By Andrew Coleman*
Fifty years ago, the Labour government passed the New Zealand Superannuation Act (1974) and introduced a contributory saving scheme. Shortly afterwards the National Government led by Robert Muldoon revoked the Act and replaced it with a new universal retirement income scheme which evolved into the scheme we now have, New Zealand Superannuation. This scheme provides a universal pension to all New Zealanders over 65 who satisfy eligibility criteria, funded from general tax revenues.
Despite some very good features New Zealand Superannuation has three major downsides. Most importantly, it imposes very high costs on current and future generations of young people, who are required to pay much more in taxes than is necessary to provide the pensions they will receive. It means New Zealand eschews some of the most efficient taxes used around the world, particularly social security taxes or contributions to compulsory savings schemes, but relies on taxes that artificially distort investment decisions and inflate property prices. Finally, it unnecessarily exacerbates inequality across the wider community even as it reduces inequality amongst older people. Throughout this series I have argued that many of these flaws could be addressed without reducing the benefits New Zealand Superannuation provides.
Muldoon had a follow up career as the narrator in the Rocky Horror Picture Show, where he won accolades for his performance of the “Time Warp.” This seems very apt when it comes to retirement income policy, as we seem stuck in a time warp of our own that dates back to the 1970s and 1980s. The world has moved on and yet we have been unwilling to reconsider the policies adopted back then.
Just as an example, none of the three major tax reviews held this century analysed the case for social security taxes or a compulsory saving scheme, even though this is the single biggest difference between our retirement and tax system and the retirement and tax systems in the countries in the rest of the OECD. In the third decade of the 21st century it must surely be time to reconsider whether the politicians of the 20th century got everything perfectly correct. The world has changed considerably in the last 50 years, and it is quite probable that a scheme designed in the second half of the 20th century no longer perfectly suits the way people live in the 21st century. It is long past the time to be concerned that change should be avoided because it may involve a jump to the left or a step to the right.
This series has had four broad objectives. The first objective is to outline why the current system needs changing. The paper has focussed on three issues – taxation, inequality, and the opportunity cost of pay-as-you-go retirement income schemes – and argued that the current system generates adverse consequences for many young people, as well as for the economy overall. Young people may be paying twice as much as they need to pay for the pensions they will receive. Whatever one thinks about reform proposals, the problems associated with the current system are real and should not be swept under the table.
Secondly, the series has made some suggestions outlines the possible choices younger cohorts could make. Last week I outlined one possible set of reforms, KiwiSaver 2.1, that would likely reduce many of the problems with the current system, while keeping many of its advantages. KiwiSaver 2.1 is compulsory saving scheme designed to replace New Zealand Superannuation for the first few years of a person’s retirement, and accumulate surplus funds for the rest. It would allow income taxes to be reduced, and it would reduce the overall cost of the retirement income scheme by taking advantage of investment opportunities. It can be designed so that older people get benefits at least as large as the current system, while reducing inequality in the broader community. It should reduce the way that the tax system artificially inflates house prices, and it is even likely to be good for the planet, to the extent that the savings it generates are invested in the type of environment-enhancing projects that many foreign pension schemes favour.
This is just one suggestion, but the more general point is that the current goals of New Zealand Superannuation plus more can be achieved at lower cost by doing things differently. There is simply no need to believe that a scheme designed for the conditions prevailing in the 1970s is still the scheme best suited to the needs of younger people.
The third objective has been to open a discussion about the plurality of policy choices in a country. Democracies allow people to choose the policies they like, but this does not mean all people must have the same policies. Since people cannot change when they were born, it is straightforward to design age-specific policies that allow different generations to achieve the goals they desire. These policies can be designed in an intergenerationally neutral manner that makes them straightforward to change as the outcomes different generations want change. The contrast with New Zealand Superannuation, which imposes increasingly larger costs on younger and future generations, is striking. Young generations should not be obliged to have the same policies as their parents and grandparents, unless that is what they want, particularly if the policies they inherent are particularly costly to themselves.
The fourth objective is to discuss the transition issue and show that it can be manageable, but not costless. Some of the changes to the retirement income system that I have discussed could be made with relatively few direct effects on older people. For example, younger people could have KiwiSaver accounts taxed on an EET (Exempt, Exempt, Tax) basis rather than a TTE (Taxed, Taxed, Exempt) basis without needing to change much at all for older New Zealanders.
