Pensions for the Twenty First Century: Retirement Income Security for
Younger New ZealandersYou are invited to read this report and engage in one of the most important conversations of our time. The report, funded by Financial
Services Council members and others, was produced to provide the basis for New Zealand-wide consideration and debate. It takes a
longer-term perspective and incorporates new information and analysis on retirement income policy, challenges and opportunities.
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Pensions for the Twenty First Century
The Financial Services Council of NZ
The Financial Services Council has 21 member companies and 17 associate members. Members are managing nearly $80 billion in savings and provide financial services to more than 1,800,000 New Zealand investors and policyholders.If you have a life insurance policy or a KiwiSaver account then there is a more than 80% chance it is managed by a Financial Services Council member.
Our thanks go to the following for their invaluable participation and/or funding:
FUNDING
FSC Members:Accident Compensation CorporationAIA NZAMP Financial ServicesANZ BankAsteron Life LtdBNZ Investments and InsuranceCIGNA Life Insurance NZ LtdFidelity Life Assurance Co LtdFNZGen Re LifeHealthHannover Life Re of Australasia LtdKiwibank LtdMercerMunich Reinsurance Co of Australasia LtdPinnacle LifePublic TrustRGA Reinsurance Co. of Australia LtdSovereign LtdSwiss Re Life & Health Australia LtdTOWER New ZealandWestpac Bank
Associate Members Bell GullyBNP ParibasBravura SolutionsBurrowes & CoChapman Tripp
Davies Financial & Actuarial LtdDeloitteDLA Phillips FoxErnst & YoungKPMGKensington SwanMelville Jessup WeaverMinter Ellison Rudd WattsMorningstar Research LtdPricewaterhouseCoopersRussell McVeaghSimpson Grierson
ADDITIONAL FUNDING
FSC MembersAIA NZAMP Financial ServicesANZ BankAsteron Life LtdBNZ Investments and InsuranceFidelity Life Assurance Co LtdHannover Life Re of Australasia LtdSovereign LtdSwiss Re Life & Health Australia LtdTOWER New ZealandWestpac Bank
Non MembersAon Hewitt
Project Advisers
Andrew Coleman, Motu Research, Member of the Savings Working GroupPaul Mersi, Member of the Savings Working GroupAdolf Stroombergen, InfometricsPaul R Rhodes, PwCGraeme Colman, Horizon Research
Independent International Peer
Reviewer
Professor John Piggott, UNSW, Director Australian Institute of Population Ageing Research (AIPAR)
Peer Reviewer of the Financial
Modeling
John Savage, formerly of NZIER
Pensions for the Twenty First Century
This report has been published by the FSC but the views expressed are not necessarily those of any member, funder or adviser
Retirement Income Security for Younger New Zealanders Page 1
Introduction 5
Executive Summary 6 Why is a new scheme needed? 6 The proposal 8 Our analysis 8
Section 1 - The future of retirement 10 Longevity after 65: trends in New Zealand 10
Section 2 - How fast is longevity increasing in New Zealand? 13
Section 3 - What does increasing longevity mean for the Government and taxpayers? 16
Section 4 - How well prepared are we for retirement? 18
Section 5 - Why won’t we save enough for retirement? 20
Section 6 - What are other countries doing about these issues? 22
Section 7 - How is New Zealand different from other countries when it comes to retirement incomes policy? 24 The pension gap with Australia 26
Section 8 - Is there a better way to fund retirement incomes? 28 What you get vs what you pay by retirement age 29
Section 9 - How can we preserve the option of retiring at 65 and provide more New Zealanders with a comfortable retirement? 30
Section 10 - What could KiwiSaver Plus look like? 32
Section 11 - What sort of incomes could KiwiSaver Plus provide for retirement? 34
Section 12 - How can we make this politically sustainable? 40
Section 13 - What would the transition look like? 42 Making the transition 43 Narrowing the pension gap with Australia 44
Section 14 - How would this change our future? 45
Section 15 - Can contribution-based retirement pensions be fair for women and the low paid? 46
Section 16 - Can a contribution-based retirement pension be fair for Maori? 47
Section 17 - What does this mean for people of different ages? 48
Section 18 - Why now, to start saving more for retirement? 49
Section 19 - Summary and recommendations 50
Recommended further reading: 51 Appendix 1 52 Appendix 2 53 Appendix 3 54 Appendix 4 55 Appendix 5 58 Appendix 6 59 Appendix 7 60
Table of Contents
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Pensions for the Twenty First Century
Retirement Income Security for Younger New Zealanders Page 3
PAGE
Table 1 – Number of New Zealand live births 1935-1979 10
Table 2 – Average life expectancy in New Zealand at 65, 1898 – 2011 11
Table 3 – Actual over 65 population compared to stats NZ Series 5 projections by year 11
Table 4 – Ratio of working age (15-64) to 65 plus population in New Zealand 1950 - 2060 (projection using SNZ Series 5) 12
Table 5 – Projected average life expectancy in New Zealand from age 65, 2011-2101 14
Table 6 – New Zealand population aged 65 & over under different longevity trends 15
Table 7 – New Zealand Superannuation (PAYGO) costs as percentage GDP 1970-2100 (FSC “Lancet” longevity) two years per decade 16
Table 8 – Estimated amount required per week to live comfortably - individual 18
Table 9 – Estimated amount required per week to live comfortably - couple 19
Table 10 – Average life expectancy gap (expectations compared with projections) 19
Table 11 – Percentage of people currently saving enough to retire on a comfortable income 19
Table 12 – Biases that distort our saving and investing behaviour 21
Table 13 – Changes in retirement income policy since 1990 23
Table 14 – How does New Zealand compare? 25
Table 15 – OECD retirement income replacement rate 25
Table 16 – Net replacement rate for average income earner 26
Table 17 – The current pension gap with Australia 27
Table 18 – The pension gap with Australia in 2055 assuming no New Zealand policy change 27
Table 19 – The relative size of SAYGO and PAYGO pensions when rates of returns and productivity change. 29
Table 20 – Average pension tax contributions and receipts by cohort 29
Table 21 – Risks and benefits of different retirement income funding options 31
Table 22 – Comparison of KiwiSaver now and KiwiSaver Plus key features. Both operating alongside NZS 32
Table 23 – Taking up the pension in either 2061 (at age 65) or 2066 (at age 70) 35
Table 24 – Taking up the pension in either 2061 (at age 65) or 2066 (at age 70) 10% contributions, 10 year phase-in 36
Table 25 – Taking up the pension in either 2061 (at age 65) or 2066 (at age 70) 12% contributions (10.9% effective) in
0.5% increments (12 year phase-in) 37
Table 26 – What KiwiSaver Plus could pay us in retirement versus PAYGO no change 38
Table 27 – Male on median male income retiring at 65 from 2061 39
Table 28 – Female on median female income retiring at 65 from 2061 39
Table 29 – What is the cost of funding NZS from savings (SAYGO) versus taxation (PAYGO)* 42
Table 30 – Costs of KiwiSaver Plus (SAYGO) transition as percentage of GDP (FSC “Lancet” longevity) 43
Table 31 – Costs as a percentage of GDP with no change PAYGO (current NZS) versus with SAYGO KiwiSaver Plus and PAYGO (NZS)
combined (FSC “Lancet” longevity) 44
Table 32 – Narrowing the pension gap with Australia with new KiwiSaver Plus retirement scheme by 2055 44
Table 33 – Pension comparison for males and females on 50% of New Zealand mean lifetime income 46
Table 34 – What does this mean for people of different ages? 48
Table 35 – Funding retirement incomes in 1955 and 2055 49
Table 36 – The price of procrastination is higher costs later 49
Table 37 – Summary and recommendations 51
Table 38 – Horizon Polling Budget 2011 – Q13 52
Table 39 – Horizon Polling Budget 2011 – Q6 53
Table 40 – Underestimating longevity 54
Table 41 – Understanding compound interest 54
Table 42 – Taking up the pension in either 2061 (at age 65) or 2066 (at age 70) (4% rate of return) 55
Table 43 – Taking up the pension in either 2061 (at age 65) or 2066 (at age 70) 10% contributions, 10 year phase-in 56
Table 44 – Taking up the pension in either 2061 (at age 65) or 2066 (at age 70) 12% contributions (10.9% effective) and 12 year phase-in 57
Table 45 – Total return by asset class in Australia over the past 25 years to end of 2009 58
Table 46 – One possible pathway to 10% contributions (5% from employer/5% from employee) 59
Table 47 – One possible timeline for the review of retirement income security policy 60
List of Tables
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Pensions for the Twenty First Century
Retirement Income Security for Younger New Zealanders Page 5
Young New Zealanders have the same high expectations about their future
quality of life as all preceding generations have done!
Recent work by Financial Services Council (FSC) into young New Zealanders’
expectations and aspirations concerning retirement, along with technical
research into longevity assumptions and the funding required to support the
future retired, makes interesting and compelling reading. I think they will
challenge your assumptions as they did mine. The FSC hopes that this report will
contribute to a new conversation amongst all the stakeholders involved in the
future planning, funding and managing of retirement for the under 40s and for
that generation themselves to take a position in what would work for them.
Financial Services Council has undertaken this work as part of a public / private
policy project to convene a conversation that will in due course deliver greater
certainty for all concerned. We appreciate that our political colleagues in each
political party will have views on this matter as will other stakeholders, and
several generations of young New Zealanders already born and well on their
way through their life journey. It is our hope that this document will inform,
inspire, ignite and excite people into that new conversation which in due course
may identify and bring certainty to the expectations these young people have
expressed about how they wish to experience their retirement.
We urge all stakeholders and political leaders current and future to see this
as both an opportunity and an obligation, and we look forward to engaging
constructively in order to move this project forward. The Financial Services
Council represents many industry players who currently are entrusted through
KiwiSaver, other investments, savings and insurance services, with managing
the long-term savings of both young and older New Zealanders alike. We do not
wish to disrupt older New Zealanders’ arrangements in any way. They are not
affected by proposals in this report. We do however believe that younger New
Zealanders have a desire and a need to fully understand what their opportunities
are, and what challenges they face. Further, we believe those of us in leadership
roles have an obligation to see that their long-term needs and interests are
addressed while they still have time to influence their levels of wealth in
retirement. That’s what this report seeks to offer.
We are partners in this whether we like it or not, and we hope that new
partnerships can emerge where public policy, private enterprise and personal
endeavour converge and conclusions can be drawn.
We also offer some new projections on longevity. If our assumptions are correct
then there are significant implications which need to be taken into account. We
hope that the public policy leaders both political and public service will do their
own research and either validate or dismiss our projections in order for future
commentary to be accurate and fully informed. We offer this report in good faith
as a starting point for one of the most critical conversations of our time!
We look forward to working with partners in this regard as well.
Rt Hon Dame Jenny Shipley
Chair of the Financial Services Council
Introduction
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Pensions for the Twenty First Century
Executive Summary
The Financial Services Council (“FSC”) Long Term Saving and KiwiSaver
project outlines a retirement system that is designed for the 21st century.
It maintains the best features of the current New Zealand Superannuation
scheme, but is designed to meet the aspirations of New Zealanders under
40 who:
Our aim was to demonstrate, as the basis for an informed discussion, an
affordable plan that preserves older New Zealanders’ rights to NZS, but
offers younger New Zealanders and future generations of New Zealanders:
NZS is a “pay-as-you-go” funded retirement scheme that provides the same
base level of retirement income to all eligible New Zealanders once they
reach the age of eligibility. A “pay-as-you-go” scheme means this year’s
pension payments are funded out of this year’s taxation. This means that the
tax rates needed to fund the scheme are low when the number of people in
retirement is small, or when the level of the pension is low.
