By Andrew Coleman*
Between 1975 and 1977, New Zealand scrapped the compulsory saving scheme that was introduced in August 1974 and adopted what is now the most unusual retirement income and tax policies in the OECD. It is becoming increasingly obvious that this system has problems, particularly for people aged under 45. To mark the 50th anniversary of the compulsory saving scheme, this series of articles re-examines whether New Zealand’s retirement income policies could be modified or redesigned to better suit the 21st century.
Last week it was observed that the most important “under the hood” pension issue is whether they are funded on a pay-as-you-go basis or a save-as-you go-basis. In a pay-as-you-go system, a government collects taxes and immediately pays them out as pensions and no assets are accumulated. In a save-as-as-you-go system the taxes are accumulated in a sovereign wealth fund and invested before the pensions are paid out at a subsequent date. (In a compulsory saving scheme the contributions are placed in private saving accounts rather than a single large public account).
Because save-as-you-go and pay-as-you-go pension schemes accumulate different amounts of assets, they impose different costs and benefits on different generations of people. Sometimes young people would be better off with a save-as-you-go retirement system and sometimes they would not. These costs can be calculated using arguments based on the economic ideas developed in the 1960s by Peter Diamond and Edmund Phelps. For those who are interested, modern treatments are Barrel and Weale and Diamond.
One of Diamond and Phelps’ main insights was that the performance of a save-as-you-go scheme relative to a pay-as-you-go scheme depends on whether the economic growth rate is higher or lower than the returns people can get from investing their savings. If there are lots of opportunities to make high yielding investments, funding the Government retirement income system on a pay-as-you-go basis imposes very large costs on current and future generations of young people, because young people end up paying much higher taxes than is necessary to fund their own retirements. However, if investment opportunities are poor, or the size of the economy is growing rapidly because of rapid population growth, the reverse is true. If much of the money people save and invest is wasted, it is better to use a pay-as-you-go system that simply transfers money from young and middle-aged generations to older people.
The rule discovered by Peter Diamond and Edmund Phelps can be expressed quite simply: a save-as-you-go system works best when the return to capital investments exceeds the growth rate of an economy, or “r > g”. An economy where this is true is called ‘dynamically efficient’. A pay-as-you-go system is better when the returns to capital investments are less than the growth rate of economy, or “r < g.” This type of economy is called ‘dynamically inefficient.’ If you have a pay-as-you-go system in a dynamically efficient economy, young and future generations face big opportunity costs and would have been better off if previous generations had chosen a save-as-you go system. Most modern economies are dynamically efficient, and this is true for New Zealand over the last 30 years. This suggests that if New Zealand had not cancelled the compulsory saving scheme started in 1975 and replaced it with an expanded pay-as-you-go scheme, current and future generations of young New Zealanders would be much better off.
When an economy is dynamically efficient, the opportunity cost that young people face because they have inherited a pay-as-you-go rather than a save-as-you-go funded scheme is the extra amount they have to pay for in taxes for the pensions they receive. To calculate the size of these costs, suppose that the government initially introduced a save-as-you-go pension scheme, one that collected taxes from a particular generation of working age people and placed them in a Government-run investment fund such as the New Zealand Superannuation Fund. These contributions, plus all the interest and dividends and business earnings would be accumulated and used to pay the pensions of the contributors when they eventually retire, at which point the investment fund would be run down to zero. For example, suppose you put $1000 in an account every year from age 25 to 65, and compounded it at a 5% real rate of return (this is the average rate of return to investments, not the interest rate). At age 65 you would have $127,000, which is enough to give you a pension of $8600 every year for 25 years.
If the government introduced a pay-as-you-go scheme instead, the funds it collects would not be invested. But this does not mean the return to a pay-as-you-go scheme is zero. Rather, when the amount of the pension is a constant fraction of wages, the return to a pay-as-you-go scheme is approximately the growth rate of the economy, or the “g” in the formula “r > g”. The growth rate of the economy has two parts. The first part is the increase in average output per worker, which is closely related but not identical to the growth rate in wages. Wage growth is a part of the return to a pay-as-you-go pension because the pension increases as wages increase. The second part of economic growth comes from the increase in the size of the workforce, which in the longer term is about the same as the population growth. When the population is growing, there are many more working-age people than retired people, and the return reflects the fact that each person only has to pay a fraction of the pension they are likely to receive.
Over the last 30 years, the real economic growth rate in New Zealand has averaged just less than 3%, including population growth. If you compound $1000 per year at 3% instead of 5%, you would only be able to afford a pension of $4300, not $8600. The additional return from being able to invest at a much higher rate than the growth rate of the economy means you could double the size of the pension that is available for the same tax payments – or halve the amount of tax you need to pay when you are young for the same pension. This is the opportunity cost that young people face because they are inheriting a pay-as-you-go pension scheme rather than a save-as-you-go scheme. In dollars, the net cost of government pensions in New Zealand is approximately $4200 per adult per year. If we had a fully-funded save-as-you-go system paying the same pensions, the contributions for the same pension would be halved, a saving of $2100 per adult per year. I know that reading about retirement income policy may be boring, particularly if you are under 30, but for many people an extra $2100 per year per person probably counts as a nice-to-have.
A pay-as-you-go scheme has a second implication – the opportunity cost that a cohort experiences varies over time, as growth rates and investment returns vary. If you are born at a time when the young population is increasing rapidly, there are plenty of young workers to support a small number of old people. This means each person has to only pay a relatively small amount of taxes to pay for pensions, and the opportunity cost is relatively low. Alternatively, if you are born at time when the population growth rate is small and the number of old people is large, each young person has to pay a much larger amount. To some extent, the costs of a pay-as-you-go system on different generations are arbitrary, depending on population growth rates.