However, other changes would require an increase in the costs that older people face during a transitory period. If New Zealand were to adopt more save-as-you-go funding of one type or another (for example, the adoption of the KiwiSaver 2.1 proposal, or additional taxes that contribute greater amounts to the New Zealand Superannuation Fund) there would need to be additional costs for people over 50 to help reduce the costs on younger people. Fortunately, survey evidence suggests there is considerable willingness to share the burden more evenly.
In this series I have made several suggestions about the ways retirement incomes and tax policies could be reformed. If you don’t like these, there are others. Many rich countries such as Norway, Sweden or Germany already use quite different retirement and tax systems that collect more taxes than New Zealand – but because they consciously design taxes to reduce their distortionary effects, they do it in ways which keep incomes high, and which generate less inequality than in New Zealand. Often this means they have lower income taxes than New Zealand.
The key requirement for progress is the willingness to discuss the issue and find a solution. If New Zealand doesn’t do something sooner, it will have to do something bigger at a later date. If these discussions are not held now, and current pension entitlements are maintained, young people will face higher and higher taxes. Young people might choose to pay higher taxes in the future to maintain current pension payments – or they could choose to reduce the pensions older people receive, or leave to countries where the balance between taxes paid and benefits received is more favourable. None of these possibilities are very attractive.
If you have been reading over the last three months, you will know I have repeatedly argued that it is New Zealanders aged less than 45 who should consider a fundamental restructure of New Zealand’s government retirement income system and its associated taxes. The dividing age does not need to be 45, but nobody under 45 voted in the 1997 referendum that ensured New Zealand has the most unusual retirement system in the world, and these New Zealanders have spent and will spend their entire working lives in the 21st century. If they don’t want to use a retirement income system designed in the 20th century, it should be up to them to say so. Those of us over 45 should encourage them to take the initiative.
This is the last article: I hope you have enjoyed them, or at least found them stimulating. Most of these ideas are based on a series of research papers I have written over the last 15 years that are expressly about New Zealand. The ideas are all inspired by and informed the thinkings and experiences of overseas countries. They are the result of a lot of discussions and boozy sessions with (bored??) colleagues and friends at Motu Economics, the New Zealand Treasury, the New Zealand Productivity Commission, the University of Otago, Al-Akhawayn University, the Asia School of Business, and the Reserve Bank of New Zealand (which remains “unresponsible” for any of this work).
I would particularly like to thank Gareth Vaughan from interest.co.nz, who made this series possible, James Weir, Jeanne-Marie Bonnet, Naeem Sheikh, Clive Thorp, and Anthea Coleman; but thanks also to all who commented in the comments sections and gave me pause for thought. I am looking forward to the forthcoming debates and hope they will be led by New Zealand’s current and future citizens and leaders in an engaging and constructive manner.
*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 the 13th and final one in this series. You can find all other articles in the series 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.
43 Comments
Thank you, Andrew Coleman, for your timely, comprehensive, and enlightening contribution to the debate on how to enable all New Zealanders to have a dignified retirement. I hope the Retirement Commission and all political parties will pay close attention to your proposals.
I like the idea of your KiwiSaver 2.1: that there be a compulsory contributory savings scheme to accumulate a pot from which at the age of 65 a person would fund (as much as their pot allowed) the first 10 years of their pension; the pension, after they reach 75, being fully funded by the state:
'When they are working, people and their employers would make contributions to private compulsory savings schemes ... that can only be accessed in particular circumstances, primarily after age 65. The money in these accounts would remain the property of the individual or their estate if they die young.
'Once people turn 65, they would make a deposit called the minimum retirement target with a public or private agency. This deposit would be enough to pay them a weekly amount at least as much as the government pension that is paid to people over 75.... Any surplus money in their account could be used however they liked.
'People without sufficient funds would be given a top-up that is enough to pay them the equivalent to the standard pension for people over 75. When people hit 75, they would get the standard government pension.'