The small number of people born in New Zealand each year prior to 1950,
combined with relatively low longevity, meant NZS could be funded with
relatively low tax rates for most of the 20th century. However, increases in
how long we live after 65 means that the current form of NZS cannot be
maintained without requiring significant increases in taxes in the future. In
turn, this suggests one of two alternatives will occur:
Either way, it does not appear that the mix of low taxes and early eligibility
that have made NZS attractive until now can be maintained in the 21st
century.
The issue of how increasing longevity affects the design of retirement
income systems is not unique to New Zealand. It affects all OECD countries.
However, New Zealand has an unusual retirement income system that
may make it more difficult to adapt to the changing circumstances of the
21st century than the systems in other OECD countries. First, all OECD
countries except Ireland and New Zealand have mandatory retirement
income schemes that link the amount of retirement benefits to the amount
an individual has paid into the scheme, either as taxes or as contributions to
a mandatory personal saving account. This not only reduces the disincentive
effects of higher taxation, as people know they will get a large fraction of
their contributions back as retirement benefits, but it also means that most
New Zealand households have lower mandatory retirement incomes than
households in other OECD countries. If New Zealand policy were to raise the
age of eligibility further, New Zealand households would rely on their own
voluntary savings to fund their retirement to a greater extent than almost any
other people in the OECD.
Secondly, NZS is primarily funded on a “pay-as-you-go” basis. Since the
taxes that are collected to fund retirement incomes are immediately paid
out as pensions, this system of funding accumulates no capital. In contrast,
the alternative “save-as-you-go” funding mechanism accumulates capital
into an investment fund as the contributions are paid, and the fund and
accumulated earnings are used to pay pensions when people retire. As long
as the return to the fund is greater than the growth rate of the economy,
which has been historically true, this funding arrangement means that in
Retirement Income Security for Younger New Zealanders Page 7
the long run lower taxes or contributions are needed to fund any level of
pension, or a greater pension can be funded from any level of contribution.
Our proposal is to create a retirement income system that, while maintaining
many of the attractive features of NZS, gives it much greater flexibility in the
future. We propose a system where universal entitlement to NZS will remain,
where the age of eligibility will be increased as longevity increases, and
where people make larger contributions to an enhanced KiwiSaver scheme.
It means that the power of compound interest can be utilised to increase the
amount of pension available from any level of contributions. It will enable
most people to have higher retirement incomes than they could expect
under the current fixed-rate NZS system by linking retirement incomes
to contributions. And it will allow people to use some of their personal
retirement income account balance to fund their retirement between the
time they turn 65 and until they are eligible to receive NZS.
This system will have some features that are similar to the Australian
Superannuation Guarantee scheme, introduced in 1992. Australia
requires employers to pay nine per cent (rising to 12 per cent by 2019)
of an employee’s income into a personal superannuation account that
can be used to provide income in retirement. In Australia these funds are
supplemented by a means-tested basic pension. The Australian scheme
means that the typical Australian currently aged in their early 40s will retire
on an amount twice as large as the typical New Zealander, if NZS remains
unchanged. The proposal we are suggesting is designed to ensure that this
gap does not get even larger for New Zealanders in their 20s, and those
younger still.
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Pensions for the Twenty First Century
The proposal
to fund their retirement and for most to lift retirement incomes
We acknowledge that our proposal, which we have called KiwiSaver Plus, is
one of many that could be adopted, and we are even agnostic as to whether
it should be voluntary or mandatory. But our research has led us to believe
that this or a similar structure has many advantages.
expected under the current NZS scheme, enabling New Zealanders to
meet their retirement aspirations.
a personal account to fund retirement between the age of 65 and the
age of eligibility for NZS.
return, the scheme will eventually reduce the total cost of providing
retirement incomes for future generations.
higher age of eligibility is reached.
exhausted, it would become part of the person’s estate as would the
remaining payments of the fixed-term pension.
their retirement will save an inappropriate amount.
reducing the incentive of future New Zealanders to migrate to Australia
to take advantage of their scheme.
of NZS is unsustainable and suddenly cut the entitlements of those
already in or close to retirement.
Our analysis
In the course of this project, we conducted a variety of pieces of research,
using the large overseas literature on retirement schemes as our guide.
Our sources included the work of the OECD on pensions, the seminal
2009 article in the respected journal “The Lancet” on longevity trends and
the economic analysis of pensions drawing on the work of Nobel Prize
winner Peter Diamond and Martin Feldstein. Our primary findings include
the following:
live for 15 to 20 years after retirement, we now have a future where
someone who may not start their first job until age 25 after study,
training and their OE, may live almost as long in retirement as they
were in the workforce.
applying “The Lancet” forecast assumptions, would change the population
over the next hundred years. Life expectancy after reaching 65 has
increased by two years per decade for the last 50 years. If this trend
continues, their projections indicated that for New Zealanders born in
2011, 52 per cent of females and 44 per cent of males would reach 100.
This longevity trend increases the challenge of the policy and funding
issues that already exist based on current forecasts and expectations.
eligible for NZS at 65, the cost of NZS to the taxpayer will grow from four
to five per cent of GDP currently to 10 to 12 per cent later this century
(2080). That would require our tax rates to increase by 28 per cent.
cent of GDP, the age of eligibility for NZS was increased and the level
of benefits for those in retirement or about to retire was maintained.
a pension and increasing the retirement age. Most people who have
looked at these trends suggest it is inevitable that eventually New
Zealand will have to do so as well. Some countries, like the United
Kingdom and Sweden, have proposed moving their pension age out
automatically as longevity increases.
equivalent income to NZS without having very large increases in tax
rates, we need to find a way to fund the income gap between 65 and
the new age of eligibility.
of retirement benefits, or to increase the benefits from any level of
Retirement Income Security for Younger New Zealanders Page 9
contributions, is to switch the funding mechanism from a “pay-as-you-
go” (PAYGO) basis where benefits are funded from contemporaneous
taxation to a mixed system that includes a “save-as-you-go”
(SAYGO) component, where benefits are funded from a capital fund
accumulated from earlier contributions.
expected to provide 60 per cent higher benefits for the same level of
contributions. If you save one per cent of your income while you are
working and leave it in an account earning three per cent a year, after
inflation, fees and tax the effect of compound interest gives you a 60
per cent higher pension than if you give one per cent of your income
as a pension to an older person, and get one per cent of a younger
person’s income as a pension when you retire.
require some people to pay more than they otherwise would have
had to pay, as they will need to fund the retirement of their parents
and grandparents and a greater part of their own retirement. This
transition will need to occur whether the Government explicitly adopts
an enhanced KiwiSaver system, or raises the age of entitlement and
simply lets people save for their retirements by themselves.
transition to a retirement income system with a greater SAYGO
component, as there are relatively few people aged over 65 compared
to the working age population. This means that working age people are
currently paying relatively little to fund their parents’ and grandparents’
generations, and are in a better position to let New Zealand make the
transition than will be the case in 20 years’ time.
mixed SAYGO-PAYGO system is feasible and beneficial.
a scheme like KiwiSaver so that most employees are contributing and
we would need to gradually lift contribution rates over a decade from
the soon-to-be three per cent from employers and three per cent from
employees to five per cent from each. One way of doing this would be
to move contributions by employers and employees up by half a per
cent a year over a decade as the economy recovers, until the combined
amount reaches 10 per cent of wages.
suggest aiming for a cross party agreement that at least 75 per cent
of the New Zealand Parliament will vote for the long-term plan. Failing
that, if the plan is agreed by a majority, but less than 75 per cent of
the Parliament, the Government will put the legislation to a referendum
to be voted on at the next election in 2014. If the Parliament agrees
to the legislation by a 75 per cent majority it could proceed without a
referendum. Future changes should only be done by 75 per cent of the
Parliament agreeing, or by another referendum.
as though moves to widen participation in a contribution-based
superannuation scheme (SAYGO) working alongside NZS could achieve
widespread support. We have suggested a staged work programme to
achieve a robust and widely supported sustainable retirement income
policy in New Zealand.
of those in or about to enter retirement. This is about securing the
retirement incomes of future generations, not about changing the
entitlements currently in place. It builds on the current NZS and
KiwiSaver schemes and makes NZS more secure for the future.
moment we still have enough people in employment to do the saving
required. If we delay both the costs and the politics of the change
become too difficult. If we save more now we can enjoy lower costs
later. This is a better long-term option for both young and old alike.
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Pensions for the Twenty First Century
SECTION 1 The future of retirement
longer on average.
Most of us have heard about our ageing population of “baby boomers”,
those born between 1946 and the early 1960s. The Great Depression of
the 1930s and the Second World War made raising a family difficult but that
trend reversed in the post war economic boom and the number of births
in New Zealand peaked in 1961. Since then the number of children in a
family has also tended to reduce, accelerating the ageing of the population.
While people born during the baby boom are beginning to retire or become
eligible for NZS, the proportion of the population in the over 65 group will be
growing faster than the numbers going into employment. Some estimates
have the over 65 population growing four times faster than the workforce.
Each successive generation has better health than its predecessor, so many
of the people eligible for NZS continue in some form of employment after
reaching 65.
There have been quite substantial increases in the proportion of those over
65 participating in the workforce. In New Zealand it is much higher than in
many other developed countries. One reason is that our base pension, NZS,
is not income or asset tested. The other reason is that our pensions are
quite low compared with average incomes and we have a higher pension
access age than in some countries. There are both income and other
benefits if you can work beyond 65 and any retirement income policy should
enable this option to continue. We don’t know all the reasons for it but there
is evidence that people who stay on in employment not only enjoy higher
incomes but also appear to get other benefits from staying active in the work
force. We also now have much greater expectations from our retirement.
Our grandparents may have been content at retirement to make a once in
a lifetime overseas trip; but the current generation of new retirees expect to
enjoy an active lifestyle for longer and to do much more travel.
When Premier Richard Seddon introduced New Zealand’s first old age
pension in 1898 average life expectancy at 65 was for a further 12.2 years
for men and 13.3 years for women. If we look at the trend for increasing life
expectancy after 65 we can see how much things have improved since 1898.
Over the last century average life expectancy after 65 has almost doubled.
The FSC asked a PricewaterhouseCoopers actuary to project forward the life
expectancy at 65 for people born in NZ in 2011 based on the increasing life
expectancy trend being seen in highly developed countries.
Those projections suggest that if we follow the long-term trends seen
here and in similar countries 52 per cent of New Zealand women born in
2011 and 44 per cent of men born in that year will get to age 100. Our
grandparents expected to live for no more than 15 to 20 years in retirement
and, if they were mortgage free by retirement, their home was low
maintenance, the whiteware and car were new, they could live frugally on
NZS for the rest of their days.
1935
1937
1939
1941
1943
1945
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1073
1975
1977
1979
Source: Infometrics from Statistics NZ
Retirement Income Security for Younger New Zealanders Page 11
Now think about the person born in 2011. With university or trade training
followed by OE, that person may not get into a full-time career job before
age 25. If they retire at age 65 retirement could last for almost as long
as employment. In 30 to 40 years of retirement they will probably need to
completely refurbish their home and possibly replace three cars, not one.
These longevity projections are based on what we are already experiencing.
When the results for the 2006 Census were released the updated forecasts
projected 160,000 more people over 65 by 2051 than had been expected
on earlier middle assumptions, Series 5 projections. Those earlier Series 5
projections were based on average life expectancy at 65 increasing by just
over one year each decade. Statistics New Zealand produces a number of
projections for the future 65 plus population.
Most users use the middle assumptions Series 5 projections, assuming
they are most likely to be in the middle of the expected range. Around the
developed world official mid-range estimates have tended to underestimate
the growth in the 65 plus population. The graph below shows how earlier
projections have compared with the actual 65 plus population growth
over the last 20-30 years. The Series 5 estimates have needed to be
Year 65
Source: Infometrics from Statistics NZ
Source: PwC from Statistics New Zealand
1991
1996
2001
2006
2011
Actual
1982
1988
19941996
19992001
20042006
2009
1991
600
550
500
450
400
350
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Pensions for the Twenty First Century
SECTION 1 Continued
consistently increased to match the actual growth in the over 65 population.