It is possible to do quite complex calculations estimating how population growth has affected the lifetime tax payments different cohorts have paid or will pay in the future, relative to the size of the pension payments they can expect to receive. These calculations show that under the current pay-as-you-go pension scheme, most people born before 1971 paid or will pay about half as much in taxes as they can expect to receive in pensions. This is largely because there weren’t many old people around when they were young. (Note that they would have paid even less if the pension scheme were operated on a save-as-you-go basis.) The generations born after 1980 are unlikely to be so lucky. The numbers aren’t certain as they depend on future birth-rates and inward immigration, but the rapid increase in the number of older people means it is extremely likely that people born after 1980 will pay significantly more in taxes, up to 50% more, than people born before 1981 for the pensions they receive. It follows that the decision to fund New Zealand Superannuation out of current taxes made New Zealand Superannuation a much better deal for older people than for people who are currently young – or for their children. This might explain why the decisions to adopt and continue with New Zealand Superannuation were so popular back in 1977 and 1997 – the costs were low because a disproportionately large fraction of the costs were pushed out into the future.
A different way of seeing this is to calculate the fraction of income that is paid out as pensions each year. The Treasury regularly estimates this amount as part of its long-term fiscal forecasts. In 2000, the net cost of pensions was 3.6% of GDP. (This is the cost after an allowance for the tax people pay on the pensions they receive.) Currently the ratio is 4.3% of GDP. By 2070 the ratio is forecast to increase to 6.7%, assuming pension entitlements remain fixed at 65% of the average wage. This is more than a 50% increase, largely because there will be a larger number of people who will be receiving pensions.
With a save-as-you-go system, there is no need for different cohorts to pay vastly different amounts to receive the same pensions: each cohort can pay enough to pay for their own pensions. This means New Zealanders could choose to reduce the fraction of the bill that young people and future generations will have to pay to fund government pensions, by changing the amount that is funded on a save-as-you-go basis. In fact, they already have, by creating the New Zealand Superannuation Fund. This is a good start, but the contributions are not particularly high – and the survey evidence discussed later suggests a majority of people would support higher contributions.
So why do we put up with a system that imposes such large opportunity costs on young people? Diamond and Phelps also worked out what happens if you try to change from one system to another – and they showed there is a catch. If the economy is dynamically efficient (“r > g”), it is not possible to costlessly change from a pay-as-you-go pension scheme to a save-as-you-go pension scheme. Making changes that reduce the costs on future generations will require some people who are currently alive to pay more or receive less than they would have if they simply stayed with a pay-as-you-go system. This creates all sorts of political problems, making a switch from a pay-as-you-go system to a save-as-you-go system difficult. This topic is the subject of next week’s article.
*This series and an accompanying paper are based on work I started in 2020 with Jeanne-Marie Bonnet while we were both at the University of Otago. I am very grateful for her assistance and insights. All errors remain my own.
(This article is part 4 in the series. Part 1 is here, part 2 is here, and part 3 is here).
**Andrew Coleman is a visiting professor at the Asia School of Business. This article is his personal view of retirement policy in New Zealand, based on academic study.
Coleman is on extended leave from the Reserve Bank of New Zealand, while working overseas. The views expressed in this article do not represent the RBNZ and are unrelated to work conducted at the Bank, which has no responsibility for retirement policy in New Zealand.
157 Comments
Indeed however it was a tumultuous time after the GFC. On the surface level it appears that nobody wants to ‘give up’ anything, or sacrifice money they could have now, for the next generations, and now it is reaching a point where it is becoming painfully clear. Governments also have made changes that sacrifice future gains and benefits, to pull the country out of harder times. This is a habit we need to stop and hold them to account for moving forwards.
The $1 billion a year the state is pouring into private KiwiSaver accounts ($521 a year each) ought to be going into the NZ Superannuation Fund for the good of all. The state has no business subsidising private savings, which ultimately will widen the gap between rich and poor.
I dunno about an asset test. I'm not against it, but I feel it can be more punitive. You don't buy groceries with assets.
An income test would be the way to go, it's not like people's living costs instantly go up $20k p.a. once they turn 65. There's potentially $1b in savings to be found just in the lucky 50k that are still in work earning over $100k p.a.
Biggest obstacle is overcoming this entitlement mentality that treats it like a loyalty scheme for paying tax, rather than welfare.
The very existence of the former absolutely depends on the latter group to exist. Wealthy people love complaining about how lazy or stupid poor people are, even though they depend on them to empty their rubbish bins, clean their offices, pick their fruit etc (while paying them minimum wage to do so).
Same. Start at the bottom and live within your means is the ticket. Financial advisors will advise you to save, invest and then have your super entitlement has a top up. This is what they will all tell you. The best thing to do is start young, set a target and strive for it. I set a target of 1 million bucks in retirement savings and thought it would be impossible. All going well I will end up with a 5 million fund, plus super on top. Education and preparation is the key, not complaining that other people listened and prepared. If the current generation of working age people do not start saving properly and make sacrifices now, we are going to have unbelievable old age poverty in 20-30 years time. It is completely avoidable and requires people to take personal responsibility now.
Yes, NZ Super is a backstop. That's why it must remain universally available to everyone over 65. But that doesn't mean people with significant other income should get it. People who sign up for NZ Super should automatically go on to a separate tax scale that will tax any income they get from other sources to claw back the NZ Super. If the other sources of income dry up, then they will benefit from being signed up for NZ Super.
You can as long as you adhere to the rules, which I believe have something to do with the value of the assets that you have support yourself whilst you seek new employment. There are no such rules with regard to the super entitlement as it is the same for everyone with the only restriction being that you must be over 65 to take up your entitlement to National Super. So, you are talking about a completely different scenario with a completely different set of rules. In this case, your logic is not correct.
I'm with Average Joe. Just because someone might have less than me, where do you get off implying he and I didn't work hard to accumulate our wealth? As with changes in the past, such as age of eligibility and benefit levels, any changes to NS have to be signaled well in advance.
The problem with AverageJoe and his $5 million is that he thinks he is 'entitled' to NZ Super. But NZ Super is a universal benefit to ensure that all old folk over 65 can live in dignity. AverageJoe with his $5 million can do that by himself. So if he insists on signing up for NZ Super he should be put on separate tax scale for his other income that will claw back the NZ Super that he feels entitled to but clearly doesn't need.
As a CA within a larger firm and working with clients for 30 years, exposed to around 4000 clients through that time period, seeing their lives playout. Regardless of luck, good timing, talent in business, enterprise success or career, very few end up with a 5m or greater fund in real dollars as at today. People believe the market stat and trends will hold for their lifetime while ignoring changes in demographics, monetary policy and the environment are working on a lazy assumption.
