation to see how it compares in real terms with the best savings and deposit rates available.

HOW BONUS BONDS COMPARE TO CASH SAVINGS (UPDATED FEBRUARY 2018)

$1,000 $5,000 $25,000 $50,000
Bonus Bonds (0.89%) (2) (3) $8 $40 $199 $398
Top call account – 2.10% with Rabo Premium Saver $19 $94 $470 $940
Top 12 month term investment – 3.50% with Kiwibank $31 $157 $783 $1,566
​Top 6 month term deposit -3.35% with Rabobank $16 $78 $392 $783
Top 5 year term deposit – 4.25% with Rabobank $38 $190 $951 $1,902

​Assumptions
(1) For all cash deposits listed, we’ve used an effective tax rate of 10.5% to calculate the return
(2) Given there are fewer than 80 prizes above $500 awarded every month, we’ve excluded these as a standard bondholder has an almost certain chance of not winning a top prize
. In doing so, we calculate an after tax return of 0.89%
*(3) An investor with “average luck” is estimated to win less the stated amounts as the odds of winning a prize are 1 in 25,003 per draw. Furthermore, the nature of Bonus Bonds and the specific prize distributions  made (i.e. $20, $50, $5,000) means you cannot win the amounts calculated.

Concluding Comments – Are Bonus Bonds Worth Your Money?

  • Bonus Bonds offer a return on investment that varies depending on your luck. If you are a high income earner and pay a high rate of tax, they offer tax relief if you win a prize.
  • All decent cash deposit deals pay a higher rate of interest and are always going to be significantly more rewarding than Bonus Bonds, unless you have remarkably good luck!
  • With the risk of inflation eating away at your investment, you may feel it wiser to pick a bank deposit over the Bonus Bonds. Both investments are equally safe – it just comes down to expected return.
  • Our tables present a fair reflection of the chances of winning. You may decide to invest a little in Bonus Bonds to be in with a chance of winning a million dollar cash prize. That would be perfectly reasonable if you are aware that the odds of winning it are very low (1 in over 3 billion every month per bond held). If you are OK with this, Bonus Bonds are a secure investment.

Posted by Alec Waugh, this article is from Money Hub.