I'm bothered by that last bit, about people without sufficient funds being given a top-up to see them through till they reach 75. I can see that people who work for wages and salaries would contribute the prescribed amounts to their pot during their working lives. However, many more people now than in 1974 are self-employed contractors and gig workers. Surely they, seeing that the state will top up their pension from 65 till 75 if their pot is too small to pay their own way, will do everything possible to minimise their contribution-assessible income, and save their money anywhere but in KiwiSaver 2.1.
https://rep.infometrics.co.nz/new-zealand/employment/self-employment
I can see that this is where the lure of an EET regime (exempting contributions and their fund earnings from tax, but taxing the ultimate payout) becomes an essential incentive to encourage to embrace KiwiSaver 2.1 those who otherwise would try to avoid it. Perhaps, to increase the contrast, the existing indulgent tax regime for the present KiwiSaver and other PIE funds needs to go.
A problem with introducing an EET compulsory savings regime will be immediate reduction in income tax. This will need to be addressed, perhaps by the introduction of other taxes to compensate, or better, by governments abandoning what Bernard Hickey has described as the shibboleth of restricting the state debt to no more than 30% of GDP, and simply borrowing more to run the state now in the hope that in the absence of jam today there will be jam tomorrow.
The finitude of the proposed KiwiSaver 2.1 seems to elegantly deal with two issues.
The first is the problem of longevity/mortality: if one is dependent on one's own savings there is the anxiety of living till 105 and not having saved enough, or becoming mortally ill at 66 and having saved too much that might have been spent and enjoyed during the previous 40 years. Having to save only enough to provide one's own pension till the age of 75 with the certainty of a state pension thereafter puts a lid on the pot that needs to be saved.
The second point is that requiring self-funding of the retirement pension from 65 till 75 neatly covers the decade when most people who continue to work after signing up for their Super do so. It effectively raises the starting age for the universal state pension from 65 till 75, but keeps the same pension available but asset-tested for those unable to save enough to pay their own way during that first decade of retirement.
I like it. Perhaps we should introduce KiwiSaver 2.1 from next year.
Although I find Andrew Coleman's KiwiSaver 2.1 proposal appealing, I'll repeat my comment from last week that it does not address the inadequacy, right now, of the existing pension. NZ Super is not enough for those who really need it: those without savings or other income, especially renters. And I suspect that unless the basic pension is raised, this will still be true in 40 or 50 years' time when KiwiSaver 2.1 would be up and running. Increasingly, there are pleas for help from those entirely dependent on NZ Superannuation:
https://www.rnz.co.nz/news/national/527290/retiree-calls-for-pension-to…
A Retirement Commission survey in 2023 found that one-third of people aged between 55 and 65 live in rental housing, that 20% of people over 65 are renters, and that by 2048 40% of people over 65 will be renters.
The median rent for a three-bedroom home in New Zealand is about $600 a week. In Auckland, the median rent for a one-bedroom home is $500 a week, a two-bedroom home $670 a week.
NZ Super now for a couple is $800 a week after tax, for a single person living alone $519 a week. Do the maths: how can a renter survive on NZ Super?
The married couple after-tax rate needs to be raised to the higher of 100% of the after-tax full-time median income or 80% of the full-time average income, to about $1080 a week; the single-living-alone needs to rise proportionately by about $200 a week.
That would increase the annual pension bill to the state by close to 40%, yet it would still leave the retired couple getting only half the median wage each: $545 a week; a pittance compared with the minimum wage $768 after tax.
How to fund such a huge bill? For starters, bring back the surcharge Winston Peters succeeded in having abolished in 1998, so that an enhanced Super goes to those who need it, not to those who don't.
https://www.auckland.ac.nz/assets/business/about/our-research/research-…
That may still not be enough. Much greater funding is needed for the NZ Superannuation Fund. It must cease to be taxed on its earnings (the tax is poised to be greater than the near $2 billion a year the state contributes to it); and the contributions to it need to be increased from the proceeds of new sources of revenue: capital gains tax, inheritance tax, and gift tax.
I don't like it at all.
not because I don't believe people should save for their retirement, but the idea to stipulate '65'.
I will not work till 65, and want to retire much earlier than that, and I have plans for it. Locking more of my money will become an obstacle if not completely ruin it.
