The Retirement Commissioner warns New Zealand Superannuation isn’t sustainable in its current form, so we need to prepare for change.
Diane Maxwell says it’s inevitable the period of time you need to have lived in New Zealand to receive Super, as well as the age of eligibility, will need to be pushed out.
She says means testing is on the horizon – as difficult as it is to implement.
And the amount individuals and their employers are made to contribute towards schemes like KiwiSaver will need to be hiked.
It takes 12 people who earn $60k a year to fund a super-annuitant
Speaking in a Double Shot Interview, Maxwell says, “We have to prepare the ground for policy change.”
Under the existing system, you may be eligible for Super if you’re a 65-year-old legal New Zealand resident, who’s lived here for at least 10 years since you were 20, with at least five of these years being since you were 50.
You may qualify for Super with less than 10 years’ residence if you have migrated to New Zealand from a country we have a social security agreement with.
Super is universal, you will receive it even if you continue to work, and it’s indexed to wages, so went up 2.7% this year.
Maxwell explains the Government used around $11 billion (net) of taxpayer money to pay for Super in the past year.
A person with an annual salary of $60,000 pays around $1,800 towards a super-annuitant, which means it takes around 12 of these people to fund a super-annuitant for a year.
Maxwell points out the NZ Super Fund, which is worth around $30 billion at present, isn’t going to start paying out until around 2030. When it does, it will fund around 9% of our annual super needs.
“We know that in 20 years, the number of people over 65 will have doubled. In 20 years, the cost will have tripled. So it will be up to almost $40 billion (net) to pay out in Super in its current form.”
“That’s not going to work… It’s just simply not going to be possible.”
Maxwell says you have to think about the costs of health and residential care in additional to Super, when considering the cost of our ageing population.
For example, over 65s already account for 42% of the $11 billion New Zealand’s district health boards spend in a year.
Maxwell admits that at around $380 a week after tax for an individual, the amount super-annuitants receive is already lean.
“Nobody’s going to the Bahamas on it.”
Yet she concludes: “It [Super] won’t be sustainable in its current form.”
So what do we change?
Where to draw the line with means testing?
Maxwell says means testing is a tough option, yet inevitable.
The question is, where do you draw the line?
For example, should a couple, in a good financial position at retirement after being frugal most of their lives and selling their home, be excluded from receiving Super, while someone who’s lived up large, bought a BMW, drank Veuve and reached retirement with nothing, qualifies?
“The critical thing with means testing is, where do you draw your line so you don’t capture the people who’ve just worked hard and done it well and saved?
“If you draw the line too high, you don’t really capture that many people. And I know we’ve all got stories about billionaires and millionaires on Super, and people banking millions. In reality, in numbers terms, those numbers aren’t very many people.”
Maxwell says taking Super away from this top echelon won’t make much of a difference in terms of making Super sustainable, because there simply aren’t many people in this category. The bulk of New Zealanders have no, very little or moderate amounts of money.
Maxwell adds: “If you include the family home in assets testing for means testing, then things get very very messy. There’s a lot of arbitrage; people sell homes and do all sorts of things.”
She’s received feedback means testing isn’t working that well in Australia.
Asked whether a move away from universal Super would be political suicide in New Zealand, she says: “I think we’ll get to a point when it becomes inevitable.”
Making it harder for migrants to qualify for Super
Maxwell agrees that as migration sees our population burgeon, the 10-year time period you need to have lived in New Zealand as a resident, will need to be expanded.
“I suspect where we’ll get to is that 10 years is not long enough.
“We are a very diverse nation. We have great immigration – that’s because this is a great place to be. Over time, that will not be sustainable and I believe that will have to go up.”
NZ First Leader, Winston Peters, has campaigned it’s unfair that New Zealanders who have paid taxes here for most their lives and are subsidising the retirement of people new to the country, who may never have contributed at all.
He claims around 80,000 immigrants have arrived in New Zealand since 2000, who were over the age of 50 and came under the parent reunion category.
Maxwell says, “I don’t think people come to New Zealand with a view that in 10 years they’ll be on Super.”
Yet she admits: “The pinch will be when people bring parents to New Zealand and within 10 years they’ll be on Super if they’re a resident or citizen.”
Getting individuals and/or their employers to hike their contributions
“The role of private provision… will have to increase. We’re all going to have to work out how we do that,” Maxwell says.
She recognises hiking minimum contributions to KiwiSaver for example, is an obvious way of doing this, as it’s a joint effort between individuals and their employers. Yet high KiwiSaver fees need to be dealt with first.
“If we can get fees down on KiwiSaver, because it eats into your sum, then fantastic. It’s a good vehicle.”
Maxwell says she will also be talking to the Government about taxation on KiwiSaver returns.
Furthermore, she will be recommending people over 65 are able to join KiwiSaver.
“As people continue to work longer, someone may get themselves in a position where for whatever reason they haven’t joined. I’d like [them] to be able to join.”
Maxwell does however recognise: “KiwiSaver is a great savings vehicle. It’s not for everybody. For some people who are self-employed, starting a new business, low income or no income, it may not be the vehicle.”
Getting voters on board the concept of raising the age of entitlement for Super
Maxwell is all for raising the age of entitlement for Super, but hopes this won’t happen for at least another 10 years.
“Nobody’s grabbing it today. But I think our view of 65 is a historical one. We see 65-year-olds as old – they’re not. In another 20 years, it will seem a no brainer. Getting super at 65 in 20 years’ time will just seem a little bit odd.
“If the age was 67 today, we’d save $1.6 billion [a year].”
Yet as she’s mentioned to Interest.co.nz before, she says it’s vital the Government gives people enough warning before implementing any changes.
She says until people like herself communicate the pressures our ageing population is putting us under, changing the age of entitlement is “going to be a vote loser”.
“Until the voting public are given, rightfully, more information that they can make their judgement calls on, then we won’t get a change. We have to prepare the ground for policy change.”
Maxwell says this is happening already.
“We are going to have to change, but we’ve got time.”
Eighteen OECD countries have raised the age of entitlement for super to 67, 69 and 70.
Maxwell says New Zealand is watching what is being done in this space overseas.
She maintains New Zealand is doing well gearing up to deal with an ageing population compared to Australia, the UK and US. As for Asia, a number of countries don’t even have schemes like Super in place.
“Our population’s not ageing nearly as fast as many Asian populations – certainly Japan… They think their population will fall below 100 million in the next 30 years, just because of their ageing population.
“They have 1.3 million people die every year and it’s going to go up to 1.7 million people.”
Maxwell concludes: “We are going to have to change, but we’ve got time.”