The case for a unified approach to New Zealand’s retirement system

Retirement Commissioner Jane Wrightson

As New Zealand grapples with the fiscal and societal challenges posed by an ageing
population the need for policies that transcend political cycles is more pressing than
ever.
A cross-party agreement on the retirement income system is something I’ve been
calling for, as the Retirement Commissioner, for some time. It’s what’s needed to
provide certainty for future generations of retirees and to encourage evidence-led
decision-making.
The bipartisan approach being delicately mooted around infrastructure is showing it’s
possible. And this week, we saw a glimmer that might also be possible relating to
retirement, when the Minister for Finance Nicola Willis invited Labour’s Finance
spokesperson Barbara Edmunds to have a discussion about NZ Super. It was quickly
played down but I encourage politicians to think hard about what the retirement income
framework looks like, how it can be improved, and how to secure a stable plan for the
future that rises above individual parties. As citizens and taxpayers we need this
stability.
NZ Super is a taonga that protects New Zealanders from poverty in old age. Currently
around two out of every five people over 65 rely on NZ Super with little or no other
income.
This means it would be difficult to change NZ Super settings without risking a sizeable
increase in pensioner poverty, particularly among groups who have smaller KiwiSaver
balances, such as women and Māori.
Treasury’s Dominick Stephens recent speech highlighted the potential impacts of what
increasing longevity might mean for public finances in New Zealand.
Every day around 80 people turn 65 and 20 people turn 85.
By 2050, these numbers will be 95 and close to 60.
The over 65s will increase from just over 900,000 now to 1.4 million in 2050.
As a share of the total population, they will go from 17% to 23%.
These numbers don’t tell us is how life in retirement is changing and going to change.
For decades, measured poverty among the 65+ population was close to zero. NZ Super
was enough to ensure pensioner incomes were above the poverty threshold.
This is not the case for all pensioners anymore.
While pensioner poverty is still lower than the population as a whole, it has been
growing. We believe that around 1 in 10 over 65s are in poverty (we’ll be getting
updated data soon). These people are more likely to be renters, single women, and
Māori.
Another big change is work. Around half of people aged 65 to 69 are in work, up from
around 15% at the beginning of this century.
For some this is because they want to; for others because they must. Should working
pensioners also receive NZ Super? Could there be a model where, say, income from
working between 65 and 69 is means tested (like Australia) and from, say 70 and
beyond it is not?
If the point of discussions around NZ Super is fiscal worries, (which are debateable),
then what other ways are available to reduce the spend than the very blunt tool of lifting
the age?
From a demography and public spending point of view, New Zealand starts in a
relatively good place.
Compared to other countries we are, for instance, only around the middle of the pack for
the age of our population.
And by international standards our government spending on pensions (and public debt)
isn’t especially high.
But this doesn’t mean we shouldn’t be thinking about what the next generation of
retirement income policies for New Zealand should look like.
So, how could we do this? And, as the problems are already well known, how do we
encourage a focus on the right solutions?
The first step is to focus on the long game. People are more likely to cooperate with a
reform process if they know where it is heading, and they think it is fair.
The second step is to look at all options, not just the seemingly easy ones. And that
means really look at them so we can see the strengths and weaknesses of each option.
Impartial and principled policy evaluation is essential.
This includes looking at who benefits policy change, and who is harmed by it, and what
mitigations need to be in place.
The third step is to not to view NZ Super in isolation. The retirement system relies on
both NZ Super and private savings. This is why I am also arguing for a review of
KiwiSaver.
While the scheme has become instrumental in encouraging retirement savings, New
Zealanders - and their employers - are simply not contributing enough. We could
improve this with a higher default contribution rate and look at increasing the
government contribution for those who do not benefit from employer matching, like the
self-employed.
It’s a bit salutary that Australian employers contribute 12% to employees' pension pots.
The consequent size of those individual pots is one reason why Australia can means
test its public pension.
And we shouldn’t forget how much uncertainty there can be over projections for the
population and the economy, and in turn fiscal costs, when looking over decades.
Reform is hard. There isn’t a silver bullet.
However, what is critical is that any major changes need to be signalled well in
advance. People can’t prepare for retirement overnight.
We need hard thinking on a wide range of options – including the thorny issues such as
income testing – and public engagement on the trade-offs inevitably involved in reform.
The three-yearly review of retirement income policy run by the Retirement Commission,
government stewardship documents, such as long-term insights briefings, and
modelling tools developed by the Treasury can all help with this.
And the fact that reform is hard doesn’t mean we should avoid it. To paraphrase the
philosopher Søren Kierkegaard, population ageing is not a problem to be solved, but an
opportunity to be taken.