By Andrew Coleman*
What do New Zealanders want from their retirement income policies? Lots of different things! As you will have noticed, retirement policies have many different features, and most people want something different. There is no single policy that will make everybody happy, so some sort of compromise is essential.
The secret of a good compromise is to give most people something they like, and to make sure that few people hate the final outcome. These compromises will have popular support and not too much opposition. This makes it important to understand the diversity of opinion. We should look for policies that improve things for a lot of people, without making them a lot worse for too many others.
In 2014 and 2022 I was one of four researchers from the University of Otago and the Treasury who surveyed more than 2000 randomly selected people to better understand the diversity of preferences over seven different aspects of retirement income policies. (The others were Joey Au, Jelita Noviarini and Trudy Sullivan.) (References [1] [2]) (See more here and here).
The surveys used an award-winning Dunedin-based software called 1000Minds that helps people make choices by understanding their preferences.
By measuring the way each individual ranks seven aspects of retirement income policies, it is possible to estimate the diversity of New Zealanders’ preferences as well as find out what they want on average.
People were asked questions about seven aspects of tax and retirement income policy. The survey was designed to find out whether people want to change the amount of the pension, when people get it, who pays for it, and whether there should be a compulsory savings scheme. To make the survey manageable for respondents, each aspect had two options.
⦁ The age at which people first get a pension: either 67 or 65.
⦁ The amount of the pension: either $360 per week or $390 per week in 2014, or $460 and $490 per week in 2022. (This was increased to reflect the increase in the actual pension).
⦁ Whether there is a means test: either a $60 per week reduction in the pension for people with $200,000 non-housing assets, or no means test and everyone gets the same amount.
⦁ Whether current taxes increase by 2 percentage points or stay the same.
⦁ Whether taxes on the next generation increase by 5 percentage points or increase by 3 percentage points.
⦁ Whether there should be a compulsory saving scheme that requires everyone to save 5% of their income in a special account, or whether people should be able to save when and how they like.
⦁ How important it is to have savings equal to 2 years of their average income when they retire, rather than 3 years.
Other than the size of the pension, the surveys were identical in 2014 and 2022.
The survey technology gets people to compare pairs of options two at a time. For example, a survey respondent could be asked whether they prefer a policy that gives them a pension of $360 per week at age 65, or a pension of $390 per week at age 67. Once they have answered this they are asked to make another comparison: for example, whether they prefer to keep the age that people get the pension at 65 and have taxes increase by two percentage points ($20 per week on a salary of $50,000 per year), or have the pension age raised to 67 and have taxes stay the same. After 10 – 15 of such comparisons, the software has enough information to work out how the respondent ranks the seven aspects of retirement income policy from least important to most important.
So what did we find? First, a lot of people are strongly opposed to means-testing. In 2014, 40% of respondents indicated that the most important feature of a retirement scheme was that it is not means-tested. This figure fell to 32% in 2022, but in both years it was by far the most important aspect of retirement income policy for the largest number of people.
Secondly, very few people thought that saving flexibility was important. If New Zealand were to introduce a compulsory saving scheme which forced people to put aside 5% of their income, only a small number would be strongly opposed.
Thirdly, people were really concerned to avoid big tax increases on future generations. In both years a majority of people thought it was more important to reduce the size of taxes on the next generation than to reduce the size of current tax increases.
To be precise, in 2014, 65% of respondents of all ages and all income levels indicated they would be willing to increase taxes by 2 percentage points immediately if taxes on the next generation would only increase by 3 percentage points instead of 5 percentage points.
In contrast, only 30% of respondents preferred keeping current taxes the same but allowing future taxes to increase by 5 percentage points. This is a stunning result. Moreover, it is actually possible to do this: the returns from the New Zealand Superannuation Fund are sufficiently high that if taxes were raised by 2 percentage points now and invested they could reduce the size of taxes the next generation pays by 2 percentage points. (This is one of the transition issues that was discussed when we looked at save-as-you-go pensions in article 5). In 2022 the fraction supporting current rather than future tax increases had reduced to 53%, but this is still a majority.
The fourth main result concerns the pension age. In 2014 this was the most contentious aspect of pension policy: about a third of survey respondents thought it was very important to keep the pension age at 65 rather than 67, another third thought keeping the age at 65 was unimportant and indicated would be happy to increase it to 67, and the remaining third were indifferent. In 2022 the fraction of people who thought it was important to keep the age at 65 had increased, and the fraction who thought it was unimportant to keep the age at 65 decreased, but the population was still strongly divided.