What year was that? In 1967 NZ shifted from the pound to the dollar, and the minimum wage was set at 57c per hour.
Interesting that if you spent that 57c on housing back then, it would be worth $58 worth of housing today. You were pretty well paid from that perspective! https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy/inflatio…
Yes, I bought my first house in 1967 for $11,500 (in dollars, not pounds) with savings from 5 years of delivering "The Auckland Star" newspaper after school and doing regular monthly money collections both for my own 'Star-run' and those for other 'runs' whose delivery boys didn't want to collect for their own 'runs'. I put down around $3,000 deposit and paid the balance with a solicitor's trust account loan, interest only. I obviously had to rent out the house to pay the mortgage. I sold it a decade or so later for around $46,000 to the motel-owner next door and foolishly went into a spec-build scheme with my father. The real estate market crashed by around 30% to 40% and had to sell at a loss.
$7.20 for me if memory serves, then shortly after they removed the youth wage and it went to around $9/hr overnight. Seemed cool at the time, but looking back on it, it was a foolish move IMO. Now we have teens living at home, working checkouts and collecting trollies for $23.15/hr and many doing jobs with double (or more) responsibility and pressure for only a fraction more.
Yes, wage compression is great. Every year more and more people get caught up by minimum and/or Living wage. Rendering their supposed "skills" and "experience" as obsolete.
They say upskill, so you work hard, study hard, learn way more, and bingo, you rise off the bottom for a year or two before the inevitable happens and you are caught again.
But don't worry. That min wage job still places you in the third tier tax bracket, so you must be rich...right?
Perhaps the sense of entitlement indulged in by those who become wealthy is a cause of social disruption in New Zealand. Poverty breeds anger and crime. Or rather, relative poverty, the gap between haves and have-nots, breeds anger and crime.
Perhaps the wealthy, instead of feeling entitled, should welcome the opportunity to contribute to a national superannuation fund that distributes equally to all who need it.
The issue being when many have gotten 'wealthy' by no means other than luck. If one bought a house in 2019 or before, then sold up 2022 they will have gained significant wealth for simply existing and maintaining their mortgage for a couple of years. This, in and of itself, does not breed contempt, but when said people claim that they got where they are out of hard work, this is where the entitlement breeds.
Now you're getting it. You'll have a lot more empathy when you realise it's luck all the way down.
It doesn't mean don't try, or don't appreciate your success, it just means realising the long list of factors that had to fall in line for you to achieve them. Just being born in a wealthy country and not being abused as a child in some way is an enormous leg up.
For most it is not by any action or choice they made. They were born and thus NZ society has committed them to destitution much like we committed them to institutions to be raped and tortured, denied any education or language not less then a few decades previously.
Nobody should feel entitled to receive a tax payer funded pension just for being successful in life. I earn a good income and pay net income taxes, and won't lose sleep if I reach retirement age and are deemed ineligible for state welfare for still working and earning a good income.
But that's the difference, the Boomer generation's default position is "what's in it for me", "what can I get", "I deserve it". And they wonder why they're so utterly despised.
I would say it does. Every generation has its entitled people, but there's no cohort more entitled than the boomers. If unsure, just ask them if we should means test the pension like is done in Australia.
Sorry, you're a millionaire with multiple income streams do you really need a tax payer top up? They will tell you they've worked hard and deserve it.
I don’t recall ever saying that anyone should get more from the super scheme because they put more in. Everyone gets the same. That is how it is. People that prepare and are able to support themselves and have a great retirement under their own steam and also receive their entitlement should really be looked up to as model citizens instead of attempts made cut them down because of their achievement. Sounds like the classic tall poppy syndrome we have in spades here.
by averagejoe | 26th Jul 24, 10:32am
I would say that those who contribute more are morally more entitled that those who contribute nothing.
What about people who for whatever reason can't "earn good income" eg those who prioritise parenthood (ironically using your assumptions likely leading to their children being more readily able to contribute in the only way you deem acceptable), those who have been traumatised by the state (do you really think those 200,000 [personally I suspect this figure is much higher] abused in state care should be expected to grow up and "earn good income"?), those who suffer various prejudices, those who are disabled, those who school failed, those who try hard but can't "earn good income", those who work multiple jobs just to pay rent and basic food, those who suffer poor health, those who focus on earning in their area of talent - contribute much but earn little eg artists, community sector - the list goes on.
Yes, and it is for all those people that the NZ Superannuation Fund is designed. It was not designed as a reward for the rich who have accumulated wealth through their lives and, quite properly, been taxed on their incomes to keep society going. NZ Super is an unearned social welfare benefit to ensure that everyone over 65 has the means to live in at least minimal dignity. Wealthy people over 65 who have significant other income should be paying a surtax to claw back the NZ Super welfare benefit they don't need to ensure there is enough for those who do.
Definitely an ever growing population of superannuants who expect a benefit paid for by young workers whose education, infrastructure and services are deteriorating around them.
Did you read the article? Nobody gives two flying shots how much tax you paid.
Just gonna keep this chart around for the socialist 65+ cohort with $5m in the bank https://figure.nz/chart/2eIStXKBWssxMIze
This is why vastly more money needs to be invested in the NZ Superannuation Fund to build a sovereign wealth fund that will finance NZ Super for future generations in decades to come. And that funding must come not from high taxes on the wages of today's income-earners, but from land tax, capital gains tax, inheritance tax, and gift tax, to clip the wealth of today's retired on their way to the cemetery.
Nzdan: 'I dunno about an asset test. I'm not against it, but I feel it can be more punitive. You don't buy groceries with assets. An income test would be the way to go, it's not like people's living costs instantly go up $20k p.a. once they turn 65. There's potentially $1b in savings to be found just in the lucky 50k that are still in work earning over $100k p.a.'
Agreed. But a problem is the increasing proportion of retired people who either are renters, or remain saddled with a mortgage. So perhaps, to level the field a bit, the income test should include the imputed income of rent saved by living in a mortgage-free home. (This might also require trust-busting.)
Yes but those retired people who are still renting or mortgaged didn't see their costs rise by $20k p.a. on their 65th birthday. It's sad that they'll have to work into retirement, but it's unlikely those on over $100k are heavily mortgaged into retirement.