Hello
KiwiSaver 2.1 is designed as a substitute/ replacement for part of New Zealand Superannuation. The money that you place in in KiwiSaver 2.1 (and which is "locked up" ) is an alternative to the money you would otherwise have paid in taxes to fund New Zealand Superannuation, which would also be "locked up" as it would be given to the government. The point is to reduce income taxes and replace them with contributions to a compulsory saving scheme which you can access in later life. If you are a high income person, KiwiSaver 2.1 would make it easier to achieve your saving targets relative to the current structure of New Zealand Superannuation, not more difficult. Fundamentally this is because some of the tax flows that currently support a pay-as-you-go system would be replaced by contribution flows that are invested in higher returning assets in a save-as-you-go system.
You might have to rearrange some of your total wealth so the privately managed component is available at age 55 and the publicly managed component is available at age 65. This is reasonably straightforward, unless most of your assets are tied up in personal businesses. Even in this case there is still the advantage of having a personal compulsory retirement fund from age 65 - 75, rather than a government pension.
AC
then simply increase contribution to the NZ super fund. that's the savings from current working generation anyways.
more on the save as you go plans, that'll hurt the ones who doesn't earn as much, or not working at all, which defeats the 'reduce equality' argument.
I agree that contributions to the NZ Superannuation Fund should be greatly increased. I think it should be done by taxing the unearned income from realised capital gains (the return higher than general inflation), inheritances, and gifts.
However, that won't be enough. By the end of the century there'll be more than one over-65er for every two people of working age. The cost of Super, plus the costs of health care and nursing homes, will be enormous.
https://newsroom.co.nz/2024/09/25/super-strain-from-nzs-ageing-populati…
I'm saying people who have shouldn't be punished for having done so.
I don't think this outlook is very productive. We are basically reaching a point where we have to triage resources. If someone arrived at the emergency department first, are they being punished if someone else came in after them gets treated first because their situation was more urgent?
Young people may be paying twice as much as they need to pay for the pensions they will receive.
this part confuses me, I didn't read any reports as such, but wonder why we conclude young people pay twice as much?
it's true current NZ super is current working people supporting current retirees, but one day the current working young will be receiving pension too. are you saying the future retiree receives less than the current pensioners?
Glad you said something. I thought it a bit odd too. Coleman has been writing ad nauseum on this subject and then undoes himself by implying young people are paying (taxes) for their pensions. But they're not. EVERYONE is paying taxes to maintain the pay-as-you-go settings of National Super AND the NZ Super Fund (aka the Cullen Fund). And if you're lucky enough to have anything left, you contribute to your own retirement fund AFTER being forced to pay for others' retirement funds first.
His voluminous writings on the subject could be boiled down to being a push for higher taxes and / or a change to eligibility of National Super, and he'd like the decisions made by people under the age of 45, because there are too many over that age who will be impacted by any such change who are likely to say 'no'.
My take is that to keep the status quo, taxis will be forced to increase to fund super at current setting, therefore the youth of today will pay higher taxes proportional to their parents generations for the predicted amount of pension one would be expected to receive, say on average life expectancy.
The "twice is much" comment refers to the advantages of a save-as-you-go system, where the taxes/contributions are invested and earn a return based on capital, against a pay-as-you-go system where the taxes/ are transferred between people of different and provide an implicit return related to the growth rate of the economy. This was discussed in articles 3 - 5. .Ever since the 1960s it has been understood that in a dynamically efficient economy (the return to capital exceeds the growth rate of the economy) a pay-as-you-go system imposes very very large costs on young generations as it prevents them from taking advantage of high yielding investments. Of course there is no guarantee that future rates of return will exceed the economic growth rate, but given the history of the last century there is no reason to bet against this proposition. (Plus there will still be some pay-as-you-go component as "insurance".) The "twice as much' reflects fairly conservative investment returns relative to the experience of the last century.
There are also an additional benefit that stems from having a more sensible taxation regime applied to investments which allows them to compound before being taxed, rather than after being taxed. This further raises the returns available from a saving based scheme rather than a transfer scheme.
The relative merits of save-as-you-go and pay-as-you-go transfer schemes are fairly well debated in the literature and there is a large consensus that suggests the opportunity costs of pay-as-you-go schemes on young and future generations are large. The reason why a KiwiSaver 2.1 is better than the current scheme is because it reduces the costs on young people - once the transition is past they simply will not need to pay so much for pensions they will receive.