The survey results also indicate that New Zealanders have very diverse preferences over retirement policy. On a diversity index scale of 0 to 100, where “0” means that everybody has different opinions and “100” means that everyone thinks the same way, the survey results scored an 8. People really do want different things. This helps explain the passion with which superannuation policy was debated in the 1970s, 1980s, and 1990s.
A natural question is whether there are big differences in the preferences of men and women, or different age groups, or people with different income levels, education attainment, or ethnicity. The answer is “No”, although there are small differences. This is because each demographic group has very diverse preferences. The range of views among old men and young women or any other group are nearly the same. That said, there is a greater preference for high pensions among old people than young people, and high-income people are more opposed to high taxes and means-testing than low-income people. But the differences are not great – people differ much more by how they think than how they look. If you took a snapshot of all the people who wanted high taxes, high pensions, and a pension age of 65, and those who wanted lower taxes, lower pensions, and a pension age of 67, both snapshots would like a snapshot of all New Zealand and they would be nearly indistinguishable from each other.
You can organise the data into groups of people who have similar preferences. There are basically five groups of people, and by construction these groups do have different preferences. The big differences between groups concern the desired pension age, means-testing, and whether or not there should be a compulsory saving scheme. The three most popular groups were happy to have a compulsory saving scheme but disagreed to some extent over means testing and the pension age. There was a distinctive but small group that wants the minimum government intervention in superannuation (no compulsion, a small pension at a high age, and low taxes). There was also another small group that wants the maximum redistribution to low-income people (a high pension that is available at age 65, with high taxes, means testing, and no compulsion).
The survey results can be used to investigate how people are likely to rank policies that have different combinations of the policy attributes. In 2014 the authors considered three policies. The first was to keep the pension age at 65 and allow taxes to increase as population ageing occurs. The second was to increase the pension age to 67, which allows taxes to be increased more gradually.
The third option was to increase taxes immediately and invest the proceeds, while keeping the pension age at 65. While taxes on the current generation go up under this option, tax increases on future generations will not be so large. Of these three, keeping the age at 65 and raising taxes immediately to reduce taxes on the next generation was ranked the best policy by just over half and the worst policy by the smallest number (about 1/6). In contrast, raising the age to 67 was considered the best policy by the smallest number (about 1/6) and the worst policy by the largest number of people (just over a half).
Keeping our current policy in place was the best policy for about a quarter of respondents, and the worse policy for another quarter.
These results have a clear implication: according to these respondents, keeping the age at 65 and prefunding New Zealand Superannuation would be much more popular and less unpopular than either raising the age of pension to 67 or keeping the age at 65 without prefunding. These results, of course, are only based on surveys, and may not to translate to actual voting behaviour if people were given the vote. Nonetheless, they provide very little support for the idea that New Zealanders think raising the pension age is a silver bullet to solve the problems associated with the current pension scheme.
Overall, these surveys provide a better understanding of the trade-offs New Zealanders’ are willing to make over several aspects of retirement policy. One of the big lessons is that there is a lot of diversity. This should give us all pause for thought. No matter how strongly you personally support a particular retirement policy, or me for that matter, your preferences will not be universally shared. It is a much more difficult proposition to find a set of policies that suit a lot of people reasonably well than it is to find policies that a few people like a lot but which are disliked by many. Another lesson is that people are really quite concerned about the forecast increase in taxes on the next generations, and “more of the same” is not that popular. The third lesson is that some possible changes seem a lot better than others, and garner quite a lot of support.
With this in mind, over the next two weeks I shall conclude this series by suggesting a way forward. Over the last 10 weeks we have discussed how our current retirement income and tax policies cause many problems for younger people, in part because they are different from the systems used in other countries. But change is possible, in ways that reduce many of the problems of our current system while preserving or improving many of the features that people like.
*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 11 in the series. You can find all other articles in the series to date 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.
36 Comments
I'm relieved that Andrew Coleman's surveys indicate a sizeable proportion of those surveyed want to keep the qualifying age for the state pension at 65, and that they prefer to increase taxation now and invest the proceeds to keep the pension affordable in the future.