The long-term trend has seen around two years per decade improvement
in longevity. Between 1996 and 2006 the increase in New Zealand was
three extra years living in retirement. The projections we had prepared
just assumed that what had already occurred for over 50 years would
keep on happening. They did not assume any break-through that
may dramatically improve life expectancy, such as being able to grow
replacement human organs from stem cells, personalised medical
treatment or prevention programmes based on our individual genetic
makeup, or some anti-ageing pill. Nor did we assume that increased
obesity will stop this trend although obesity is associated with Type II
diabetes which tends to reduce life expectancy. Overall it looks like we
can look forward to both a much longer life and potentially a healthier
retirement, which is great. But what do these changes mean for the cost
to taxpayers of funding NZS for our longer retirements?
The graph in Table 4 shows how the ratio of people of working age to those
eligible for NZS has gone from 7 to 1 in 1970 to a projected 2 to 1 by 2060.
Note that we believe the Statistics NZ Series 5 projections underestimate the
likely longevity trend and therefore the ratio is likely to decline more sharply
than shown in the graph.
It should be noted that many people in the 15 – 64 age group such as
school or tertiary students may not be in the workforce, and could be
described as “dependent”, and a number of people over 65 are still in
employment and therefore are not “dependent” although they are likely to be
receiving NZS.
Source: Infometrics from Statistics New Zealand
1950
1970
1990
2010
2030
2050
2070
Retirement Income Security for Younger New Zealanders Page 13
SECTION 2 How fast is longevity increasing in New Zealand?
The Series 5 estimates were based on an assumption that each decade
those people who had reached 65 could expect to live about one year
longer than their decade older predecessors.
An article in the British Medical Association Journal, The Lancet, in 2009
said that, based on the long-term longevity trend of around two more
years each decade, the majority of people already born since the year
2000 will live past 100 in highly developed countries like New Zealand.
Source: The Lancet, Vol 374, October 3, 2009
Summary
If the pace of increase in life expectancy in developed countries over the past
two centuries continues through the 21st century, most babies born since
2000 in France, Germany, Italy, the UK, the USA, Canada, Japan, and other
countries with long life expectancies will celebrate their 100th birthdays.
Although trends differ between countries, populations of nearly all such
countries are ageing as a result of low fertility, low immigration, and long
lives. A key question is: are increases in life expectancy accompanied by a
concurrent postponement of functional limitations and disability? The answer
is still open, but research suggests that ageing processes are modifiable and
that people are living longer without severe disability. This finding, together
with technological and medical development and redistribution of work, will be
important for our chances to meet the challenges of ageing populations.
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Pensions for the Twenty First Century
SECTION 2 Continued
This table and the graph opposite show the population of over 65 year
olds we can expect if the trend is one, two, or three years a decade over
the next 100 years. We have used the FSC “Lancet” Series for our own
forecasts because we expect that it is more likely to be closer to the
actual longevity trend than the Statistics NZ Series 5 projections that
are most frequently used. The FSC “Lancet” forecasts assume that the
longevity of 65 year olds will continue to increase by two years each
decade in the future.
You can see from the graph that getting our longevity estimate right can
make a huge difference in the number of New Zealanders over 65 we
expect to have in 2061 or 2100.
If you are over 50 you probably are saying “so what, that’s an issue for
the grandchildren”. If we don’t start planning for the possibility, however,
we may face a situation where tomorrow’s taxpayer may be reluctant to
pay more tax to support the growing numbers in retirement. It is always
difficult making long-term forecasts, but equally it is not smart to ignore
likely future occurrences that will have a significant impact on retirement
incomes, health and aged residential care policies.
Better healthcare and diet, combined with reductions in cigarette smoking,
are believed to be part of the story about why we are living longer.
Scientists believe there may be constraints on longevity growth, such
as the number of times cells can replicate themselves, but anti-ageing
research continues.
With much of our expenditure on pensions, healthcare and aged
residential care being funded out of taxation, the increasing number of
people over 65 can be expected to increase the cost to taxpayers for
the balance of this century. If we do not get the balance of costs and
benefits between generations right we place the implicit contract between
the generations in jeopardy. When we are young we receive education
and health benefits funded by our parents and grandparents. Later as
taxpayers we fund the education of the young and the health services
and pension of our parents’ and grandparents’ generation. Demographic
changes are challenging the sustainability of some of these transfers.
scenarios Year 65
Retirement Income Security for Younger New Zealanders Page 15
3000
2500
2000
1500
1000
500
0
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
2060
2070
2080
2090
2100
2110
Sources:* Historical – NZ Stats. *Statistics NZ Series 5 –1 extra year of life after 65 each decade.*FSC “ Lancet” Projections – 2 extra years of life after 65 each decade.* Recent NZ 1996-2006 Trend (ELL) – 3 extra years of life after 65 each decade.
Page 16
Pensions for the Twenty First Century
SECTION 3 What does increasing longevity mean for the Government and taxpayers?
The retirement of the baby boomer generation and the rapidly increasing
length of time we live past 65 (longevity) means we will have many more
people eligible for a pension and for more years in the future. If current
longevity trends continue, and we have no reason to expect that they will
not, then the number of people eligible for a pension will grow massively
by the second half of this century.
Currently, we are spending around four or five per cent of national income
(measured as GDP) on NZS. On the FSC “Lancet” trends currently
underway we can expect this percentage will grow to almost 12 per cent
of GDP by later this century.
Paying for this would require us to increase tax rates by about 28 per
cent, so, if that happened today, on our current tax rates the 17.5 per
cent income tax rate would rise to 22 per cent, the top 33 per cent
income tax rate would rise to 42 per cent, the GST rate would rise from
15 per cent to 19 per cent, and the corporate rate from 28 per cent to
36 per cent. This tax burden may be unacceptable to future taxpayers
who may decide through the political process to reduce the level of NZS
or tighten eligibility relatively suddenly to make it more affordable for
themselves.
In the past when we became aware that the cost of NZS was trending
toward seven or eight per cent of GDP we made changes to cut the cost
by moving out the age of eligibility for future recipients rather than cutting
the benefits of those already retired or close to retirement.
One way of dealing with this cost issue would be to gradually move out
the age of eligibility for NZS as longevity increases. NZS would continue
to be available without income or asset testing, but at a later date.
Income tested social security benefits like unemployment and sickness
benefits would continue to be available for those unable to work because
of sickness or unemployment up until they were eligible for NZS. There
would still be the option of continuing to retire at age 65 for those who
save during their working lives to fund an adequate income from age 65
until they became eligible for NZS.
Moving in that direction by increasing the rate of contributions to
KiwiSaver and having KiwiSaver cover all employees would allow future
generations to continue to retire at 65 without increasing the cost of NZS
for future generations of taxpayers.
To make such a transition we need to start increasing participation by
employees in KiwiSaver and gradually increasing the proportion of income
14%
12%
10%
8%
6%
4%
2%
0%
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
2075
2080
2085
2090
2095
2100
Source: Infometrics
Retirement Income Security for Younger New Zealanders Page 17
saved in KiwiSaver accounts. You might ask why we don’t simply do
nothing and subsequently pay the 12 per cent of GDP required to fund
taxpayer based pensions into the future. The problem with that option is
that it may make New Zealand a less attractive place for people to spend
their working lives as it would require the next generation of employees to
pay more of their income in tax to support the growing number of people
over 65. If people in other countries such as Australia are funding their
own retirement incomes from savings through contributions out of wages
and salaries, their tax rates will be comparatively lower and that will look
more attractive than working and paying more tax in New Zealand to fund
retirement incomes mainly from taxation.
New Zealand was one of the very early reformers when it introduced the
old age pension in 1898, but the pension was only for those aged over 65
and of “good character”. It was funded out of taxation so the retired were
supported by the earning taxpayers.
Count Bismarck in Germany had introduced an old age pension
scheme in 1889 and that model was the one adopted around most
of the developed world, with the exception of New Zealand, Australia
and Ireland. In most countries, like Germany, the predominant
means of funding retirement incomes was contributions based on
employee income. Retirement benefits were then linked to the level
of contributions or pre-retirement income, much like the scheme used
in New Zealand to provide pensions for public servants. A basic aged
pension was available in Germany for individuals whose contributions
were insufficient to prevent poverty in old age.
The New Zealand system has the virtue that it pays a good basic pension
to everyone eligible without income or means testing. It provides a level
of income that has enabled us to eliminate poverty in old age for anyone
who owns their accommodation, without a mortgage, by the time they are
65. In New Zealand, regardless of what you earned during your life, you
receive the same level of pension. In the past that has meant many people
on low incomes and women who were not in the paid workforce for some
of their career often received a modest income boost after age 65. It has
also enabled many people to continue working past 65 as they do not lose
any of their pension income because of wage or salary earnings after 65.
While our economy and our working age population were growing faster
than the number of aged pensioners the cost to the taxpayer was relatively
modest, around four to five per cent of GDP. As our population ages and
now that people are living much longer after 65, the cost of taxpayer
funded universal age pensions will begin to increase as a percentage of
our national income measured as GDP.
To avoid these issues some countries have used Save As You Go
contributions to build up savings to fund retirement pensions rather than
relying only on the Pay As You Go (PAYGO) tax based system approach to
fund their major form of retirement pension.
New Zealand could learn from these approaches if we want to preserve
retirement at 65 as an option for all and lift retirement incomes.
Page 18
Pensions for the Twenty First Century
SECTION 4 How well prepared are we for retirement?
In December 2011 the FSC commissioned a survey of New Zealanders
to look at how well we are prepared for retirement (Horizon Research,
Horizon Poll Panel, 2,558 respondents, at the 95 per cent confidence
interval, has a margin of error of +/- 2.1 per cent for the national sample).
Of those currently retired, a little over 50 per cent say they have an
adequate or more than adequate income. However, they were mainly the
people who were living in a home with the mortgage fully paid off. For
those still paying off a mortgage only a little over 15 per cent said they
had an adequate or more than adequate income to live on.
When current retirees were asked whether their income was as much as
they expected before retirement, some 61.5 per cent said “no”.
When asked about when they planned to retire, the average expected
retirement age was 67.6 years but, significantly, the numbers nominated
tended to cluster at 60, 65, 70 or 75 as expected retirement ages.
Only 29 per cent of New Zealanders thought NZS alone would be
sufficient to meet their retirement needs and only 10.1 per cent thought it
alone would provide enough for them to live comfortably in retirement.
On average, people thought about another $300 a week above the current
level of NZS would be needed for a single person to live comfortably and
another $330 a week above NZS levels for a couple to live comfortably.
Only one third of New Zealanders thought they would have enough in
retirement income from NZS alone to cover their basic costs, with another
third not knowing whether it would.
Typically, people underestimated their likely duration of life beyond 65 and
nearly 80 per cent of respondents had some concern that their savings
would run out before the end of their lives.
It is notable that the underestimation of longevity is currently greatest for
those furthest away from retirement, when saving would be most effective
in boosting retirement income.
Of those surveyed, 62.9 per cent said they were not currently saving
enough to give them a comfortable retirement.
Some 58.4 per cent believed that New Zealand could not afford to keep
funding NZS if eligibility remained at age 65.
In summary, most New Zealanders want to retire by 68 and want higher
incomes in retirement than are provided by NZS, but at the moment we
are not saving enough to make it happen. Over 60 per cent said they did
not know how much they will need to save and 45 per cent say they are
not really planning for retirement.