Old people might need to start living a bit more within their means so we don't bankrupt the country.
I don't quite understand the point you are making here - over 65s who are still renting or mortgaged don't see their costs rise by $20k on their 65th birthday, but neither do over 65s who are living in a home they own mortgage free.
For me, the big issue with income but not asset testing is this: it effectively ends up punishing the less wealthy and favouring the wealthy. I don't see why it matters really whether you live the kind of lifestyle you have because of wealth you accumulated earlier, or because of wealth you are accumulating now through working. Put it this way: why should someone who owns a multi-million dollar house, a bach, a boat, several cars and has (say) 500 grand in a non-interest earning bank account get $20 k a year or so from the government just because they are 65 and have chosen not to earn an income, but someone who is renting, working and earning minimum wage get nothing?
I wanted a scenario in which it was clear that a person wasn't earning any income, so regardless of how the proposed income testing was going to work they weren't going to be hit by it. Of course realistically it is unlikely that any income test would require you to earn zero to access any amount of super!
Uh, because an income test does not kick in at the minimum wage. The income test would kick in at say.....$100k and then it dwindles your Super away from there. The Super payments abate as the income over this threshold increase, to a point where they hit $0.
As for the $500k in a non-interest bearing account, try getting an Unemployment Benefit with $500k in the bank. There's already mechanisms in place with other benefits with asset limits.
I assume your next point would be "well the wealthy would hide their assets" to get around it, sure there's nothing stopping people from committing fraud.
Perhaps I misunderstood you - I wasn't talking about getting the unemployment benefit. I was talking about whether Super should be income but not asset tested.
Presumably if Super was income but not asset tested, then there could be a scenario relevantly similar to the one I outlined: there is a very wealthy person with loads of assets, and a great lifestyle because of it, but very little income. My point was that it seems unfair to say that if Person A's lifestyle is a result of their assets, they should be able to get full super. But if Person B needs to continue earning an income, they should not get super.
Take your suggestion that there should be income abatement to $0 over a certain threshold - lets set that at $150k for the sake of argument. On your model, a person who sells an investment property worth $750k in year 1 and then puts that $ in a term deposit earning (say) 5% would presumably get $0 super in year 1 (as the income from the sale would put them over the limit), but then full super in years 2-5 (as the investment income would keep them under the limit). But someone who earned $750 (150k a year) over a five year period from actually working would get zero dollars in super. This doesn't seem fair to me.
Point being, I'm not arguing against any kinds of means testing - I just don't think it's fair to treat earned income differently from assets with regards to Super eligibility.
Well, yeah. They'd have realized a $750k income in the year, but that highlights the inherent problem with our tax system.
Selling a property for $750k that you might have owned for 30 years, and paid $30k for it, is not a tax event. This is despite making $24k p.a. in income over that 30 year period, whereas your average wage earner would've paid over $100k in tax of that $24k p.a. during that same time period.
Is your example fair to someone earning $150k per year? Probably not, but why should the tax payer fund the lifestyle of a retiree still earning over twice the average wage? They should've bought an investment property and sold it for $750k.
"So perhaps, to level the field a bit, the income test should include the imputed income of rent saved by living in a mortgage-free home. (This might also require trust-busting.)"
That might also simply be called what it is: Marxist envy theft of private property.
No, not 'paying rent to live in a mortgage-free house that you own': rather, paying tax on the imputed income of the money you save by NOT paying rent on a mortgage-free house that you own. The point being that NZ Super is not an entitlement that you have somehow earned; it is an unearned social welfare benefit to ensure that all can live in at least minimal dignity in old age.
How is taxing the working persons pocket instead not Marxist envy theft? Isn't it making people more responsible for their own lot in life? Aren't the right wing all for that? They seem to be in every instance except for the benefits they are (planning on) getting.
Perhaps, but you're ignoring over a century of history that has led to the design of the NS scheme as we now know it.
By all means, let's have a convo about what is appropriate and affordable for the country in the longer term but don't kid yourself about the lead-in time. If we went back to the settings of the original old-age pension scheme of 1898, which actually excluded most people that were above the age of eligibility, I'd be happy enough because my taxes would reduce, but that's not going to happen.
'How is taxing the working persons pocket not Marxist envy theft?'
Are we complaining here about advocating a surtax on the income of 'working persons' who want to grab a share of NZ Super, an unearned social welfare benefit designed to ensure at least minimal dignity to all people in their old age? No 'Marxist envy theft' here: just sensible economics.
Agree. What's next? Start taxing people because they have vegetable gardens or solar panels on their roof? Imputed income of grocery savings and cheaper power bills.
Watercare: Sir, I see you have invested in rainwater harvesting tanks. Here's an invoice for our lost income opportunity.
Re: Watercare example. I remember my father complaining about having to pay additional taxes for having a water tank for rain water collection (in Queensland).....it was abolished in 2007, but the government still did a grab for taxes on water falling from the sky onto your private property prior to 2007...
Owning a house to live in rent-free is an investment like any other. The dividend comes in the form of the rent saved (say $700 a week in Auckland). That dividend should be taxed like any other (at least when the receiver of that dividend has the other hand out to receive the social welfare benefit of NZ Super). Nothing marxist about it; simply the even-handed application of capitalism.
Why should it be taxed? If that is the argument then the financing costs of that investment should be considered deductible as well. It would be interesting to see how many millennials actually come out on top once the costs of actually maintaining an asset and financing it are taken into account.
The only credible and honest argument for the taxing of imputed anything is "I want the tax money so the government can pay for me to have things". I would respect that. Anything else is an exercise in goalpost shifting.
Pretty straightforward to turn assets into cash these days - reverse mortgages for starters.
All we're really doing is making all taxpayers ensure that houses are fully passed on to the next generation in untaxed inheritance - everybody pitching in to give gifts at random to the already fortunate.
A small number of working folk. If we're going to have a discussion about this on the basis of 'fairness' then it's good to be honest about who is actually making the tax contributions that the state is ultimately currently reliant on. I'd say a big part of the social contract that keeps those people working here and paying tax here is that they will have acess to this kind of support come retirement.