Raising the pension universal qualifying age from 65 would harm the people who most need it: those broken in body or spirit, and probably poor and unemployed. The people who would be least affected by raising the age would be those who least need it.
In the 2023-2024 year the NZ Superannuation Fund had a contribution from the state of $2 billion, and paid the state $1.5 billion in tax. Next year, and thereafter, the fund expects to pay more in tax than it receives in contribution. This is absurd. The ACC fund does not pay tax, and neither should the NZSF. Removing the tax burden, and committing the government to neither suspend contributions nor help itself to NZSF funds, would greatly help the NZSF achieve its task of funding the future increased cost of NZ Super.
https://nzsuperfund.nz/assets/Media-Fact-Sheet-Apr-2024_i.pdf
https://www.interest.co.nz/public-policy/129665/new-zealand-super-fund-…
The NZSF has the limited goal of helping to fund the state pension disbursement from 2034. We need to be more ambitious, and grow it to be a sovereign wealth fund that will pay for a much bigger slice of the pension. The $2 billion-a-year contribution needs to be increased. First, the $1 billion going each year to subsidise private KiwiSaver accounts by $521 each needs to stop and go to the NZSF instead: the state has no business subsidising private savings.
And New Zealand must reintroduce inheritance taxes and gift taxes, specifically to boost the NZSF, and likewise tax the capital gains on the sale of assets, including the family home.
Andrew Coleman writes 'There was also another small group that wants the maximum redistribution to low-income people (a high pension that is available at age 65, with high taxes, means testing, and no compulsion).'
I am proudly in this group. NZ Super is not enough for those who need it, and too much for those who don't. The after-tax rate for a couple needs to be raised to equal the higher of 100% of the after-tax full-time median income, or 80% of the after-tax full-time average income. Even that will not answer the needs of those who retire as renters with few savings: they will continue to exist in poverty.
To partly balance that payout increase and restrict the amount going to those who have little or no need of NZ Super, those who sign up for it need to be on a separate tax regime, as Susan St John has proposed:
https://www.auckland.ac.nz/assets/business/about/our-research/research-…
Yes. Leading questions to get the answers that you want. This data is also old. In 2022 National we’re proposing a tax cut (after Labours tax increases), and no one seemed to want the tax cut. Roll forward a couple of years and after the Labour economic disaster, people were clamouring for a tax cut and then complaining it was not enough. The trick here is cutting the fat from government to get and additional funds as you rightly say. There is plenty too cut so there is no point trying to foist more expense on the tax payer for something that will just be wasted anyway.
Correct statement - never a discussion on reducing wasteful spending and always on how much extra to tax or levy off us. Our GDP per capita productivity is causing significant long term damage and unless we learn to live within our means, everyone is going to be affected and the poor and less fortunate will be the most affected.
First up i found the questions as presented too specific, with too limited answers. the results could then be argued to be largely predetermined, providing answers only in ranges the researchers wanted.
I suggest that what people really want is for Super to provide sufficient income such that recipients with few other cash reserves are not living in relative poverty. I.e. they can afford their accommodation, food, heating and so on costs. Current times have shown how easy it is for these people to be left behind.
The other concern I have on this topic is the number of people who openly admit they wouldn't need Super when they retire, but would still claim it. this to me smacks of a lack of integrity. these people would complain and protest loudly if the Government acted to impinge on their freedoms, but demonstrate a lack of integrity to make the 'right' decisions when free to do so.
How many times does Rumpole need to be told that NZ Superannuation is
*a social welfare benefit paid out of current taxation
*available to everyone who has lived the required number of years in New Zealand, whether they have ever paid taxes or not
*to ensure that all over 65 can live with some degree of dignity and not die in a gutter
*not something that Rumpole or anyone else has 'paid for' through their working and tax-paying lives.
There's a bill being proposed in the States whereby every child gets $1k invested into an index fund on birth, with additional funds being deposited every year until they're 18. This would give them a stake in the economy and set a foundation for an investment mindset from childhood, while also an actual capital base for their retirement trajectory.
Given the benefits of long term compounding interest, sounds like a pretty good plan, and something we should be looking at here.