On these numbers it looks as though New Zealanders need help to
understand how much they will need to save and some sort of plan to
make that happen. Most New Zealanders want to retire on an income
higher than NZS but need help to get there.
$601 to $800
$551 to $600
$501 to $550
$401 to $500
$300 to $400
Source FSC Horizon Research Dec 2011* NZS for an individual living alone $339.92 per week after Tax at ‘M’ rate as at 1 April 2011
0% 5% 10%
15%
20%
25%
Retirement Income Security for Younger New Zealanders Page 19
$601 to $800
$551 to $600
$501 to $550
$401 to $500
$300 to $400
Source: FSC Horizon Research Dec 2011* NZS for a couple $522.96 per week after Tax at ‘M’ rate as at 1 April 2011
0% 5% 10%
15%
20%
25%
30%
Source FSC Horizon Research Dec 2011
Source: FSC “Lancet Projections” and Horizon Research Dec 2011
100
90
80
70
2011
or e
arlie
r
2012
-202
1
2022
-203
1
2032
-204
1
2042
-205
1
2052
-205
8
2059
-206
1
FSC “Lancet” - WomenSelf - Women
Page 20
Pensions for the Twenty First Century
SECTION 5 Why won’t we save enough for retirement?
Some 1.9 million New Zealanders now have a KiwiSaver account but some
of those accounts do not currently have regular contributions being paid
into them. For the KiwiSaver accounts where contributions are ongoing,
the typical contribution rates of two or four per cent of salary with another
two per cent from the employer (three per cent from 2013) are insufficient
to provide a comfortable income in retirement. With each successive
generation of people living longer it is likely the age of eligibility of NZS
will need to move out. It will require some serious saving to keep the
option to retire at 65, or to put our retirement incomes up to the level to
provide comfort in retirement, about two times the level of NZS. It will also
probably require starting that saving from when we begin working.
Before we had a welfare state people needed to save if they wanted to
have a comfortable retirement but most people were too poor to save
much and often relied on living with their children and hoping they would
be willing to share. In those days your social security came from the
number of surviving children you had.
We decided this wasn’t an acceptable arrangement and by 1898 in New
Zealand an old age pension was introduced. The fact that most developed
countries have an old age pension suggests that there is broad agreement
that voluntary savings alone will not prevent poverty in old age and that
many of us will not save enough unaided.
Saving for retirement sounds like a useful idea but we may not do it for a
variety of reasons:
Investment decisions are not always well informed.
New Zealanders have tended to invest in real estate in addition to the
family home rather than shares in companies although shares have
outperformed investing in “bricks and mortar” in the longer term.
People investing in shares or equities tend to buy the companies that pay
out a high proportion of their earnings as dividends rather than the ones
that can grow and employ more people because they retain earnings to
invest in promising opportunities.
Even when investing to fund retirement, many decades away, people tend
to over react to short-term trends. For example, they buy into shares or
funds that have outperformed the market recently which are likely to then
underperform in the near future.
Similarly, they buy when the market is hot and prices are high, meaning
the risk of a price fall is greater. When prices fall inexperienced investors
get out rapidly so prices drop further, depressing the market, and they
then miss out on participating in the rising market that usually follows.
The research undertaken in the last 40 years into behavioural economics,
in particular the work of Daniel Kahneman and Amos Tversky on how
people actually make economic and financial decisions, shows that we are
very prone to quirks and biases that are likely to prevent us from retiring
with the earnings we intended. The main ones are listed in Table 12.
As a consequence of these quirks and biases even smart people may end
up at retirement regretting they had saved less than they wanted.
Sometimes doing the right thing, like saving, giving up smoking or losing
weight is hard to achieve and people need help.
KiwiSaver is helping 1.9 million New Zealanders to do some saving. The
challenge now is to lift the level of saving so most New Zealanders can
arrive at retirement with mortgage-free accommodation and enough
savings for a comfortable retirement.
Retirement Income Security for Younger New Zealanders Page 21
Loss Aversion
Regret
Self Control -
Source: Andrew Coleman, Motu Research
Table 12 – Biases that distort our saving and investing behaviour
Page 22
Pensions for the Twenty First Century
SECTION 6 What are other countries doing about these issues?
Underlying issues with the long-term viability of pension systems in
developed countries have come to a head with the arrival of the Global
Financial Crisis, just as the first wave of baby boomers born after 1945
become eligible for a pension.
There will be a gradual ageing of the population as the baby boomers retire
and are followed by a smaller generation (their children and grandchildren)
becoming wage earners. Not only is the number of retirees increasing,
they are living much longer than had been expected. So governments are
paying more retirement pensions for longer just as the finances of most
governments are the worst they have been in two decades.
In some countries like France and Greece, benefit levels are being cut
and access to retirement pensions is being delayed with very little notice.
These are countries where some workers have a pension age of 60 or
less. Understandably those close to retirement have been very upset by
these sudden changes.
The general recessionary conditions and the extremely loose monetary
policy being used to prevent a collapse of house prices and share markets
has produced the lowest interest rates in almost three decades. When
interest rates drop, pension funds need more capital to deliver the same
income to retirees. As a consequence governments and employers in
Europe and the USA are being asked to increase contributions just to
maintain existing pension entitlements.
In Britain, the previous Government had decided that the pension age
would increase to 68 by 2046. The new coalition Government has
decided to lift the age of eligibility for a pension to 66 from 2018,
earlier than was proposed by its predecessor, to 67 from 2026, and is
considering bringing forward the date by which the pension age will
move to 68. In the recent Speech from the Throne outlining its legislative
programme, the British Coalition Government announced its intention to
index the age of eligibility for its age pension with increasing longevity.
Sweden and Denmark are both proposing that their retirement age will
continue to rise in line with increasing longevity. (In Sweden you can
obtain a pension from 61 but at a much reduced rate compared with a
later retirement age.)
The USA is moving its retirement age in stages to 67, as are Australia,
Denmark, Spain and Germany.
Accompanying these changes most of these countries are also reducing
barriers to the continued employment of people after they are eligible for a
pension. Many of these countries are forecasting a doubling of the cost of
public retirement pensions over the next 20 years if changes are not made.
Retirement Income Security for Younger New Zealanders Page 23
AGE OF ELIGIBILITY
Australia
Future changes in eligibility age directly
Germany
Phased abolition of favourable tax treatment
IrelandTightening contribution conditions for access
Eligibility age to be increased to 66 from
United States
Source: Andrew Coleman, Motu Research
Page 24
Pensions for the Twenty First Century
SECTION 7 How is New Zealand different from other countries when it comes to retirement incomes policy?
New Zealand is unusual in that its predominant source of retirement
income is in the form of a flat rate pension paid to the over 65s by current
taxpayers. In effect each generation of working age taxpayers pays for
their parents’ and grandparents’ retirement pensions. New Zealand and
Ireland are the only developed countries to take this approach. In most
developed countries the predominant source of income in retirement is a
pension related to the contributions made on previous earnings.
Tier 1 a publicly provided pension like NZS.
Tier 2 a mandatory personal retirement scheme or schemes.
Tier 3 a voluntary personal retirement savings scheme or schemes
like the current KiwiSaver.
A Tier 1 scheme like NZS usually pays out a pension unrelated to what
taxes or contributions you have made to the Government. In New Zealand
we pay a flat rate benefit to all people that have been resident in New
Zealand for the qualifying period and the benefit is subject to neither asset
nor income tests. This arrangement is relatively generous for people
who have had very modest incomes throughout their adult lives. Without
assets or income testing it provides a strong incentive to keep on working
past the age of eligibility for NZS, currently at age 65. For some people
on very low incomes for much of their working lives, working past 65
gives them the highest income they have ever had in their lives and New
Zealand’s approach has been very effective in almost eliminating absolute
poverty in retirement amongst our older citizens provided they own their
own home mortgage-free by 65.
Where New Zealand is very unusual is that unlike most developed
countries it does not have the mandatory second tier which enables the
majority of citizens in those countries to enjoy a comfortable retirement.
Ireland is the only other OECD country without a mandatory Tier 2
scheme, but features of their scheme, including widespread enrolment
in concessionally-taxed workplace-based contributory retirement savings
schemes, mean their retirement arrangements are closer to those of other
OECD countries than New Zealand.
In countries with a second tier, employees (and often employers) pay taxes
or make mandatory contributions into a fund while they are working. The
retirement incomes they receive are related to their previous earnings or
their level of contributions.
Schemes with benefits based on members’ previous earnings would be
described as defined benefit schemes. There has been a trend to put
a stop on new enrolments in defined benefit schemes and to develop
defined contribution schemes, in countries such as Australia or Chile. In
these schemes the level of benefits is dependent on the level of member
contributions and investment returns achieved in the fund.
Since 2007, New Zealand has had a Tier 3 scheme, a voluntary personal
retirement savings scheme called KiwiSaver. While contributors benefit
from some incentives these are modest compared with what other
developed countries provide.
New Zealand provides a combination of a universal base level pension
combined with a voluntary personal savings scheme, which does a good
job of preventing absolute poverty in New Zealand’s senior population. It
does not, however, mean most New Zealanders end up with a comfortable
retirement.
Someone on the average income in New Zealand receives a retirement
income from NZS that is a little over 40 per cent of their pre-retirement
income, whereas someone in Australia would receive nearly 60 per cent
of their previous earnings and the average for the OECD is almost 70 per
cent of previous earnings for someone on the average wage. In most
OECD countries including Australia, employees make regular compulsory
contributions toward their retirement savings and as a consequence enjoy
much higher incomes in retirement.
Retirement Income Security for Younger New Zealanders Page 25
COUNTRY TIER 1 TIER 2 CONTRIBUTIONS
TIER 3
Australiascheme
9%
scheme11%
Irelandon contributions history
15%
or income tested
USA Public scheme 12%
Germany Public scheme 20%
Central Provident Fund 29%
Source: Andrew Coleman, Motu Research
70%
60%
50%
40%
30%
20%
10%
0%
Source: AMP Capital 2011 from Pensions at a Glance OECD 2009* Replacement rates are the percentage of pre-retirement income represented by the retirement income.
Aust
ralia
Page 26
Pensions for the Twenty First Century
SECTION 7 Continued
The graph above shows that New Zealand, along with Ireland, is at one
extreme of international practice with respect to level and funding of
retirement incomes. First, for someone on the average wage we only
provide a pension worth 40 per cent of previous earnings and secondly,
our pension is almost entirely funded from current taxation, whereas most
other developed countries have most of their retirement pensions funded
from savings.
With the deterioration in developed countries’ government accounts since
the Global Financial Crisis, many governments are suddenly having to
cut retirement benefits and push out the date for eligibility for retirement
benefits. Increasing longevity is also requiring governments to review their
retirement incomes policies. In New Zealand there is merit in looking at
turning KiwiSaver into a Tier 2 scheme to ensure all New Zealanders can
enjoy a more comfortable and secure retirement.
Australian retirement incomes from their age pension and compulsory
Superannuation Guarantee are much higher than those paid in New
Zealand for several reasons:
Once you earn more than the median income the pension gap with
Australia becomes significant.
What this means is that if one New Zealand twin with the same
qualifications as the other went to Australia in 2011 and earned the
average wage in Australia, their retirement income in 2055 would be more
than twice as high as the twin who stayed in New Zealand and earned the
average wage here. For this comparison we assumed that wages would
increase in both countries at the same rate from now on. To achieve
that more than 100 per cent higher retirement income in Australia, the
Australians would have only needed to have made 44 per cent higher
contributions on average as a share of GDP. This pension gap will provide
a major incentive for our young people with the highest earnings potential
to move to Australia taking their tax revenue with them. This will make it
even harder to keep funding the NZS scheme on a PAYGO basis. We may
not be able to fix the fact that Australians already have higher incomes but
we can decide to have our own contribution-based super scheme to help
close the gap.