The other issue, also discussed in articles 3 - 5, is that young people are being asked to pay a disproportionately large share of the total costs. Older people like me were also disadvantaged by a pay-as-you-go system, but by much less as there were fewer people receiving a pension when i was younger, so taxes could be lower. The forecast increases in taxes we are facing reflect the fact that younger people are being asked to pay a disproportionately high share of the costs relative to people my age and older. If you are happy with that, sobeit. the point is, it doesn't have to be this way. it is a choice that in part stems from having scrapped a compulsory saving scheme and adopting a pay-as-you-go scheme back in 1977. This choice - this decision to push a disproportionate share of the costs on to future generations of young people - can be reversed.
These issues are separate from tax issues. It so happens that when adopted New Zealand Superannuation, and when scrapping the EET system for retirement savings in 1989, as a country we also decided to adopt a set of inefficient taxes. There are simply better ways for the government to raise tax revenue than the taxes we currently use. This why almost all other OECD countries use these methods. If you want to to keep a series of inefficient taxes because you have become acclimatised to them, sobeit. i personally prefer to use taxes that cause fewer economic distortions when raising revenue, but i understand that other people prefer more distortionary taxes for a variety of reasons.
AC
if you are saying saving so that we enjoy compound returns on the savings, I'd rather agree, that's what NZ Super Fund is designed for, to invest and fund the future NZ super. you could hand it over the centralized schemes like NZ Super Fund, or give it each individual saving scheme like kiwisaver. non the less, government will need to pay nz super for current or soon-to-be retirees, it's government's liability already, switching to a 'kiwisaver 2.0' won't change that, the hypothetical tax-relieve to young people is questionable.
also, we need to consider the equality issue here, save as you go, means the poorer lot won't save as much, when they retire, and if they cannot maintain a basic living, government will need to pay benefit. this pretty much why we have a universal pension in the first place. to give whoever lives in this country a protection for their old age, savings or no savings.
I suggest you reread the articles, because it is clear i am advocating for changes that will ultimately reduce taxes, and change their form to less distortionary types of taxes, not increase taxes.
While the KiwiSaver 2.1 proposal advocates a change in eligibility to NZ Superannuation, by substantially raising the age when the government pension is received, it is also designed to ensure that all New Zealanders would receive a retirement income at least as large as this from age 65 -75. I have not advocated for changes in eligibility criteria other than this, and the whole point of KiwiSaver 2.1 is to to show there are potentially better ways to deliver the current benefits of New Zealand superannuation, plus more, at lower costs.
Calculations clearly show that the taxes paid over a lifetime to pay for New Zealand superannuation by people born in different years are quite different, and higher the later you are born. Of course people of different ages have paid taxes for NZ Superannuation. But they are paying very different amounts relative to the benefits they receive, with younger people expected to pay the most if there are no changes to the scheme. This does not have to be the case - we can change the system so that young people are not required to pay a lot more than older people were asked to pay for the same pension entitlements. You may not think this is a good idea; the series of articles is designed to show that it is possible, and to advocate that we should seriously consider rebalanced the tax burden. Survey evidence suggests a lot of older people - probably a majority - think such rebalancing is appropriate.
It is true that I advocate people under 45 should have a right to decide. They are inheriting a scheme that was designed by much older people that shifts a disproportionately large share of the costs onto people under 45 , and which was designed for economic circumstances that are very different to those prevailing today. Not only do I doubt that wisdom is monopolised by older people, but since preferences change there is no reason to expect that the preferences of older people and younger people are the same. There is simply no need to have the same retirement income systems for people of all ages; and giving older people veto rights over younger people seems unnecessary.
ac
Thanks, in short you've confirmed my summation and fudged the issue of tax. A compulsory payment to the government is a tax and if it means putting more tax money into a save as you go scheme that's not going into my own retirement fund, it's being paid for someone else's.
I don't completely reject the main thrust of your thesis, but you really haven't articulated how to transition from a pay as you go scheme to a save as you go without causing serious inequities to people approaching retirement. And, to cap it all off, you unashamedly confirm you'd actually disenfranchise this group in the interests of 'fairness' to a younger age group. I'd say that's unprincipled.