Millennials are now half-way through their working lives, paying huge mortgages and huge living costs. The idea that they're going to suddenly be able to pivot to finance their retirement, everyone elses and somehow get debt free as well as having families that they house (without becoming a burdern on the state) will become simply a question of "Is this even possible for us to do any longer in NZ?".
I would need to increase my income by roughly 40% before tax effectively overnight, which I would then have to fully commit to investing for the next 35 years in order to self-fund my own retirement and keep paying tax at the settings that finance current retirees. The only way that works is with an inheritance (which is supposely also something the government should have first rights to.... not entirely sure why, given they've done even less to earn it than I would have) or simply leaving for pasutres greener. I know which one looks the most appealling.
Yes, our taxes are loaded onto workers, especially high earners. Personally, when I speak to 20-40 year olds, none of them really expect Super to be there for them in the way that it is there for current retirees. I know I don't. Most of them don't have a coherent plan, but they know they will need to sort themselves out (probably just work till 70+).
The pivot you're speaking of it obviously too much. Current and near-retirees need to take a hit too. Delay the age people can claim super, asset test, means test.
As for inheritance - you take it for granted that the government has a right to 30+% of your hard earned money, but the chap down the road who doesn't work but gets a million dollar inheritance gets away without sharing a penny? Bizarre. Personally I like the idea of equality of opportunity - lower taxes for workers pulling themselves up by their bootstraps, higher taxes for those already born into wealth with all the benefits that accrues.
We don't have equality of opportunity and you can't tax your way to it. There's a difference between inheritances taxes the way other countries implement them, and the way people talk about it here - we tend to ignore things like rollover relief, or the thresholds that other countries use to make them palatable and stop them applying to ordinary people. We seem incapable of having an honest debate about this. We point out that other countries have taxes so we should to, without ignoring the pitfalls and concessions that make them workable and acceptable.
Tax just isn't that simple and we are poorly served by the quality of mainstream analysis and debate of our tax system.
As for means testing - I'm OK with it if means-testing specifically excludes retirement savings or nominated retirement savings products. There's no justification in taking from those who planned for winter to give it to those who may have lived to a much higher standard of living because they know someone else is going to pick-up the tab. The reward for being doing the right thing can't be getting sent to the back of the queue.
The biggest obstacle is irritating a growing segment of the voting population. Labour and National were burned by the superannuation surcharge of the late 80s / early 90s. Although few of today's politicians will remember that time, they're quite capable of working out such a move would be political suicide.
In a sense that's true. The superannuation surtax of the late 1980s and early 1990s was agreed on as necessary to Super's continued affordabilityy by all parties in Parliament except one man: Winston Peters. He's still alive, and would be just as vociferous now has he was back in 1996 and 1997, when he seduced National into abolishing the surtax from 1998.
The difference now is the ever-widening gulf between haves and have-nots; between home-owners and home-renters. The voting power will pass from today's haves to tomorrow's have-nots. Then watch out for the return of the surtax, inheritance tax, gift tax, capital gains tax, and land tax.
Can you enlighten us all as to how yo will asset test the recent arrivals from across the globe?
How we will asset test NZ's wealthy who operate through trust's, companies and tax havens?
Or are you just fine that kiwi mum and dad struggler are the ones who will be caught?
How do we stop people committing other benefit fraud? We investigate them and prosecute where necessary. The thought of going to jail seems to stop most people committing crime doesn't it?
That is like saying lets not tax income because there is a plumber I know who does cash jobs. Do you want honest plumbers to be disadvantaged?
Do you live in New Zealand ? Since we were soft on crime over the last six years, people wander around breaking into cars all over the place and just don't care. The police are too busy dealing with other crime to even investigate. So, the answer is no, people are not afraid of going to jail right now for committing crimes (particularly annoying petty crime like this).
Agreed.
A lot of older wealthy people spent a lot of their time buying up several houses as an income to look forward to in retirement driving the present housing shortage and thus extortionate prices.
But remember,the past governments enabled this and offered no viable alternatives that could of been attractive.
I suppose that is one of the issues why the governments of now are reluctant to do anything that may look like it would be unfair or a generational punishment for essentially doing nothing wrong.
This needs to be seen as an entirely predictable consequence of taxes on income being far too aggressive and savings chasing other types of investments as a result. 39 cents in the dollar for everything over $60K, which was then not adjusted for years on end. It's easy to pile in on the boomers, but realistically, the governments of the day bought that upon themselves. And the rest of us.
Given there's a qualifying requirement and that involves making contributions from their net wages / salaries, it's simply giving those who qualify a tiny % of their tax back. There is an argument that such incentives mean those people won't rely on as much state support later in life. I'm not sure it holds true, but there was a proposal a few years back (from Act, I think) that the extra $521 only be paid when people contribute more than the 3% minimum to their Kiwisaver.
Have you considered how to transition from pay-as-you-go to save-as-you-go? The common criticism of the change is that, because the current pensioners still receive a benefit, the younger generation has to pay both for their own super (through save as you go) and for the older generation through (by paying for the current pensions).
Precisely, but the flip side is that if we wish to stay as we are, then we need to either incentivise breeding more humans in this country, or continuing with population increase via immigration. This isn't digestible as we are already overshot as a species and can't keep increasing the number of humans at an exponential rate which the system currently relies on. The other issue being that due to such leaps in the cost of living currently, and low confidence in local and central government, most would be reluctant to trust that if they did start finding their own pensions, that the money would be invested appropriately. In essence, we are all as bad as each other, with younger generations now asking "what's in it for me", a learned behaviour by their predecessors.
I'm not arguing to stay as we are, just looking for discussion of how to implement a change and any unintended consequences.
One view is that compulsory kiwisaver is step towards means testing for national super i.e. national super become a 'top up' for those that don't have 'enough'. But that does not address whether to, or how to, change national super from pay-as-you-go.
NZ Super can transition from pay-as-you-go to save-as-you-go not by increasing income tax, but by introducing a capital gains tax, and reintroducing land tax, inheritance tax, and gift tax, so that the rich old bequeath some of their wealth to the NZ Superannuation Fund for subsequent generations. As the Good Book says, 'We brought nothing into this world, and it is certain we can carry nothing out.'