120
100
80
60
40
20
0
GREICE
LUX
NZ
IRE
AU
CZECAN
ISR
TUR
POR
US
SPN
FRA ITYNOR POL
SWZ
Source: OECD 2011
0 10 20 30 40 50 60 70 80 90 100
Retirement Income Security for Younger New Zealanders Page 27
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Australia
Source: Andrew Coleman, Motu Research* The replacement rate is the percentage of your previous earnings that your pension delivers from the compulsory system in the respective countries
PENSION IN 2055AUSTRALIAN PENSION FOR
IN AUSTRALIA
RATIO AUSTRALIAN PENSION FOR
IN AUSTRALIA
RATIO
34% 52% 59%
CONTRIBUTIONS
2011
2055
Average 2011-2055
* This table compares the compulsory retirement systems in both countries. Australia has its age pension and its Superannuation Guarantee whereas New Zealand has New Zealand Superannuation and no compulsory retirement savings scheme.**The ratio of Australian and New Zealand incomes assumes an exchange rate of $NZ1 = $A0.85, close to average value since 1990.Source : Andrew Coleman, Motu Research
: Australian Treasury
Page 28
Pensions for the Twenty First Century
SECTION 8 Is there a better way to fund retirement incomes?
When Seddon introduced the old age pension system in 1898, New
Zealand was a country abundant with resources and opportunities, and
short of people. At that time our wages were as high as any in the world
and having the age pension paid from taxes made a lot of sense. The
politicians of the 1890s and their advisers expected that there would be
more taxpayers in each succeeding generation and that they would have
higher incomes from which to pay the pensions for a relatively small group
in the total population who would not live too long after retirement.
Compare that with the situation today. Not only do we expect the future
working age population later this century to be growing very slowly, if not
actually getting smaller, but many people expect the current generation
entering employment will be no better off than their parents and may even
be poorer. Could saving to fund retirement pensions do a better job?
Nobel Prize winner Peter Diamond has shown that, provided the earnings
rate on our savings was greater than the growth rate of the economy, then
saving for retirement by making contributions to an asset accumulating
fund (Save As You Go – SAYGO) would be more efficient than directly paying
for pensions from taxation (Pay As You Go – PAYGO). To manage risks he
suggests it’s best to combine both approaches. The former chairman of the
Council of Economic Advisers for President Ronald Reagan, Martin Feldstein,
in his 2005 address as the President of the American Economic Association,
also agrees that funding pensions from savings is not only much more
efficient but that a transition to greater reliance on savings for funding
retirement incomes is both feasible and desirable.
The key condition is whether the return on the assets we invest our
savings in is greater than the economic growth rate. The economic growth
rate depends on how quickly the workforce increases, and how quickly
labour productivity – the amount of output per worker – increases. In
the past 50 years, the workforce increased rapidly due to the high birth
rates during the baby-boom era and the increased participation of women
in the workforce. But such increases are not expected in the next 50
years. Rather, the number of children born every year is expected to be
almost constant, and the population aged 18 – 64 is expected to only
grow modestly, by maybe 0.25 per cent per year. Consequently, economic
growth will be largely determined by the rate of productivity growth.
Table 19 shows how the size of SAYGO pensions and PAYGO pensions
depends on the rate of return on saving and the productivity growth rate
of the economy when there is zero workforce growth. The table shows the
size of pensions if the average wage starts at $45,000 and increases at
the productivity growth rate, and if people contribute either 10 per cent of
their incomes into a saving fund or to a government funded pay-as-you-
go scheme. The productivity growth rate varies from one to two per cent,
and the rate of return from three to four per cent. In all cases, a SAYGO
funded pension is significantly larger than a PAYGO funded pension. If
the workforce increased by 0.25 per year, the cost of providing PAYGO
pensions declines by about 10 percent, because the costs of providing
any size pension are spread over more people, but even in this case the
SAYGO funded pension is considerably bigger in value than a PAYGO
funded pension.
Our modeling has been based on the set of assumptions shown in green.
On these relatively modest assumptions (a three per cent earnings rate
on savings and a 1.5 per cent productivity growth rate) savings are 62
per cent more efficient than taxes in delivering retirement incomes. You
might ask why we don’t fund all our retirement earnings by saving but a
tax-based pension is still needed for those already retired and those who
will retire in the next 20 years and would not have enough time to save for
all their retirement income needs.
If we wanted to move quickly on this, one generation would end
up paying for their own retirement pensions and those of the older
generations still alive, in effect paying twice but only getting one
retirement funded for themselves.
There is the option of moving gradually to a totally savings funded
retirement but this would take a long time and in the meantime pensions
still have to be paid from each year’s taxes to the generation that has
already retired.
Another alternative is to gradually move out the age of eligibility for NZS
as longevity increases and continue paying NZS from taxation on the
same basis for the last 20 to 25 years of life. The United Kingdom plans
to and Sweden already does this. Anyone could still retire at 65 by saving
sufficient for a retirement nest egg to provide an income between 65 and
a later age of eligibility for NZS. Putting those retirement savings aside
would give several advantages:
earning compound interest (interest paid on the interest earned
and left in a retirement account) is more efficient than paying for
retirement income out of taxation.
NZS means future generations will be able to pay less tax while
employed as more retirement income will come from compound
earnings on savings and less from taxation.
That retirement nest egg is a personal asset and can be taken
and used for retirement anywhere in the world and if you die
prematurely the balance in your account goes to your estate.
Retirement Income Security for Younger New Zealanders Page 29
want to retire at 70 rather than 65 they can continue to build up
retirement savings for the additional five years and get a higher
income when they do decide to retire. Alternatively, there is an
option to retire at, or least take up a pension from, 65.
future taxes on incomes will provide a strong motive for additional labour
supply and much smaller dead weight losses from lower tax rates.
One fallacy that is commonly assumed is that we fully pay for our NZS
from the taxes we pay prior to retirement. From the analysis below it can
be seen that typically in retirement we receive about two to three times
what we contributed through taxes back in our working time.
There are several reasons for this:
by many more people than there were in retirement. For example,
at one stage seven working age people were supporting only one
person in retirement.
comes as a percentage of today’s average wage whereas we were
on lower incomes when we were paying our taxes so they were a
smaller dollar amount from our then lower incomes.
REAL RETURN RATIO
* The pensions assume the average wage begins at $45,000 and grows at the productivity growth rate. Each year a person contributes 10% of their income to either an accumulated SAYGO pension fund or to the Government to fund a PAYGO pension. Pensions increase at the productivity growth rate. The working life is 45 years and the retirement period is 19 years. When the working age population increases by 0.25% per year, the cost of providing a PAYGO pension reduces by 10%.Source: Andrew Coleman, Motu Research
25%
20%
15%
10%
5%
0%
1976
1981
1986
1991
1996
2001
2006
2011
2016
2021
2026
2031
2036
2041
2046
Average entitlement to future pension benefits gained each year alive 25-65, as a fraction of average annual income.
Average fraction of annual income paid as taxes to fund pensions.
Source: Andrew Coleman, Motu ResearchExample: Someone turning 60 in 2011 will have paid 8% of annual income each year to fund other peoples pensions but will gain entitlement to pension benefits equal to 18% of one years annual income. Over 40 years, their total pension entitlement is 7.2 years annual income, or a pension equal to 30% of annual income for 24 years.
Page 30
Pensions for the Twenty First Century
SECTION 9 How can we preserve the option of retiring at 65 and provide more New Zealanders with a comfortable retirement?
With the ageing of the population and increasing longevity after 65, it
is inevitable that the age of eligibility for the taxpayer funded NZS will
gradually increase to keep the cost affordable for the smaller proportion of
the population in employment. If we want to preserve the option of retiring
at age 65 we will need to find a way to save and provide an income
between 65 and the age of eligibility for NZS. If we all save more during
our working lives we can also boost our retirement incomes to the level
that would give us a comfortable retirement. FSC commissioned polling
indicates that most New Zealanders believe they could live comfortably in
retirement on an income about two times the level of NZS.
For compound interest (the interest on interest earned by leaving money in
a retirement account) to work we need two things: to put the money aside
by not spending it; and then leave it alone to earn the compound interest
over many years. At the moment many people only do serious saving for
retirement after they reach 50 years of age. If you start earlier more of
your retirement savings “pot” comes from the compound interest rather
than the initial contributions made.
While we know saving for retirement is at least 60 per cent more efficient
than paying for today’s pensions out of current taxation there are many
different ways to do that saving.
The Government could simply increase taxes and pool the extra tax in a
retirement savings fund which could be managed using private sector
investment managers or a public sector agency such as the NZ Super
Fund or the ACC Fund. Alternatively, the Government could deduct
contributions from wages or salaries and put them into individual accounts
in a similar retirement savings fund with the option of public or private
sector management.
Another option would be to put those deducted contributions into funds
like the current KiwiSaver scheme managed by the private sector. That
gives scheme members the option of switching to another provider and
scheme if they are not happy with their current provider or scheme.
While each approach would enable our savings to be managed, each has
different risks.
These are outlined in the Table on the right.
During the superannuation debate back in 1975, many New Zealanders
were not comfortable with the idea that the Government would have
control over where our retirement savings would be invested. Having
everyone’s investments managed by one organisation does concentrate
everyone’s hopes on one place. That might make it uncomfortable for
the Government, retirement savers and the taxpayers as, if a Government
agency or its chosen private sector provider fails, the Government of the
day will inevitably come under pressure to make good the losses so the
taxpayer ends up paying.
If the Crown has the total fund managed by one organisation, whether it
is taxpayer or privately owned, the Government faces the “too big to fail”
dilemma. Even if it performs badly with its investments the reputation of
New Zealand and the retirement income needs of its investors means the
Government at the time cannot allow it to fail. An organisation managing
savings like this would therefore be incentivised to take on more risk than
may be prudent.
When the KiwiSaver scheme was introduced, the Government of the day
decided that having individual accounts managed by multiple private sector
providers gave the best balance of risks and the strongest incentives for
investment performance. While many people have stuck with their default
provider most people have chosen a scheme other than the one they were
allocated to initially, and despite the worst investment conditions in 50 years
most people appear happy with the existing arrangements.
To enable every employee in New Zealand to retire on at least the level of
the NZS from 65, and most people to achieve a retirement income close to
two times the level of NZS, contributions from employees and employers
will need to grow to equal 10 to 12 per cent of their earnings going into a
retirement account. In Australia, employers currently contribute nine percent
of earnings to each employee’s compulsory superannuation scheme. There
is cross-party support in Australia for the contributions to increase to twelve
per cent from the current nine per cent between now and 2020.
Expanding enrolment into KiwiSaver to cover all employees and stepping
up the contribution year by year until it reaches 10 to 12 per cent of
earnings is probably the best way to phase-in additional retirement
savings. We have called this KiwiSaver Plus.
Retirement Income Security for Younger New Zealanders Page 31
ASSET
POTENTIAL FOR EFFICIENCY
SCALE
POTENTIAL
ACTUAL OR
ACCESS TO -
SIFICATION
PAYGO Nil Nil Nil Nil
SAYGO Public Tier-1
or the ACC Investment
Positive Some
SAYGO Public Tier-2
overseen by a govern-
Investment Team or
Positive Nil
SAYGO Private Inter-mediated
Positive Nil
SAYGO Private Non- Intermediated
Positive Nil Nil
Page 32
Pensions for the Twenty First Century
SECTION 10 What could KiwiSaver Plus look like?
Our analysis indicates that the first nine of these objectives could be
achieved by having contributions equal to 10% of incomes, whereas
adding the last two features would require a further two per cent of
income in contributions bringing the total to 12%.
The KiwiSaver Plus scheme outlined below builds on the best features of
NZS and KiwiSaver while ensuring they work together to create a more
secure retirement income for all participants.