But thanks for trying.
Of course. This was part of an ongoing drive to reduce the distortionary nature of the tax system. At the same time GST was increased (which offset some of the tax rebates you got), which also reduced the distortionary nature of the tax system. Much of what i am advocating is further steps towards more sensible types of taxes.
You personally may have paid for your pension, plus a lot more, for that is what a progressive tax system does; it taxes high earning people more than low earning people. When i teach public finance, I tell my students to say "thank you" to people like yourself, who help keep taxes low for the rest of us; so thank you. The current tax system is still progressive, although less so. But as a cohort born in a particular year, the average taxes that younger people are expected to pay for the pensions they will receive are higher than the average taxes older cohorts such as yourself (or me) had to pay. One question is whether this might be changed. A separate question is whether we can continue the search for less distortionary taxes.
AC
Since tax paid is proportional to income received, maybe those who earn a high income should be thankful for the fortune and opportunity that comes with a high income, instead of being so down and negative about paying more tax than others.
I know I am and wouldn't for a second look down on someone who earns less in the way many older people in this country do. Comparison is the thief of joy.
Perhaps we look at where the true problem lies. I don't think those lower income earners have sold the Government a convincing sob story that they should be refunded their income tax so they can party up. The taxpayer is subsidizing their basic cost of living, so the real culprits are either (but not limited to):
- Underpaying employers,
- Gouging power companies,
- Gouging supermarkets,
- Gouging landlords (proxy of the banks)
Uh, what? Wasn't that extra 33% in the marginal tax rate what funded the pension? Which was conveniently axed when Boomers started moving up in their careers, and would be potentially subjected to that marginal tax rate.
If you had a 66% marginal tax rate for your whole working life then sure. But depending on how old you are, you would've had if you're lucky 5 years?
Interesting that there never seems to be any discussion by those advocating Super surcharges about the effect this would have on those immigrants coming from countries that have social security agreements with NZ. I'm entitled to a full UK pension as I paid full UK National Insurance (NI) contributions while employed in UK and Additional Voluntary Contributions (AVS's) for a number of years, after settling in NZ 22 years ago, to top up my UK pension to the full rate. I've paid general tax on my income here in NZ, the same as other Kiwi folk, but stand to be disadvantaged by a surcharge as I also have a separate pension income, also from UK. The NZ government would not be funding the whole of my NZ super as WINZ require me to surrender my UK state pension in order to claim NZ Super. The additional pension would likely trigger any surcharge to be imposed on the NZ Super payments, yet In my case, I'm pretty much funding the entirety of my NZ Super. To get an additional Surcharge (Tax) seems grossly unfair in these circumstances.
I'm a keen advocate of bringing back the surcharge: getting rid of it was possibly Winston Peters's greatest disservice to New Zealanders, and to NZ Super.
However, I cheerfully concede I cannot make any suggestion about how to tailor the surcharge to accommodate overseas pensions. I'm sure, though, that there would be a government department happy to figure it out if the surcharge were reimposed.
This is sort of rehash of what I said to Andrew last week.
Lots of good things here Andrew. Some suggestions
# Make the super benefit start age 80 years not 75. Contributions will be bigger. Life expectations are increasing
# EEE please. This is a social instrument not a standard investment. And it's compulsory. So no tax at all. Also means compulsory contributions can be smaller.
# We have to do this regardless. National Super will collapse at some point.
# Double paying . Deal with this by a gradual phase out of current scheme to new scheme. Say thirty years.
# Low income or no income people. Government makes their contribution via the benefit system. For those dependent on somebody else, they get some of their contribution.
# The 80 plus super is best regarded as quite different from National Super. Better to rename it. "Pension for the old old." or something
# Current Kiwisaver providers are already set up and able to do the defined annuity process that you describe for 65 - 80. And as now you would have choice to change providers.
I think there's a case for EEE total tax exemption for the lump sum saved to provide a pension instead of NZ Super for the decade between 65 and 75, because that saves the state paying Super for that period. Anything saved above that must be taxed as income on disbursement, whether as a lump sum, or drip-fed, or withdrawn to purchase an annuity.