While also paying higher and higher percentages of their total working net earnings for the basics that other generations previously were able to afford with far more left over, for things like 'food' and 'housing'. In short, here is the short end of the stick - again. Funny how that keeps happening. You're going to see more and more middle- and middle-upper class families priortising getting out of huge mortgage debt over retirement investments and savings.
Quite how they're meant to finance everyone else's retirement as well as their own is something that people seem keen to ignore.
MLC ".....Have you considered how to transition from pay-as-you-go to save-as-you-go? The common criticism of the change is that, because the current pensioners still receive a benefit, the younger generation has to pay both for their own super (through save as you go) and for the older generation through (by paying for the current pensions)....."
The answer is - with great difficulty. But we have got to do it. A 30 - 40 year planned transition might help a bit.
We can't magic all the money needed out of mid air. Kicking the can down the road is just heading for disaster.
Businesses can also play a crucial role in shaping the future of pension systems and ensuring the financial security of their employees.
To encourage businesses to support their present and future employees in retirement planning, several strategies can be implemented. Businesses could provide retirement savings plans, similar to the 401(k) or pension schemes, to their employees as part of their benefits package.
By contributing to these plans, employers can help their employees build up savings for retirement and secure their financial future.
Employers could incentivize employees to save for retirement by matching a portion of their contributions to retirement plans. This not only encourages employees to save more but also demonstrates the company's commitment to their long-term financial well-being. Unfortunately employers are let of the hook in the present kiwi saver where this is concerned.
Businesses could offer financial literacy programs and retirement planning resources to help employees make informed decisions about saving for retirement.
By empowering employees with knowledge and tools to manage their finances, businesses can contribute to their overall financial security.
Providing flexible work arrangements, such as phased retirement options or part-time work opportunities for older employees, can help facilitate a smoother transition into retirement.
This can benefit both employees and employers by retaining valuable skills and knowledge within the business and productivity gains.
Also they could advocate for policies that promote retirement security, such as tax incentives for retirement savings or reforms to strengthen the social safety net for retirees.
By engaging in policy discussions and supporting initiatives that enhance retirement benefits, businesses can contribute to a more sustainable and equitable pension system.
It is about time businesses started to play a critical role in supporting the retirement planning efforts of their employees by offering retirement savings plans, providing financial education, promoting flexible work arrangements, and advocating for policies that enhance retirement security.
By taking proactive steps to support present and future employees in preparing for retirement, businesses can help build a more resilient and inclusive pension system that benefits both individuals and society as a whole.
Unfortunately it seems that businesses as a whole are reluctant to encourage or engage this conversation in any form and wish to enable the slow train wreck of retirement poverty that will hit the country in the next half a decade.
There was an era when there were very good pension funds operated by employers.
But they became administratively challenging following the great NZ economy reset begun by Roger Douglas - fringe benefit tax was a biggy I recall. Most were washed up and paid out.
This gave beneficiaries a windfall lump sum benefit of access to what were their retirement savings, when they were in the prime of their careers. This enabled mortgages to be repaid early, and pursuit of other investment opportunities. To be debt free and not paying rent opens up a whole different realm of possibilities.
And now we are at this impasse re continuing funding for national superannuation. Bloody neoliberal fanatics.
"Coleman is on extended leave from the Reserve Bank of New Zealand, while working overseas. The views expressed in this article do not represent the RBNZ and are unrelated to work conducted at the Bank, which has no responsibility for retirement policy in New Zealand."
The usual suspects.
Some years ago, Labour wanted to make changes to National Super and National opposed, then they both switched positions and, so, an impasse has bene perpetuated and time wasted for addressing the challenges of our changing demographics. I've long held the view that another Superannuation Accord should be considered.
During the late 1980s and early 1990s Labour and National both agreed to have a surtax on other earnings of people getting NZ Super, to keep it affordable. Winston Peters rebelled, and National bowed to him and scrapped the surtax in 1998. NZ Super has been paying the wealthy a pension they don't need ever since.
I find this quite confusing, possibly because I look at it from 'how does this affect me?' and also 'how will this affect my kids'? I pay massive taxes and over the course of my life will be a net taxpayer, so viewing this according to paying less tax than I receive from a pension doesn't hold true for me.
I fail to see the logic of arguing that NZ would have been better off if the save as you go scheme would have been better because the economy has been dynamically efficient for the past 30 years, when the Douglas Scheme was scrapped around twenty years prior. The argument may be valid, but the 30-year time period isn't. Similarly, using a hypothetical 5% return over 40 years then saying the real economic growth rate in New Zealand has averaged less than 3% over 30 years does nothing to help my comprehension.
I understand the point that as the ratio of older (retired) people increases, it places an increasing cost burden on the working cohort of the population. But I thought we were actually running a pay as you go scheme AND a save as you go scheme. The National Super is pay as you go. But isn't the NZ Super Fund designed to be a 'save as you go scheme'? In addition, Gen X and younger also have Kiwi-saver, which is a second, private, save as you go scheme.
I find this quite confusing, possibly because I look at it from 'how does this affect me?' and also 'how will this affect my kids'? I pay massive taxes and over the course of my life will be a net taxpayer, so viewing this according to paying less tax than I receive from a pension doesn't hold true for me.
Whether you are a net taxpayer across your lifespan is not relevant in context of when you reach the age to qualify for receiving NZ super. Because your pension it is not a piggy bank, as when you start drawing from it, that money is coming directly from current taxpayers at that time. What would be more relevant when you retire is how many taxpayers there are at that point, and currently we have mass retirements happening and large increasing costs of NZ super with less and less taxpayers underneath them to fund it.
I see your point that NZ Super fund, however it is there to generate returns to help fund the NZ Super scheme (lessen the load on the draw from current taxpayers), but it is inadequate to fund it in full, and Kiwisaver will help again to some degree, however it has major flaws such as being able to draw out in hardship, excessive fees, and the fact that people have to voluntarily opt into it.
"But I thought we were actually running a pay as you go scheme AND a save as you go scheme. The National Super is pay as you go. But isn't the NZ Super Fund designed to be a 'save as you go scheme'? In addition, Gen X and younger also have Kiwi-saver, which is a second, private, save as you go scheme. "
We are but it is not entirely compulsory so dosnt fit the narrative....conveniently.