FEATURE
Contribution rates
Retirement Income Security for Younger New Zealanders Page 33
retirement savings
-
Is the value of my retirement contributions
No
-
Is there a guarantee that
No
account balance above that Yes
Can you enrol your children or grandchildren
Yes
to buy a retirement income Yes Yes
money in my account if I Your estate receives the balance in your Your estate receives the balance in your account and the
When you reach the age of eligibility for
longevity may mean this age is lifted in the
Page 34
Pensions for the Twenty First Century
SECTION 11 What sort of incomes could KiwiSaver Plus provide for retirement?
To help provide some context for what future retirement incomes will be it
is helpful to understand our current income distribution in New Zealand.
The median male income in mid 2011 was about $52,100. The median
means the income level where almost 50 per cent of the male population
earns more and almost 50 per cent earn less. The male average income
or mean for males in paid employment is higher at almost $55,000. The
mean is calculated by adding everyone’s incomes together and dividing
that number by the total count of the male population.
The mean is higher than the median because while a large number of
people have lowish incomes a small number of people have much higher
incomes pushing up the average.
The first scenario below assumes a contribution rate equal to 10 per
cent of earnings (five per cent from the employer, five per cent from the
employee). We have used a two years per decade assumed improvement
in longevity from age 65.
The pensions available at retirement in 2061 from introducing KiwiSaver
Plus are the result of making steady contributions at 10 pe rcent of
earnings over 40 years and the impact of compound interest (interest on
the interest left in the account).
All participants in KiwiSaver Plus will receive at least the income level of
NZS from age 65. Most people will be able to receive a pension for more
than the equivalent of NZS at 65. For those who can defer taking up a
pension to 70 the majority will achieve a retirement income close to the
level identified in our opinion polling as providing a comfortable income
in retirement for an individual or a couple of two times NZS. The next
three tables all use a three per cent real rate of return (after inflation, fees
and tax) and assume a 1.5% labour productivity growth rate). These are
conservative assumptions based on past trends. In Appendix 4 we have
the same tables based on a four per cent real rate of return over 40 years
and assuming a productivity growth rate of one per cent.
Fund managers are prepared to contract for a four per cent real rate of
return long term and the one per cent productivity growth rate is close to
what has been achieved in New Zealand over the last 10 years.
The proposed contributions track to produce these pensions is contained
in Appendix 6.
Retirement Income Security for Younger New Zealanders Page 35
(To interpret the table see notes in orange)
6. How much would be in your retire-ment account at 70 if you delay taking up your pension till then.
7. The KiwiSaver Plus pension your account can purchase in 2066.
8. What you would have received if you had collected NZS from age 70.
AT AGE 65 AT AGE 70
Earnings in
$Fund Balance$
SAYGO
Self-Funded Pension $
No Change PAYGONZS $
Fund Balance$
SAYGO
Self-Funded Pension $
No Change PAYGO
Quintile 1
Quintile 2
Quintile 3
Quintile 4
Quintile 5
Quintile 1
Quintile 2
Quintile 3
Quintile 4
Quintile 5
1. e.g. income levels Quintile 1 is the average income of those people in the bottom fifth of earnings as-suming that the person stays on that relative income for the whole of their working life.
2. The annual income for someone in this category in 2011.
3. How much will be in yourKiwiSaverPlusretirement account at 65.
4. The pension your KiwiSaver Plus account can purchase at 65.
5. What you would have received from NZS if the pension was still available at 65 in 2061.
Pensions paid from 2061 (age 65) or 2066 (age 70) comparing the no change PAYGO pension (NZS) with the proposed SAYGO (KiwiSaver Plus) pension (Assumes 10% contributions commence from day 1 (i.e. no phase in)
** As we assume that wages increase each year with productivity growth the PAYGO pension (NZS) paid will be higher by the time you get to 70.*** The mean income relates to earnings for those in paid employment as at June 2011. The other incomes are expressed as lifetime earnings relative to the mean. They do not represent a cross-sectional income distri-bution. The distribution by quintile is assumed to be the same for males and females.
Page 36
Pensions for the Twenty First Century
SECTION 11 Continued
AT AGE 65 AT AGE 70
Earnings in
$Fund Balance$
SAYGO
Self Funded Pension $
No Change PAYGONZS $
Fund Balance$
SAYGO
Self Funded Pension $
No Change PAYGO
Quintile 1
Quintile 2
Quintile 3
Quintile 4
Quintile 5
Quintile 1
Quintile 2
Quintile 3
Quintile 4
Quintile 5
The Table shows what you can expect as a KiwiSaver Plus pension when you retire in 2061 at 70 if we phase in the target 10% contribution rate over 10 years.
*This would be topped up at 65 or when you decided to retire to provide the funds necessary to purchase a pension equal to NZS i.e. $27,368 and increasing with wages from then on until you were eligible for NZS.** As we assume that wages increase each year with productivity growth the PAYGO pension (NZS) paid will be higher by the time you get to 70.*** The mean income relates to earnings for those in paid employment as at June 2011. The other incomes are expressed as lifetime earnings relative to the mean. They do not represent a cross-sectional income distribution. The distribution by quintile is assumed to be the same for males and females.
Retirement Income Security for Younger New Zealanders Page 37
The table below assumes we decide to include the 1% cost for insurance and the 0.1% cost of the capital guarantee on contributions. This requires contributions to rise to 12% of income to be an effective 10.9% contribution rate into your KiwiSaver Plus account phased in over 12 years.
AT AGE 65 AT AGE 70
Earnings in
$Fund Balance$
SAYGO
Self-Funded Pension $
No Change PAYGONZS $
Fund Balance$
SAYGO
Self-Funded Pension $
No Change PAYGO
Quintile 1
Quintile 2
Quintile 3
Quintile 4
Quintile 5
Quintile 1
Quintile 2
Quintile 3
Quintile 4
Quintile 5
** As we assume that wages increase each year with productivity growth the PAYGO pension (NZS) paid will be higher by the time you get to 70.*** The mean income relates to earnings for those in paid employment as at June 2011. The other incomes are expressed as lifetime earnings relative to the mean. They do not represent a cross-sectional income distribution. The distribution by quintile is assumed to be the same for males and females.
Page 38
Pensions for the Twenty First Century
SECTION 11 Continued
Under the three scenarios outlined above everyone who participates
receives at least the level of NZS from 65 and most people who defer their
retirement past 65 can achieve closer to two times the level of NZS most
New Zealanders consider they need to have a comfortable retirement.
Tables 27 and 28 show how the (SAYGO) KiwiSaver Plus self-funded
pension integrates with the taxpayer funded (NZS) pension you receive
from the Government. Based on a 10 per cent contribution rate we can
maintain access to an income at least equivalent to NZS at 65. Most
people would be able to achieve an income above NZS levels and a
majority of those who deferred picking up a pension till closer to the age
of eligibility for NZS would receive a level of income that would enable
them to have a comfortable retirement about two times NZS. Everyone
gets to enjoy at least an income equivalent to NZS from 65. The first part
of your retirement is funded by your own savings (the blue area under the
white line). This is the fixed-term pension you are required to purchase
if you participate in KiwiSaver Plus. The white line is the level of the
NZS pension which increases in line with increases in wages. Later your
pension is mainly paid for by the taxpayer (the red area under the white
line). The blue area above the white line is the pension income from your
KiwiSaver Plus savings, above what you used to purchase your fixed-term
pension, spread out over the rest of your life. You can use your savings,
above that required to purchase your fixed-term pension between when
you want to take up your pension and when you are eligible for NZS, any
way you like. The example below presents it as additional income over the
rest of your expected life.
Retirement Income Security for Younger New Zealanders Page 39
Source: Infometrics
0
AGE
$PA
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96
Source: Infometrics
0
Table 28 – Female on median female income retiring at 65 from 2061
AGE
$PA
65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
Page 40
Pensions for the Twenty First Century
SECTION 12 How can we make this politically sustainable?
Retirement income policy changes cast a very long shadow because they
affect our decisions on where to live and what to save during the 40 plus
years we are preparing for retirement and what we will receive in the 20-
40 years of likely retirement. This timetable covers the lifetime of almost
27 parliamentary terms. The decisions of today’s politicians will have an
impact on the retirement of people not yet born.
There are therefore major benefits in having some stability in the core
aspects of retirement income policy over the long term. We have
struggled with achieving this in the past.
Political stability can be achieved when:
the generations and between the political parties most likely to form
future governments.
The KiwiSaver Plus features we have proposed are designed to have
acceptability to the widest possible range of political opinion while being
affordable and fair for successive generations.
We need that acceptability across the generations and across the
community if we are to have a broadly sustainable policy.
To achieve such a wide consensus most people will need to agree on the
facts underpinning and the goals and values embedded in the proposals.
To help build the consensus required for a broadly stable retirement
income policy we have proposed a multistage process to examine the
evidence on the following topics:
- the adequacy of retirement incomes compared with our aspirations
- saving for retirement being more efficient than funding retirement
incomes from taxation
- whether increasing longevity requires us to reconsider how we fund
our future retirement income policy
- whether a transition to greater reliance on savings is feasible
- whether it can be fair across the generations and for women, Maori
and the low paid.
Retirement Income Security for Younger New Zealanders Page 41
We have suggested an all party Select Committee on Retirement Income
Security oversees the preparation of a Discussion Document for public
consultation commencing later this year.
There would also be value in having a reference group of New Zealanders
under 40, representative of the diversity of New Zealand, to consider this
report and other evidence to help design the future of retirement income
policy in New Zealand.
Following this in 2013, we suggest a draft Bill be prepared under the
supervision of the all party Select Committee on Retirement Income
Security.
To encourage a cross party consensus to emerge we have proposed that
any legislation on this topic should require a 75 per cent level of support
in Parliament.
If that level of support is not achieved we propose that the legislation as
passed come into effect after a referendum at the 2014 election inviting voters
to vote for or against the package supported by a majority of Parliament.
This approach encourages the parties in Parliament to build a wide
coalition of support but would not prevent a proposal being submitted to
the voters by way of a referendum if that were not possible.
We have also recommended that future changes to retirement income
policy be supported by 75 per cent of Parliament or be the subject of a
referendum.
Page 42
Pensions for the Twenty First Century
SECTION 13 What would the transition look like?
Our proposals address several issues with our current retirement income
policy based around NZS, funded by compulsory taxation of current
earners and spenders alongside a voluntary KiwiSaver scheme.
The likely trend in longevity will mean NZS at aged 65 requires 12 per
cent of GDP from taxpayers later this century compared with four to five
per cent today. If this results in tax rates increasing by 28 per cent then
those taxpayers will have the option of moving to Australia or elsewhere.
If those countries have mature retirement savings schemes they will be
able to pay less tax and receive greater retirement incomes than if they
remained in New Zealand.
To ensure we can keep our younger earners in New Zealand we need
to move to more reliance on a savings funded retirement income and
less reliance on tax based funding. We cannot do this overnight as one
generation might end up paying more than once because while saving for
their own retirement they would need to continue to pay taxes to fund the
NZS being received by their parents and grandparents.
We have established that funding from savings is at least 60 per cent
more efficient for funding retirement pensions than funding from taxation.
For that reason it would make sense to shift to savings based funding for
NZS anyway but we have other objectives.
If we decided to start funding NZS from savings rather than taxation we
would have to put more money aside initially but by 2060 we would be
reducing the total cost of retirement incomes. Unfortunately, this would
only pay the current level of NZS which most New Zealanders consider is
inadequate for a comfortable retirement.