Yes. It is an excellent idea. I could ask loaded question like the writer does here. For example I could ask “Would you be interested in putting a small amount of money away today and continuing to save a small amount knowing that when you retire you would have upwards of 1.5-2 million dollars plus super on which to retire”. Yes/no. Next would be “Do you think it would be fair; since you had taken the responsibility on yourself to become financially independent, that the govt then tax your wealth each year”. Yes/No. I would of course be asking people in their 20s. I know the answers I would get. So what you are suggesting is spot on. I had investment funds started for my kids when they were one. They are not teenagers yet, but their funds are higher than the average KiwiSaver balance of adults 40+. What you are suggesting would work. My kids don’t know they have these funds, but their School (luckily) is heavily into financial literacy and so they are learning all about financial commitments, savings and debt. So when the time comes, they will know how to manage.
Good for you. I'm doing the same, though by the sounds of it my kids won't end up with as much. I want them to have something to essentially self-insure themselves against unemployment. When the time comes, I will encourage them to keep contributing to it and only ever withdraw from it as a last resort, with the idea that if it keeps compounding they can pass it on to their children. Inter-generational wealth is the antidote to inter-generational poverty, and even with a small amount of money, given enough time, it is possible to achieve.
There's 3.6 million babies born every year in the States. So at a grand a baby, that's $3.6 billion. If you're doing it till 18, that's $65 billion a year for every kid 1-18 years old.
At 18, the combined wealth of the 3.6 million kids born in a given year would be $160 billion. Or $2.8 trillion for the entire group of 1-18 year olds upon reaching 18.
$65 billion is a drop in the bucket.
NZ could do this with Kiwisaver by people being automatically enrolled at birth for people born in NZ, and the government giving $1000 each year into each account. Already the government gives $60 a week for the first year but that goes to the parents, and that is pretty stingy compared to other countries. NZs birth rates are very low partly because it is so expensive to have children and the potential costs in the future. This idea may pay for their tertiary education, or provide for a large deposit for a house. .
In comments like "just cut government spending and we're all good" all I can read is "We want the whole first world shebang but we do not want to pay for it".
The tax system is already messed up as it is, there's only so much efficient spending one can do to solve some (but not all) of the problems - and most frequently that means making something arguably better at the expense of other projects/initiatives that have positive impact. The current government's need to borrow money to cover the tax cuts while still chopping a lot of stuff is a clear example the current tax structure os not effective and that tax revenue needs to be seriously reviewed
I think instead of means-testing, there should be an additional income tax surcharge on anyone working while receiving Super. This could have a tax free threshold, and then make it so that people who were earning over say 100k are effectively being taxed their Super amount with this surcharge
'I think instead of means-testing, there should be an additional income tax surcharge on anyone working while receiving Super.'
Or how about on all other income, regardless of whether from working or from investments:
https://www.auckland.ac.nz/assets/business/about/our-research/research-…
You guys are just suggesting ideas here to enable Labour to shoot themselves in the other foot. They did such a poor job of even explaining the problem last time, along with flip flopping all over the place, that this topic is political poison (but dripkins has now flopped back and wants another go). I say keep going, because as long as they talk about this, they will never be elected again. Maybe you guys could help them, and start suggesting realistic solutions rather than defaulting to the good old 'someone else can pay for our mess' solution. How about education ?...our kids don't really need to be coming out of school hardly able to read or write or do math. One solution would be to fix that. Obviously it is long term, but currently we are breeding a country of thickos here, and it will not end well.
What a great deal. Your reward for working hard and going without in your working life is to then watch other people get money for free while you are suddenly left with a yawning gap in what you can afford to live on. Because fairness.
What an appealing prospect for Kiwis when considering whether they continue to live and work in NZ.
That is the same with all tax and benefits/entitlements. Very little is fair for everyone. They have the option to stop working and then they can receive it. Look at how councils charge rates, they rate based on poeples wealth and those with more expensive houses pay more in rates solely because they can afford to pay more in rates. That IMO is very unfair but the public accepts it.
Has anyone ever considered giving people a choice. Allow people to opt in to super at any point after 65 but the longer you leave it the more you get.
I'm sure someone can figure out a rate of increase that results in a net saving to the government coffers, the longer you leave it the less years you will receive it but the better standard of living you will have when you need to claim it.
People with savings, or a desire/ability to continue working, may defer opting in, knowing that doing so offers them a bigger parachute if something unexpected forces them into retirement.
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.