The National government suspended contributions to the NZ Superannuation Fund from 2009 till 2017, to the fund's detriment. Labour resumed contributions, but the contributions are not nearly enough to entirely fund retirement pensions in 20 years' time and onwards.
Save-as-you-go is promoted as the best way to fund a bulge of population hitting retirement.
While that bulge are working and saving there is a net cash inflow into savings products...shares etc. That bids up the prices of these assets. But who is going to buy these assets when the bulge hits retirement and a net cash outflow is needed? What will the price of these assets do?
It's not the money you put into retirement savings that counts, it's the money you get out.
"But who is going to buy these assets when the bulge hits retirement and a net cash outflow is needed? What will the price of these assets do?"
Bingo! (Simple answer: Prices are going to fall. The trick is to get out early and avoid being trampled in the coming rush)
And as each day passes, more owners of assets will be looking to cash them in to allow them to enjoy their remaining years. The current answer appears to be, "more immigration" but all that does is extend-and-pretend. And to get the next generation to leverage-up and create more new Debt for them to take on, to buy our asset holdings and turn into retirement savings. It's what we have been doing for decades already.
And so here we are. All looking for the possible buyer to take from us what we have. Trouble is, they have less and less to pay to us, to do that....
Super is easy, you turn 65 and everyone that's lived or worked long enough in NZ gets it. Anything other than this is just envy and will lead to a whole pile of admin costs that in the end save nothing. Just pay it and move along, perhaps the government should not waste millions of dollars on things like consultants for for projects that never happen, like the harbour bridge walkway, what a doozy and things like 3 waters.
Yet these admin costs are already paid to manage all other benefits yet sum them all up and they pale to the crippling debt paying rich people benefits they never needed in the first place. We even have far more rules, graded rates and exemptions on these far more trifling support packages that often still are not enough for those in need to access food or a GP. Yet we pay out billions for millionaires to have more overseas holidays. I not saying lets can all pension benefits. I am saying lets means test it using the systems we already have to do so in the same dept that manages all benefits so we can put money to those who actually need income support. So we can have less people under 65 die from sepsis, the flu or untreated chronic conditions because we don't view lives if they are under 65 as worthy as existence or recovery from medical conditions that will disable them left untreated.
So means testing means the people who did put something aside get nothing, and many who lived the high-life and frittered it away during their working years get a free ride?
Yea, I can't exactly see that being an appealing prospect for working NZers. Far better to get out early, find a country with a credible super and tax system that work hand-in-hand and set-up shop over there for life.
If you are born with an inheritance to come or stable housing to live in, act as a landlord or did not get institutionalized as a child then you already are reaping unfair benefits by doing nothing of value that could be generated from income support above those who actually need income support. But sure the poor must be poor by choice. It was their choice to be tortured and denied education, to be beaten by medical staff, to have no employment available to them, to be denied essential medical care and to be denied the same housing opportunities you had. Obviously they should have been born differently and it is only their laziness that stopped them from editing their birth with a time machine. Come back next week when your entitlement, greed and obvious abuse is not so blatant. If you cannot comprehend why we have benefits and your hypocrisy around them then sadly you present a lost opportunity that costs communities and this nation far more then you ever put in.
Playing the envy card is an incredibly lazy way to try and dismiss those who don't think millionaires need welfare.
The whole country is having to tighten their belts at the moment, is giving an extra wad of cash to high earners just because they ticked past 65 really a priority?
Do you honestly think the admin costs could come close to the ~$1 billion of low hanging fruit here?
I'm not sure i's worth arguing about. I mean who really cares. Sure stuff costs more money, that applies to everyone. Particularly old people collecting super. I find it extraordinary that people would be so envious that they would promote the wholesale looting of old peoples assets just so they could deny them something that they are entitled too....particularly when you have zero chance of that happening...not for the next 30 years anyway or until a suitable replacement is accepted.
I mean...I care. I'm arguing from the position of someone who will almost certainly get no super if there's mean/asset testing, and I am planning as if I will never receive super. That's fine, I don't need it.
It's incredible to see people in similar situations but older than me thinking that it is perfectly fine to receive a little spending boost from every other taxpayer, most of whom will be in worse financial situations.
Super is a great thing, and should be there as backstop to ensure dignity. Not frittered away to those who already have plenty.
Super is a great thing, and should be there as backstop to ensure dignity. Not frittered away to those who already have plenty.
Precisely, it is there to provide a minimum standard of living for those who have worked and lived, may not be able to work anymore, and may not be able to afford this standard of living otherwise. Not for those who have plenty and have made wise choices to allow them to have a higher standard of living, and subsequently not have need of the pension.
I guess you are entitled to your opinion about whether it should be available to everyone...or not. But, end of the day it is only your opinion and super is there for everyone now, and well into the future. The process (of changing this) will involve, decades, education, planning, clear understanding of responsibilities. Not punitive actions against retired folk now by a minority that are upset/ashamed/guilty/whatever, that they did not plan.
Correction you had the opportunity for education and employment, stable housing, and govt support. Something we deny a significant percentage of the population. But then I guess the hypocrisy and entitlement of your position is in your mind some people also don't deserve to have education and employment, housing or lives either right. Because from their birth they were condemned to destitution by NZ and were treated differently to you. But hey the door is wide open for you to demonstrate knowledge of that. After all we have over 1000 articles, 500 studies, multiple generations of statistics. Its not like you have been cloistered with a bag over your head to not know it right? right?!
The generation approaching/starting retirement need to realise that if they don't vote for reasonable changes to super entitlement, they will see the next generation bring in much more dramatic cuts in the next decade or two.
Time to make the course correction now rather than waiting for the over-correction in the future.
This suggests that if New Zealand had not cancelled the compulsory saving scheme started in 1975 and replaced it with an expanded pay-as-you-go scheme, current and future generations of young New Zealanders would be much better off.