* Costs of funding NZS from Tax No Change versus from Savings (Green Line) (including the cost of NZS recipients that have already retired) as a percentage of GDP (FSC “Lancet” Longevity)
14%
12%
10%
8%
6%
4%
2%
0%
Tier 1 SAYGO + Legacy PAYGO NZS
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
2075
2080
2085
2090
2095
2100
2105
2110
Retirement Income Security for Younger New Zealanders Page 43
Most New Zealanders aspire to a comfortable retirement which requires a
level of income in retirement roughly twice the level of NZS. Many people
are not currently making contributions to a KiwiSaver account and the
typical contribution rate of two per cent from the employee and two per
cent from the employer (soon to go to three per cent plus three per cent)
is insufficient to move most people to two times NZS in retirement.
To make the transition we need both to raise the number of employees
covered by KiwiSaver and lift the typical contribution rate to five per cent
plus five per cent a total of 10 per cent.
Our recommendation is that over one decade we move the employee
and employer contributions up by 0.5 per cent a year, meaning the total
contributions go up by one per cent each year. This phase-in is designed
to make it affordable for both employers and employees.
Most years in New Zealand inflation is about two per cent and in dollars
of the day wages move by at least a similar amount. Most years wages
increase by more than inflation to reflect improvements in labour
productivity. As we can expect real wages to increase by one percent
a year, this does not require a reduction in current consumption during
the ten year transition. As this increase in contributions will be known
well in advance, employers and employees will be able to recognise
these changes when they agree wage increases. As increased saving
means less spending we have proposed that the phase-in to a 10 per
cent contribution rate not start until 2015/16 by which time we should
expect our economy has moved out of recession and employees should be
experiencing wage increases above the level required to just compensate
for inflation.
As we transition we need to continue paying for those already retired
(the green line), the PAYGO pension NZS for those retiring in the future
(the purple line) while we are increasing our contributions towards our
KiwiSaver Plus retirement (the orange line). Initially therefore looking at
the total cost (the blue line) we pay more overall for our retirement income
policy. Later on however Table 31 shows the total cost of the retirement
income policy (the blue line) becomes less than the cost of continuing NZS
with eligibility at 65 (the red line).
14%
12%
10%
8%
6%
4%
2%
0%
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
2075
2080
2085
2090
2095
2100
2105
2110
PAYGO NZS Future Payments
Page 44
Pensions for the Twenty First Century
SECTION 13 Continued
So for a total cost to the economy of 12-13 per cent at the end of the
century we achieve retirement incomes closer to two times the level of
NZS at retirement.
If we take on board the KiwiSaver Plus proposals and our contribution
lift to 10 per cent of income then we can narrow the pension gap with
Australia over time. If incomes are higher in Australia we cannot eliminate
the gap entirely but a maturing of our own KiwiSaver Plus scheme would
considerably improve our relative position.
Our modelling elsewhere has used a three per cent return after inflation,
tax and fees but here we have used the same four per cent return
assumption that the Australian Treasury used to make the Australian
median and average income forecasts. If we had used a three per cent
assumption for the New Zealand KiwiSaver Plus return the pension gap in
this table would have been overstated.
* Note: the blue line is funding retirement pensions considerably higher than the NZS pension funded by the red line of costs.
14%
12%
10%
8%
6%
4%
2%
0%
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
2075
2080
2085
2090
2095
2100
2105
2110
PENSION
AUSTRALIAN -
ONE RETIRING IN
IN AUSTRALIA
RATIO AUSTRALIAN PENSION FOR
-
IN AUSTRALIA
RATIO
52% 59%
*The ratio of Australian and New Zealand incomes assumes an exchange rate of $NZ1 = $A0.85, close to average value since 1990.Source : Andrew Coleman, Motu Research
: Australian Treasury
Retirement Income Security for Younger New Zealanders Page 45
SECTION 14 How would this change our future?
If we are to have everyone in New Zealand able to enjoy a comfortable
retirement then most of us will have to save more than we currently are.
In Australia they made saving for retirement compulsory but also made
it tax advantaged relative to most other forms of investment. In New
Zealand we have compulsory taxation to fund NZS and have provided
incentives for participation in the voluntary KiwiSaver scheme. To put
more New Zealanders in reach of a comfortable retirement we will need
most employees contributing five per cent of their income, backed with
another five per cent from their employer.
Last year at around the time of the Budget, the FSC commissioned Horizon
Research to ask New Zealanders their attitudes toward compulsory
participation in KiwiSaver and also what they were likely to do if there was
a day of enrolment into KiwiSaver with the option to drop out later.
Given the heat of the debate on compulsion over the past 40 years it is
perhaps surprising that a majority of people by age, gender, ethnicity, income
and political party support, now favour compulsion. [See Appendix 1]
However when asked what they would do following automatic enrolment
into KiwiSaver with the option of withdrawing later, some 40 per cent or
more of the people asked under 40 years of age, said they would opt out.
[See Appendix 2]
As these people include the generations most likely to face a delayed date
of eligibility for NZS and a much longer life expectancy after 65, it does
suggest that a level of take up of KiwiSaver above 60 per cent will only be
achieved with either stronger incentives or compulsion.
Evidence from New Zealand and elsewhere indicates that even generous
incentives won’t ensure most people participate. If membership of
KiwiSaver and an increasing level of contributions were compulsory, then
the fiscal cost of incentives could be avoided.
These are decisions for the community to make but the do nothing option
appears to be unsustainable.
If tax rates have to continually increase to fund retirement incomes
for more people in retirement living longer, paid for by fewer people in
employment, then more and more of our best qualified young people
will move to countries such as Australia where they can enjoy higher
retirement incomes and lower taxes.
Most New Zealanders want their children and grandchildren to be able to
stay here. To make that possible we do need to talk about how we should
fund future retirement incomes in New Zealand.
Page 46
Pensions for the Twenty First Century
SECTION 15 Can contribution-based retirement pensions be fair for women and the low paid?
Women live on average several more years than do men after 65. That
gap is narrowing but it still exists. Living longer is obviously good but if
men and women pay the same amount into a KiwiSaver account and then
turn that into an annuity (pension) on retirement a woman would be paid
less each year because she is expected to live longer.
It is also a fact that women are more likely to have taken time out of the
workforce to have a family or care for a relation. If you have less time
earning from paid employment and consequently lower savings it is likely
your retirement savings pot will be smaller as a consequence and your
pension will be smaller.
If women continue to be paid less they will also be less likely to achieve
the same level of retirement savings as a man with similar talents and
ability based on the same proportion of their income being put into a
retirement account.
Some people therefore argue that standard level benefits paid from
taxation are fairer for women. However, the same evidence can be used to
argue that men are short changed by tax paid pensions, as they are likely
to receive a lower payout in retirement compared with the tax they pay
from earning more in employment but living less time in retirement than
most women.
How does the KiwiSaver Plus plan suggest we deal with these issues?
First, the proposal is to keep NZS, but it is expected the age of eligibility
will move out as longevity gradually increases. NZS will continue to
provide everyone with a guaranteed income from the age of eligibility and
women are more likely to be in the group that lives the longest.
Secondly, we propose that the taxpayer, by way of Government, should
commit to top up the retirement account of anyone who has contributed
but who does not have sufficient savings to fund a pension equivalent to
NZS at 65. This not only helps women who may have spent time outside
the workforce it will also help anyone who has had low earnings over their
adult lives. It will also assist those who have suffered poor returns on their
investments which would have taken their retirement pot below the level
to fund a pension equivalent to NZS at 65. This may be quite important
if someone’s retirement came after a couple of bad years for investment
returns. We have also proposed that your contributions be guaranteed so
you must get back at least what you saved.
The cost of providing a top-up guarantee is relatively modest as few
people suffer a very low income for most of their working lives or spend a
lot of time outside of the workforce. While these arrangements will ensure
every participant will end up with an adequate fund for retirement we need
one more thing to address the fact that women live longer.
We propose that the Government consider holding a tender to supply
gender neutral fixed-term pensions so that anyone can use their
retirement nest egg to purchase a pension at least equivalent to NZS.
We propose that you would only need to convert a sufficient amount of
your retirement pot to purchase a pension equivalent to NZS. Any other
money in your account will be available for you as a lump sum to invest,
to purchase a higher pension or to spend as you wish. Some countries
pay the contributions for women or men while they are on parental leave
and some schemes split the contributions of a couple so they both have
an equal balance in their retirement savings accounts even where their
incomes are different.
This approach means that everyone who participates has the option of
retiring at 65 and that the arrangement is fair for women and the low
paid. As is currently the case if a couple was to separate or divorce the
combined value of the KiwiSaver Plus account balances would be split
evenly between the separating parties.
No Change PAYGO NZS Pension $
Pension $
No Change PAYGO NZS Pension $
Pension $
* This would be topped up to the level of NZS.
Retirement Income Security for Younger New Zealanders Page 47
SECTION 16 Can a contribution-based retirement pension be fair for Maori?
The Pakeha population age structure is gradually evolving to look like a
skyscraper with very similar numbers in each age band until you get to
over 65 when more people begin dying off.
The Maori population meanwhile is more like Mt Taranaki, a lot of young
people but each older age band has fewer people in it and at the peak
there are very few people over 65.
Maori also do have a lower life expectancy at birth than Pakeha. Once
they get to 65 their life expectancy is still lower but not proportionally as
different from Pakeha as life expectancy at birth.
Some Maori have argued for a lower age of eligibility for NZS for Maori as
they pay taxes but are less likely to get to 65 or enjoy a long retirement.
As campaigns for quitting smoking and healthier lifestyles take hold and
if Maori incomes improve, we would expect the Maori/Pakeha differential
in life expectancy to narrow. If you are pessimistic about your life
expectancy an approach that allows you to build your own retirement
account and keep taxes lower may have attractions for many Maori. With
the current NZS if you die prematurely you have funded the retirement
incomes of the previous two generations but you yourself will not receive
such an income from the next two generations. As your KiwiSaver Plus
retirement savings belong to you, if you die prematurely the balance in the
account goes to your estate to benefit your family as do pension payments
for the remaining years of your fixed-term pension.
Page 48
Pensions for the Twenty First Century
SECTION 17 What does this mean for people of different ages?
LIFE STAGE
education and training
future
Retirement Income Security for Younger New Zealanders Page 49
SECTION 18 Why now, to start saving more for retirement?
The circumstances of last century made it a very good time to minimise the
cost of funding retirement incomes by having the working tax payers pay for
the pensions of the very small number of people over 65.
The trends this century are the complete opposite. The numbers over 65
are growing more rapidly than the numbers in the workforce and we are
living much longer in retirement.
There are three reasons why we should start saving more for retirement
sooner rather than later.
First, at the current time we still have many of the baby boomers and the
subsequent generations still in employment and capable of both earning
and saving more prior to retirement. We will soon transition to having a
much higher proportion of our population in retirement as greater numbers
retire and we live much longer in retirement.
Secondly, the benefits of compound interest take time. If we start saving
more now, the compound returns (the interest we will earn on the interest
we leave in our KiwiSaver accounts) will be much greater than if we delay.
If we delay, the proportion of our income we need to save to fund our
retirement incomes grows quite rapidly. If we delay too long we will not be
able to afford to both pay the taxes to fund the pensions of those already
retired and also save for the self-funded part of our own retirement incomes.
Thirdly, the politics of making any changes to pension policy gets more
difficult as the over-65 age group becomes a greater proportion of society,
as voters don’t like changing the pension entitlements of existing pensioners
because they recognise how difficult it is for them to change their work
and savings patterns. Politically sustainable alterations to pension policy
need to be agreed to well in advance. It will be easier to do this before the
number of people on a pension increases significantly. As younger working
taxpayers have the option of going to Australia or elsewhere to avoid paying
higher taxes if no changes are made, change should be made before it
becomes politically difficult. If no change occurs, we face the worst of both
worlds where we can’t afford the cost of the retirement income funded from
taxation but it is too late to make the transition to greater reliance on savings
to fund retirement incomes.
