Hard News by Russell Brown


Superannuation: Back to the Future

The National government's bold move to bind a future government, nearly 20 years hence, to phase in a rise in the age of elibility for National Superannuation, from 65 to 67, invites a yawn on its face. But it's significant in a couple of senses.

Firstly, it is Bill English's big break from the entirely political promise of his predecessor that the age would not change on his watch. (Ironically, the leader of the Labour Party has bound himself to the same entirely political promise.) And, significantly, it has fired up superannuation as an election-year issue. Inevitably, the argument has quickly become one of competing generational interests.

It's actually worth stepping back a little and looking at the history here. It's summed up nicely enough in the Wikipedia article for Welfare in New Zealand:

A means-tested old age pension for those 65 years and older was introduced in 1898.[12] This established some key features of public pensions in New Zealand, such as the use of general government spending rather than individual contributions, and a "pay as you go" rather than actuarial approach to funding.[13]

The 1938 Social Security Act lowered the age for the means-tested pension to 60, and introduced a universal (not means-tested) superannuation from age 65.[12] The universal pension catered to a strong demand for universal payments, while the lowered age for the means-tested pension provided for the likes of manual workers who were worn out and still poor at the age of 60.[13]

The third Labour government introduced a compulsory superannuation scheme in 1975 where employees and employers each contributed at least 4 per cent of gross earnings.[12] Rob Muldoon's third National government abolished the Labour scheme the following year, and in 1977 created a universal (not means-tested) scheme called National Superannuation that paid 80% of the average wage to married people over 60.[1][12] The age of eligibility was lifted to 61 in 1992, then gradually raised to 65 between 1993 and 2001.[12][14]

The design of a compulsory retirement savings scheme was drawn up as part of the coalition agreement between the National Party and New Zealand First following the 1996 general election. The proposed scheme was put to a referendum in 1997 and rejected by 92 per cent of votes, with only 8 per cent in favour.[13] A move to a partially pre-funded or "smoothed pay-as-you-go" system was made with the creation of the New Zealand Superannuation Fund under the leadership of Labour Minister of Finance Michael Cullen in 2001.

KiwiSaver was introduced by the Fifth Labour Government in July 2007 as a voluntary retirement savings scheme on top of New Zealand Superannuation. Employees choose to contribute 3%, 4% or 8% of their gross earnings, with employers contributing 3%, and the government contributing a $1000 "kick-start" upon joining KiwiSaver as well as 50c per dollar on the first $1043 contributed by the employee each year. The savings are privately managed in a scheme of the person's choosing (if they don't choose a scheme, the government assigns them one), with the government's role limited to regulation, and the collecting and passing on of contributions via the PAYE tax system. An added incentive for younger people is the ability to make a one-off withdrawal from their KiwiSaver fund to help buy their first home.[15] While completely voluntary, 2.15 million New Zealanders are active KiwiSaver members as of June 2013, equal to 56 percent of the country's population under 65.[16][17]

At 1 December 2011, a person may be able to get New Zealand Superannuation if they:

  • are aged 65 or over
  • are a New Zealand citizen or permanent resident
  • normally live in New Zealand at the time they applied.

They must also have lived in New Zealand for at least 10 years since they turned 20 with five of those years being since they turned 50. Time spent overseas in certain countries and for certain reasons may be counted for New Zealand Superannuation.[18]

New Zealand Superannuation is taxed, the rate of which depends on their other income.[19] The amount of Superannuation paid depends on the person's household situation. For a married couple the net of tax amount is set by legislation to be no less than 65% of the net average wage, although the Fifth Labour Government increased payments to ensure it is no less than 66% of net average wage. Rates are also payable for people living alone and for single people in shared accommodation.

