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.
17 Comments
I thought that with unequities being one of your main measures that you would not be recommending that contribution rates to kiwisaver be increased?
Plus this article reinforces again that the cost of NZ super is low, internationally. So there is no need at all to increase the age of retirement.
Private saving into private KiwiSaver inevitably results in iniquitous inequality in retirement.
Better by far to increase taxation to grow the NZ Superannuation Fund so that it can distribute adequate and equal pensions to all who need them in the decades to come.
@ John - Taxing further younger generations to help fund older generations is essentially robbing Peter to pay Paul. In an ideal world, every private individual would be financially responsible for their own retirements, not reliant on government handouts. Come 65yo one should have plenty of knowledge, skills & finances built up to be able to accomplish this.
You are advocating for equality of outcome. Such a reality does not exist. Equal opportunities however is something that we can strive towards.
Financially responsible, eh?
What if the supply of things gets curtailed?
What would that artificial proxy be 'worth? Can you eat it?
Pension funds, and private 'savings' and 'investments', all fail the 'will there be anything to buy' test.
As does the whole of economics - which is based on a (physical) non-input, non-output model.
Maybe their super (or whatever is their equivalent of KiwiSaver) is better because their employers are forced to fork out 11% contributions, but their pension system (the equivalent of our Super) isn't better because of means testing, in my opinion. I believe NZ pensioners are generally better off (on average) than Australian pensioners.
For me personally, the biggest benefit of NZ system over Australian one is the lack of means testing in NZ.
As the article mentioned, this allows retirees in NZ to keep working (or to keep receiving passive income from investments) in retirement while still receiving a full pension. In Australia, those who worked hard to create passive income of themselves, or those who prefer to keep working past retirement age (often for reasons other than just extra income), are penalised by receiving a reduced pension amount, or even no pension at all.
I didn't say there was an impediment to working in Australia past retirement age, what I said is that those who do chose to continue working are penalised with a reduced pension or even no pension at all.
Also it is not true that retirees 'passive income' is tax free after 60. they still need to lodge a tax return on all income, unless it's income from Super. What is tax free is their income from Super only, as far as I know.
NZ system is better for retirees in these regards
"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"
A lower drop in income is not necessarily a good thing. If in NZ you drop from $100 a week to $80 a week that does not make you better off than an Australian who drops from $150 a week to $100 a week. This statistic is meaningless unless you know what the absolute dollar amount is both before and after retiring.
Secondly, the NZ pension payment is taxed, the Australian one is not. So are we comparing a before tax payment with a no tax payment?
Thirdly, less than half of new retirees in Australia are now qualifying for a pension (20% get a part pension, 25% get a full pension), as their super funds are adequate. https://www.experien.com.au/the-average-new-retiree-is-now-self-funded/
So there is less impediment to older Australians working as they are already non-eligible for the pension. If Australians are not working in retirement its because they can afford to not work in retirement, whereas obviously that does not apply in NZ because everyone here is broke and reliant on the pension.
If I moved back to Australia, I could drop close to a million dollars immediately into my super fund tax free (thanks to all the lovely tax exemptions super offers). This money would then pay 15% income tax on earnings until I am 60, then all earnings (and distributions) will be tax free. Show me what Kiwisaver offers? LOL.
My employer contributes 12.75% providing I contribute 5%. Both are taken pre-tax with tax applying in the fund at 15%. I forgot the exact amount additionally that I'm able to add before marginal tax rates apply (think it's 25k approx). Given an income is in the 170k + category this is quite advantageous from a tax burden perspective.
If NZ maintains universal super id arguably be better off in NZ but a. Am not sure this will be the case in 17 years when I do retire and b. Australia offers my children more merit based opportunities than NZ. I'll be encouraging them to take advantage of this as we all know, time is your friend when it comes to the compounding returns.
Ohhhhhhh...and I forgot to mention that my NZ super returns will now be taxed at 28% having recently been deemed non-resident for tax purposes in NZ.
@K.W., The point is that this 27k from NZ Govt is the pension ON TOP OF your Kiwi Saver. Comparing NZ's pension with Australian Super is like comparing apples with oranges. Instead, you should be comparing NZ govt.pension (which Kiwis call superannuation) with Australian age pension, and comparing NZ Kiwi Saver with Australian Superannuation.
I am no expert but I believe the scenarios might work out to be something like this:
In Aus you will get NO age pension, but you will get your 50k(tax free) if you can retire with 1 mil in your Superannuation account.
In NZ you will get your full 27k pension PLUS you will get your 50k(but it will be taxed) if you can retire with 1 mil in your Kiwi Saver.
In Aus you might have more money from your super (because employers contribute more and because you pay no tax on Super) but you might get no age pension. While in NZ you might end up with less in your Kiwi Saver (because employers contribute less and you pay tax on Kiwi Saver) but you will get the full 27k from the govt in the form of a pension (which in NZ is called superannuation).
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