Table 35 – Funding retirement incomes in 1955 and 2055
Funding retirement incomes in 1955 Funding retirement incomes in 2055
if you start at age 25 on 10% contribution rate:
Account balance at 65 Account balance at 70
Female Female
Starting age
25
35
45
55
Page 50
Pensions for the Twenty First Century
SECTION 19 Summary and recommendations
Table 37 – Summary and recommendations
ISSUE OR OPPORTUNITY
-
-ment incomes it is sustainable to fund from
Agreement that the age of eligibility for NZS
Funding retirement incomes from savings -
ment incomes from saving rather than from move to greater reliance on savings to fund
-
-the age of eligibility moves above 65 then
10-12% of our incomes to achieve that and
increase their savings steadily by 1% a year until contributions reach 10 to 12%
eligibility for NZS to have an income at least
NZS could be achieved on the basis of a reasonable investment return say 3% or
Zealanders could achieve a comfortable
discussion on the future retirement income
Agreement to gradually raise contribution
Agreement that some form of structured
Retirement Income Security for Younger New Zealanders Page 51
http://www.motu.org.nz/publications/detail/motu_note_7_behaviour_
economics
http://www.motu.org.nz/publications/detail/motu_note_6_mandatory_
retirement_income_schemes
http://www.nelm.nhs.uk/en/NeLM-Area/News/2009---October/05/Ageing-
populations-the-challenges-ahead/
www.nber.org/feldstein/aeajan8.pdf
http://www.sciencedirect.com/science/article/pii/S1573442002800118
http://www.oecd-ilibrary.org/finance-and-investment/pensions-at-a-
glance-2011_pension_glance-2011-en
http://connection.ebscohost.com/c/articles/404081/macroeconomic-
aspects-social-security-reform
transition to greater reliance on SAYGO to
today on either the median or average
having earned either the median or average
cross the Tasman to double their
to start using savings more to fund
to greater reliance on savings for funding retirement incomes and the timetable for
Page 52
Pensions for the Twenty First Century
TOTAL A B C E F
ALL 2321 100%
SEX
Female 51% 100%
49% 100%
AGE GROUP
18-24 years 13% 100%
25-34 years 17% 10% 100%
35-44 years 18% 36% 9% 100%
45-54 years 21% 100%
55-64 years 17% 100%
65-74 years 12% 100%
75 years or over 3% 4% 100%
Under 18 years 1% 100%
2% 100%
0% 19% 100%
14% 4% 100%
21% 100%
8% 100%
5% 100%
10% 100%
39% 13% 100%
0% 100%
3% 100%
Chose not to vote 16% 100%
9% 34% 14% 100%
Green Party 5% 100%
1% 27% 100%
Labour Party 25% 33% 100%
2% 28% 100%
National Party 34% 100%
3% 34% 5% 100%
2% 100%
United Future 1% 29% 16% 100%
Was not eligible to vote 0% 100%
Source: Horizon Polling Budget 2011
Retirement Income Security for Younger New Zealanders Page 53
TOTAL A B C E F
ALL 2321 100%
SEX
Female 51% 100%
49% 100%
AGE GROUP
18-24 years 13% 100%
25-34 years 17% 10% 100%
35-44 years 18% 36% 9% 100%
45-54 years 21% 100%
55-64 years 17% 100%
65-74 years 12% 100%
75 years or over 3% 4% 100%
Under 18 years 1% 100%
2% 100%
0% 19% 100%
14% 4% 100%
21% 100%
8% 100%
5% 100%
10% 100%
39% 13% 100%
0% 100%
3% 100%
Chose not to vote 16% 100%
9% 34% 14% 100%
Green Party 5% 100%
1% 27% 100%
Labour Party 25% 33% 100%
2% 28% 100%
National Party 34% 100%
3% 34% 5% 100%
2% 100%
United Future 1% 29% 16% 100%
Was not eligible to vote 0% 100%
Source: Horizon Polling Budget 2011
TOTAL A B C
ALL 1135
SEX
Female 48% 18% 100%
52% 100%
AGE GROUP
18-24 years 11% 100%
25-34 years 14% 100%
35-44 years 17% 34% 100%
45-54 years 20% 100%
55-64 years 15% 28% 100%
65-74 years 18% 100%
75 years or over 5% 30% 100%
Under 18 years 1% 100%
2% 100%
0% 100%
14% 100%
19% 100%
7% 100%
3% 34% 100%
11% 100%
43% 100%
0% 42% 58% 100%
2% 46% 100%
Chose not to vote 18% 51% 100%
10% 100%
Green Party 3% 27% 100%
1% 100%
Labour Party 25% 100%
2% 100%
National Party 33% 100%
4% 40% 100%
1% 100%
United Future 1% 100%
Was not eligible to vote 0% 100% 100%
Page 54
Pensions for the Twenty First Century
Source: FSC Horizon Research Dec 2011
Source: Motu Research December 2011
Last year the FSC asked Horizon Research to ask adult New Zealanders how
long they expected to live past 65. The results below indicate that most
people are likely to be underestimating their likely life expectancy past 65.
The estimation gap is largest in those age groups where they are most likely
to be able to save for retirement. The same research indicated that most
people had an understanding of what they would need to be comfortable
in retirement but most people could not make a good estimate about how
long it would take to double their money from a certain interest rate and
keeping the interest in the account to earn interest on interest. Other
research undertaken internationally reveals that most people have difficulty
understanding what size of retirement savings pot would be needed to fund
a level of pension.
Year of Entitlement for NZS at Age 65
Female Female Female
2011
2012-2021
2022-2031
2032-2041
2042-2051
2052-2058
2059-2061
Table 40 - Underestimating longevity
TOTAL
10 years11 years12 years13 years14 years15 years16 years17 years18 years19 years20 years21 years22 years23 years(24 years(25 years26 years27 years28 years29 years30 yearsTotal
23%
6.0%)7.4%)
100%
Retirement Income Security for Younger New Zealanders Page 55
6. How much would be in your retirement account at 70 if you delay taking up your pension till then.
7. The KiwiSaver Plus pension your account can purchase in 2066.
8. What you would have received if you had collected NZS from age 70.
AT AGE 65 AT AGE 70
Earnings in
$Fund Balance$
SAYGO
Self-Funded Pension $
No Change PAYGONZS $
Fund Balance$
SAYGO
Self-Funded Pension $
No Change PAYGO
Quintile 1
Quintile 2
Quintile 3
Quintile 4
Quintile 5
Quintile 1
Quintile 2
Quintile 3
Quintile 4
Quintile 5
1. e.g. income levels Quintile 1 is the aver-age income of those people in the bottom fifth of earnings assuming that the person stays on that relative income for the whole of their working life.
2. The annual income for someone in this category in 2011.
3. How much will be in your retirement account at 65.
4. The pension your KiwiSaver Plus account can purchase at 65.
5. What you would have received from NZS if the pension was still available at 65 in 2061.
(To interpret the table see notes in orange)
Pensions paid from 2061 (age 65) or 2066 (age 70) comparing the no change PAYGO pension (NZS) with the proposed SAYGO (KiwiSaver Plus) pension (assumes 10% contributions commence from day 1 (i.e. no phase-in)
** As we assume that wages increase each year the PAYGO pension (NZS) paid will be higher by the time you get to 70.*** The mean income relates to earnings for those in paid employment as at June 2011. The other incomes are expressed as lifetime earnings relative to the mean. They do not represent a cross-sectional income distribution. The distribution by quintile is assumed to be the same for males and females.
Page 56
Pensions for the Twenty First Century
This Table shows what you can expect as a KiwiSaver Plus pension when you retire in 2061 at 70 if we phase in the target 10% contribution rate over 10 years.
** As we assume that wages increase each year the PAYGO pension (NZS) paid will be higher by the time you get to 70.*** The mean income relates to earnings for those in paid employment as at June 2011. The other incomes are expressed as lifetime earnings relative to the mean. They do not represent a cross-sectional income distribution. The distribution by quintile is assumed to be the same for males and females.
AT AGE 65 AT AGE 70
Earnings in
$Fund Balance$
SAYGO
Self-Funded Pension $
No Change PAYGONZS $
Fund Balance$
SAYGO
Self-Funded Pension $
No Change PAYGO
Quintile 1
Quintile 2
Quintile 3
Quintile 4
Quintile 5
Quintile 1
Quintile 2
Quintile 3
Quintile 4
Quintile 5
Retirement Income Security for Younger New Zealanders Page 57
The table below assumes we decide to include the 1% cost for insurance and the 0.1% cost of the capital guarantee on contributions. This requires contributions to rise to 12% of income to be an effective 10.9% contribution rate into your KiwiSaver Plus account phased in over 12 years.
** As we assume that wages increase each year the PAYGO pension (NZS) paid will be higher by the time you get to 70.*** The mean income relates to earnings for those in paid employment as at June 2011. The other incomes are expressed as lifetime earnings relative to the mean. They do not represent a cross-sectional income distribution. The distribution by quintile is assumed to be the same for males and females.
AT AGE 65 AT AGE 70
Earnings in
$Fund Balance$
SAYGO
Self-Funded Pension $
No Change PAYGONZS $
Fund Balance$
SAYGO
Self-Funded Pension $
No Change PAYGO
Quintile 1
Quintile 2
Quintile 3
Quintile 4
Quintile 5
Quintile 1
Quintile 2
Quintile 3
Quintile 4
Quintile 5
Page 58
Pensions for the Twenty First Century
Source GoldmanSachs Research Report 6 September 2010 p.35 Economics; A Study of Australian Housing: Uniquely Positioned or a Bubble?
YEARAUSTRA-
INTEREST
INTERNA-TIONAL
INTEREST
PROPERTYAUS-TRALIAN
INTERNA-TIONAL
INTERNA-TIONAL
ALTER-
ASSETS
A$ RESI-
PROPERTYPROP-ERTY
5 year CAGR
10 year CAGR
15 year CAGR
20 year CAGR
Cash
Australian Fixed Interest
International Fixed Interest
Australian Shares
International Shares
Alternative Assets
Retirement Income Security for Younger New Zealanders Page 59
* If we decided we wanted to include a base level of insurance for hardship events and a capital guarantee, the contributions would need to go to 12 percent (10.9% effective) to do so. This would be achieved by having two more years with 1% increases each year until the contribution level reached 12% (6%t from the employee and 6% from the employer).
% % % % % % % % % % %
Total
Current
Total
Total
Total
Page 60
Pensions for the Twenty First Century
2012 2013 2014 2015
JULY – SEPTEMBER 2012-
ing of Retirement Incomes covering
-able incomes in retirement for most
SEPTEMBER 2012
-
an All Party Committee on Retirement
OCTOBER 2012Public Consultation launches
Retirement Income Policy meets and
DECEMBER 2012.
FEBRUARY 2013
of submissions and recommendations for
MARCH 2013
Income Security meets and agrees
APRIL 2013.
APRIL/MAY 2013
MAY/JUNE 2013All Party Select Committee
JULY
AUGUST/SEPTEMBER 2013
NOVEMBER 2013
If the Bill does not receive a
FEBRUARY 2014All Party Committee meets to
MAY 2014Referendum Public Information
legislation NOVEMBER 2014.Automatic enrolment from 1 APRIL 2015.
Retirement Income Security for Younger New Zealanders Page 3
QUALIFYING AS ANNUAL RATE
Single - living alone
Single - sharing
Source: Ministry of Social Development
Here are the standard rates of NZ Super from 1 April 2012 after tax has been deducted at rate ‘M’.
Financial Services Council of New Zealand
Level 12, City Chambers Cnr. Johnston & Featherston Streets
PO Box 1514, Wellington 6140 New Zealand
Ph: +64 4 473 8730 Fax: +64 4 471 1881
Email: [email protected]
www.fsc.org.nz
www.yourwealth.org.nz
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