New Zealand is one of only four countries that have flat-rate universal superannuation, the others being Canada, Denmark and Russia. One quarter of the state's core operating expenditure goes on superannuation.[19]

This summary, based in part on this Brian Gaynor column from 2011, omits a few things, most notably the superannutation surtax/surcharge introduced by the Labour government in 1985 – a form of income-testing that was understandably unpopular with superannuitants. The National government that followed in 1990 campaigned on abolishing the surcharge but it wasn't pared back until 1996  and only finally surrendered in 1998 as part of National's coalition agreement with New Zealand First.

The trade-off for the restoration of a universal benefit was a lower rate for everyone – a floor of 60% of net wages after tax, with adjustments to be made on the basis of CPI movements. Tax rates and policy add a lot of complexity here, but the full historical drama is available in this excellent Good Returns post, excerpted from a paper by David Preston for the Office of the Retirement Commissioner, which also traverses the two super task-forces and the multi-party accord on the issue broken by National's deal with New Zealand First.

The Labour-Alliance government restored the floor vs wages to 65%, which is still a lot lower than the 89% it reached in 1978 (but, again, tax had a significant impact on how that actually worked out).

But another part of that Wiki summary bears noting. The age of eligibility for superannuation increased by five years between 1992 and 2001. That does make Bill English's promise that a future government will make a two-year adjustment up in two decades' time look fairly timid. It also tends to make Andrew Little's adoption of John Key's "no age increase while I'm leader" stance look arbitrary.

There are, of course, obvious problems with increasing the age of eligibility. We are all living longer and there's a very large generational cohort entering retirement now which will soldier on for many years. Maintaining superannuation in its current form is going to be very expensive. On the other and, there are demographics – most notably Māori – who will not live as long. Middle-class white people will be paid a lot more super as a group than working-class Māori – and an increase in age elibility only makes that disparity worse. Could we look again at means-testing from 60-65 or at Peter Dunne's idea of offering the option of a lower rate, taken earlier?

Okay, then. If we value the current system, we could all accept that we need to pay more tax to keep it as it is. But who should pay that tax? Current taxpayers (who do include supperanuitants) who will derive the benefit in future – or the group of working taxpayers in 20 years' time, who will be faced with supporting a large group of superannuitants from a relatively smaller tax pool?

An actuarial approach would suggest that we should be paying those extra taxes now on a scale that reflects the greater demand in future and not the demand now. But that's not how our pay-as-you-go system works.

This also touches on Michael Cullen's New Zealand Superannuation Fund. The fund won't cover anywhere near the whole of the future superannuation bill, but it wasn't meant to: it was always meant to be a smoothing system for pay-as-you-go.

National stopped paying into the Super fund when it started running GFC-related deficits, and any number of right-wingers this week have publicly disdained the idea of "borrowing money to invest". Leaving aside recent actual history (returns from the fund have considerably outstripped the cost of borrowing), that really depends on how you look at it.

If you take an actuarial view, then providing for the future retirement of workers now is a core government duty. Now. So you're not actually borrowing for that, you're borrowing for the least-prioritised stuff at the other end of the budget.

At any rate, we can be grateful that Cullen took his steps to improve our terrible national savings performance. Our house, with two income-earners born just outside the boomer window in 1962, has a Kiwisaver account and a longer-running unit trust that isn't subject to the same restrictions on withdrawal as Kiwisaver (which is fortunate, given that we had to dip into it three years ago when we got in a bad tax mess).

We're doing okay with our saving, I guess, but I'm well past my earnings peak in a declining trade and I can't see us significantly ramping up our rate of savings for the next decade. So we'll quite probably do what a lot a lot of people will do – sell up, take the gain and move out of Auckland. I don't actually want to leave Auckland, I'm in love with the way it's changing, but it may just be the only prudent course. The more so given that we have two disabled adult children whose future independence remains unclear.

So, yeah, it's our house. We're lucky. As Keith Ng noted this week on Twitter, New Zealand Super's assumptions include that the majority of its recipients will own their own houses. And maybe that's the really big problem here. And if it is, our governments need to do a lot better than they've been doing.

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