National governments come and go across the generations, but it seems we can always rely on them for their "sound financial management"
They have a fantastic system, with good management options, and excellent tax incentives. We started much later with a system that is not fit for purpose. We can never catch up. I guess that is why they are the lucky country. If you look into this history of their system, I think it started with 2% contributions from employee and employer, and they had specific periods where you could salary sacrifice and put it into your fund and pay no tax. I was once in a taxi with an Australia client when he made a call to forgo six months of his salary and put it into super, tax free. In comparison, we offered no incentives (520 bucks is not really comparable). Following that they increased the percentage contributions by a percent or so every few years and they are now at 9 or 12 or something (I have not kept up). In any case, they did it right, and they are laughing. We are still working out what to do.
Agree buts it's not luck
We can't afford to do it as fast but we can do it, even if slower.
Kiwisaver, good or bad, is a start and we need to make sure we don't rob this. Silly ideas like rent bonds coming out (Nationals policy in election)make me despair. I understand house deposits but even this slows things down and is a surrender on housing problems.
Those that stay in, use time in the market and compounding will be the winners. Knowing NZ they will be accused of not paying enough tax and they need to support those who didn't use these known wonders of the world.
Australia is not "Lucky" its a huge land mass full of resources and they simply dig shit up and sell it. Coal, Gold, you name it. They cannot lose and continue to sell just crazy amounts of Coal to China so perhaps they are more opportunistic and really don't give a rats about the climate.
I would say that given boomers paid up to 66c in the dollar under Corporal Muldoon, that they'll pay significantly more in taxes than those born after 1980.
66c in the dollar as a marginal tax rate. Offset by double digit % returns on term deposits, and affordable housing where mortgages were rapidly inflated away due to across the board inflation at the time.
Also, is that the same 66c in the dollar that the Government apparently set aside for your Government Super? Which conveniently went away in the 80's at a time when many Boomers were in their 20's to early 30's, began moving up the employment ladder into these higher tax brackets.
Double digit returns doesn't mean instant riches, the inflation rate was 19% under the Corporal. Which led to the rise of Roger Douglas, a man I admire for his eminent common sense.
Houses were not affordable any more then than now, which is why there's lots of suburbs crammed with awful state houses like Otara.
Hi Mr/Ms Wingman
Yes, the comment refers to the amount of taxes as a fraction of GDP, not the marginal income tax rate. We now pay GST as well as income tax, for example. When the tax fraction increases the country as a whole pays more in taxes, although some individuals may pay less.
(I remember several of my parents' friends playing golf on Wednesday afternoons rather than paying 66% marginal tax rates. Or at least they said they played golf.)
People born before 1981 had to taxes to support relatively few pensioners for two or three of reasons. Birth rates were quite low in the 1930s due to the depression. The were a large number of casualties during World War 2 which further reduced the population of older people in the 1980s. Moreover, life expectancy was lower, partly due to cigarette smoking. All of this meant the number of old people relative to the number of working age people was rather low.
AC
National Super will break down. It cannot last.
So lets replace it with large contribution universal Kiwisaver. Starting yesterday.
All this talk of saving National Super by raising the age or means testing won't save it. It will end.
We have to use the other way.
You are so right! KiwiSaver is a delusion indulged in by the haves, a weapon with which they reproach the have-nots for their inability to save.
NZ Superannuation is a national treasure; its payout needs to be increased to provide a dignified standard of living, and the NZ Superannuation Fund needs much greater investment so that it can sustain NZ Super in the future.
We actually can make the increases to a dignified living standard now for the pension simply by means testing those with incomes well above average. We also by the same token at the moment give pension benefits to those who don't need them instead of funding income support for those disabled, chronically ill e.g. with cancer, internal injuries, or external ones etc. It is the opportunity cost. The total number of pension benefits handed out that are not needed at all outweighs the cost of all other benefits combined.
In many cases for those under 65, they are not allowed to find love & have children if disabled, they are not able to afford food or transport, they are not able to afford a GP. Quite a few disabled guys I know suffer severe infections to near deadly states of sepsis, collapsing & then needing long hospital stays and surgeries, (one had large section of bowel removed, another had multiple repeat surgeries because of organ failures from infections, another just nearly died and internal organ bleeding is now a common sight, many died in their 30s and 40s due to cancer & untreated conditions left unchecked before death etc), because they literally cannot afford to go to the GP for diagnosis or antibiotics. They could not even afford the cost to pick up the prescription from the pharmacy. Long term body & head injuries from falls is often unsupported and untreated as ACC often denies recovery support from accidents to those under 65 with disabilities. Many have zero income support because they have romantic partners but do not have their own income for their own medical needs. It is a mess we fund those in the wealthiest positions who claim they need more benefits and paid discounts and freebies with the gold card all the time, yet we deny income to access to basic medical care to the point of further organ failures for those who are in destitution.
NZ is messed up with discriminatory abuse like this. If access to a dignified income to afford transport and GP access was available less would become further disabled and may even have the ability to interact with the community in some education, work or volunteer roles. But in destitution, homelessness, denial of income support, denial of transport etc far too many get further disabled and the opportunities for them are denied completely. Yes having education & employment is an opportunity denied to so much of the population we literally have a large proportion so destitute and living in terrible conditions yet we are completely ok with this. All so we can fund those over 65 more investment properties and holidays because obviously their luxuries are far more important then human lives and living needs.
This all ends up costing NZ far more in the long run, not only because giving pension benefits to those who obviously don't need them for essential needs is so unaffordable to the government that we suffer a massive debt burden and all essential services and infrastructure are running at crisis levels, underfunded. Even the death of someone under 65 does more economic damage to NZ then any benefits from giving a pension to someone who does not need it; as no person is an island. The family and partner of one disabled women ended up out of work and only doing odd jobs for years (instead of high essential skilled work) as the tragedy was so emotionally damaging and there was almost no point (as they saw it considering what happened to their daughter) going on with their life goals. This plays out as young parents die, young adults etc leaving more demands on the state for those around them and less productivity in the younger generations to overall fund the benefits of those generations over 65. Because a birthday is considered more crippling then actual disabilities.
Isn't just looking at pension costs to narrow and atomistic?
Crudely there are two phases of state support - childhood and retirement.
If we have an aging population doesn't that imply less demand for childhood support along with increased demand for pensions.
So wouldn't a comprehensive analysis mean assessing both at the same time (one going up at the same time as one going down may mean very little overall change)?
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.