How do the Australian and New Zealand retirement income systems compare? The NZIER takes a look

By Jane Wrightson*

There’s regular commentary that the Aussies are doing it better on retirement income policy and that’s where New Zealand needs to aspire to. But, when you boil it down, the grass isn’t necessarily greener.

A recent report from NZIER took an evidence-based look at how the two retirement income systems compared.

Australia is a good place for us to look for lessons, given the closeness of the two countries, along with much shared history.

Australia has also had a government mandated pension scheme – the Australian Superannuation Guarantee – for 32 years, which is almost twice the time that New Zealand’s KiwiSaver scheme has been in operation.

However, it’s important we don’t view individual parts of the retirement system out of context.

Retirement income policies are a product of a country’s history and different countries have different objectives for these policies. These can reflect differences in values, population characteristics, and economic constraints.

Further, the outcomes of individual programmes depend on how they interact with other policies. The retirement income system is an integrated whole.

Mercer recently ranked Australia’s retirement income system as a B+ and New Zealand’s as a B. Both systems are sound – but with some areas for improvement.

The retirement income systems in both countries have several pillars: a public pension, savings in pensions schemes, and other forms of private saving.

In Australia contributions to pension savings are compulsory and the public pension is income and means-tested. In New Zealand contributions are voluntary and the public pension is universal.

Savings in Australia also attract generous tax concessions, but not in New Zealand.

So, according to NZIER how do these different schemes perform?

The schemes were evaluated against five criteria: adequacy, equity, sustainability, impact on savings and investment, and impact on labour and wages.

On adequacy, while comparing incomes across countries can be difficult, NZIER found that many people are better off retiring (have a lower drop in income when they stop working) in New Zealand than in Australia, especially around the middle of the income distribution.

Looking forward though, the increases in contribution rates in Australia over time means that younger people can be expected to spend more of their working lives contributing at higher rates, so this situation may well reverse.

NZIER also found that New Zealand’s system is less likely to mean inequities in the labour market are mirrored in retirement. The less you earn the harder it is to build up a pension pot – so the greater reliance on private savings in Australia means that groups disadvantaged in the labour market can be disadvantaged in retirement too.

Further, in New Zealand people of state pension age face fewer financial barriers to work, with the means-testing in the Australian system discouraging people to work past the retirement age. This might in part explain New Zealand’s older effective retirement age and higher labour force participation rate among people 65 years and over.

On government spending, NZIER highlighted the importance of looking at the full suite of programmes, including tax concessions. By 2050 it is expected that Australia will spend more on these tax concessions than on the Age Pension. In this year, the total cost of the Australian system is expected to be 4.6% of GDP, compared to New Zealand's 5.8%. This is not as big a gap as some would have us believe and well below the expected OECD average of 10.2%.

NZIER also showed that while KiwiSaver is not compulsory, it has similar coverage to the Australian scheme. In Australia around 90% of people in paid employment received superannuation from their employer, which is similar to the 90% of eligible paid employees in New Zealand who are currently contributing to KiwiSaver.

This reinforces earlier recommendations I made that reform should focus on increasing contribution levels over making it compulsory. The Australian system highlights how higher contributions to KiwiSaver could be achieved through an incremental approach.

Both retirement systems have their pros and cons. Maybe we’re both the lucky countries after all.

*Jane Wrightson is the Retirement Commissioner at Te Ara Ahunga Ora Retirement Commission.