65 is arbitrary. So is 70, 75 or 80. The original arbitrary 65 was based on the average life expectancy a century ago; so link the age of retirement to the average life expectancy. There are rumours that after 5 decades of it increasing by 2 years every decade that it has just started declining because of Covid and obesity and maybe plastic pollution. The point is who knows how long Kiwis will live in the future so continually reestimate and keep the cost static.
Its good to have a series like this with some considered thinking.
At the end of the day it seems impossible to avoid that we will need to change in some form or way to a save as you go system. Whether this is as Andrew has laid out or variations is the discussion.
Kiwisaver is a start, with all its good, bad and ugly bits - but its a start. The longer we pontificate Kiwisaver will quietly grind away, compounding, growing in the background and it will/has finally give NZ a capital base invested here and offshore. Sure some cant afford to invest in it but it seems to me this is solvable and now that it has a $110 billion going its the best thing to work off - lets not start again and waste the last 10 years - the hardest part is starting.
Imagine when it gets to 1 trillion returning 50 to 70 billion in returns (Nett as well - not Gross) each year - our biggest export earner on the horizon on top of goods we produce - can anyone tell me anything that we can do to replicate that in stuff from the land?
Little wonder Aussie trundles on with $4 trillion in super funds - if only we had started with them - its not to late.
A good case is made that young people pay too much tax to support those receiving Super. Especially hard on those who start work after school while the generally better off families are sending their kids to university. More so those immigrants who arrive in their thirtiesa and forties and pay as little as 20 years income tax but receieve the same full Super as born Kiwis.
The solution is to link income tax rates to age. They are already linked to income so no significant admin cost. Super is one in every six tax dollars so for those on the current 30% tax rate this would drop to 25% up to the age of 25 (i.e. zero contribution to Super) and then increase 1% every five years so at 65 that tax rate would be 33%. Same average of 30% so raising the same amount but a strong bias towards the young.
Fairer for Super but also better for paying off student loans, buying first house. Also wealthy working retirees end up paying more tax on the Super they receive.
Hello Singautim
I have a lot of sympathy with this idea. The Swiss do something like this, having a surcharge for people in their 50s, when it is easier to afford.
Peter Diamond, the Nobel prize winning tax specialist (who made ground-breaking contributions to almost every aspect of these debates), also is sympathetic to this idea. If you want to find out more, search for the following paper, which was written as part of the British tax enquiry " The Mirrlees Review"
James Banks and Peter Diamond (2008) "The Base for Direct Taxation"
I also agree that age 65 (and other ages) could be changed in the future. One of the advantages of a system like KiwiSaver 2.1 is that it would be reasonably straightforward to change the ages as different generations see fit. Years ago I did quite extensive modelling about the way the interaction of the population ageing, the retirement system, and the tax system all affect younger peoples' housing choices, and the work clearly suggested raising the age would raise the living standards of younger people by making it easier to get a foot on the housing ladder. At the moment, however, there is still a lot of public support for keeping the age at 65, and seemingly to pay taxes to pay for this support. Who am I to blow against the wind?
ac
Public opinion can change. Especially if it is towards a fairer system. It just needs a clear explanation. My idea jumped into my head this afternoon and the numbers are so simple - 1% every five years. There would be resistance from the elderly who will be paying more tax but most of us old folk really want what is best for our kids. The current system is bound to fail my children and grandchildren.
I am certainly no expert, but as far as I can see, the overall financial position of this country is deteriorating. We run a seemingly permanent trade deficit, we borrow heavily from overseas-private debt- our poor productivity seems to be permanent feature of the economy and our debt/GDP ratio is rising-government debt.
Then, on the other side of the coin, our rapidly ageing population will continue to place increasing strain on the health and social welfare sector. I think it inevitable that Superannuation will again become income tested, as it is in Australia. Sadly, I see New Zealand becoming poorer-a second rate country. I hope to be proved wrong for the sake of my grandchildren.
Sadly, as we've just seen with the electorate voting to "get back on track" - more correctly, to return to a track that goes nowhere for the bulk of us - I expect the can to be kicked down the road until finally a catastrophic event forces change. Kiwis, alas, are not open to change of any sort.
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.