Pension reform discussion

Pension reforms in New Zealand happen - if at all - at snail's pace. Many pensioners would be happy if they happened while they are still alive.

Income spectrums in retirement

(as presented by the RPRC at the Overseas Pension Forum in Auckland)

- Pure private

- Pure voluntary saving

- Tax-subsidised private saving

- Mandatory private saving

- Tax-subsidised private saving

- Mandatory private saving

- Mandatory public saving

- Social Insurance

- Earmarked taxes

- Tax-funded flat-rate universal pensions

- Tax-funded flat-rate means-tested pensions

- Social assistance

- Pure public

NZ Super's success

The simplicity and transparency that once defined NZ Super was based on the fact that it was:

- paid on an individual basis

- not tied to work

- a taxable flat-rate

- not welfare

- and had low residential requirements

An unsustainable scheme

New Zealand’s Long-term Fiscal Statement, released by Treasury in October 2009, noted that by 2050, the total population was projected to have grown by around 25 per cent, while the number of people aged over 65 years was expected to have increased by around 150 per cent.

1.1 to 1.3 million New Zealanders will be older than 65 by 2050 (520,000 when the report was published in 2009). They were expected to make up 25% of the population of about 4.8 million (about 12% of 4.3 million in 2009). [That's numbers that don't add up as the population already hit 5 million in 2020.]

Net cost of NZ Super was 4.71% of the GDP (= Gross Domestic Product) in 2009. By 2050 it would be rising to 8.02% (so 1.7 times higher).

According to Finsia research, New Zealanders started thinking differently about retirement in the wake of the global financial crisis (GFC).

Before the GFC, 35% of working New Zealanders expected to retire between age 61 and 65 years. After the start of the GFC, 40% of working New Zealanders thought they would have to work until age 66 to 70 years.

Before the GFC, 54% of working New Zealanders expected to be retired by age 65 years, but in the wake of the GFC this number fell to 37%.

Projections by Statistics New Zealand, published in The Press on 26 May 2010, showed that workers of retirement age would account for more than a fifth of the labour force in coming decades. A peak was expected in 2028 with 23%, up from 6% in 1991 and 12% in 2006. By 2061 the proportion was expected to be at 21%.

Two options for reform
as food for thought

At the Overseas Pension Forum in Auckland on 24 February 2010 the co-directors of the Retirement Policy and Research Centre (RPRC), Dr. Susan St. John and Michael Littlewood, presented two options for reform.

Both options were established after analysing the advantages of NZ Super and all other kinds of existing pension schemes. The spectrum of retirement incomes reaches from pure private to pure public funding.

Nobody would complain if the original simplicity of NZ Super were applied to all pensioners in New Zealand, as the lawmakers had intended. This simplicity is still praised as a success story. There were times when politicians honoured the principles the RPCR researchers would expect of a fair law. "Policy should be based on clear principles and be simple and transparent", they say.

The authors of the study already then described the Direct Deduction Policy of Sections 187-191 (then still called Section 70) as "increasingly out of touch with the modern immigration trends and [say that] it produces uneven results". Furthermore, New Zealand's inability to conclude Social Security Agreements with most countries in the world is seen as a sign of "discomfort by our trading partners that needs attention".

The Government has lost the plot

By introducing the Direct Deduction Policy in 1938, adding Spousal Provision in 1985 and doing some repair work in 2009 that created even more inequities, the New Zealand government has long lost the plot and left the path of simplicity that once defined NZ Super.

For the researchers it was important to find common ground between the two extremes where people affected by the Spousal Provision (abolished in 2020) did not get a pension at all, and others who, according to Susan St. John, "think they should get two full basic pensions".

Editor's note: Here lies one big problem of these apple/oranges comparisons. New Zealand considers overseas pensions like the German and most European ones as state pensions because the technical term for the German pension on the Pension Reforms website is translated as Social Security, as if the state fully funded it. In reality the German word is Social Insurance, and that is exactly what it is. Each recipient pays big contributions into his compulsory Social Insurance account on top of income tax and compulsory health insurance, and only receives a proportional amount to his working years as superannuation.

Beside this a state pension for civil servants (Beamtenpension) exists. Even the terms used are different: Rente and Pension. What New Zealand calls NZ Super is considered a social welfare benefit overseas.

Not the name but the nature of the pension should count

This means: the "normal" pension is neither fully funded by the state, nor is it a full pension that - if at all - should be deducted as a 100% pension from NZ Super, even if a Social Security Agreement between the countries existed. Furthermore, by comparing other countries' pension systems to NZ Super, it should not be the name that counts but the nature of the pension.

There will always be these apple/oranges comparisons, no exception, because New Zealand Superannuation is such a rarity. No other major country has a comparable Tier 1 (basic) pension that is based on residence only. Some countries even have two or three types of pensions. And New Zealand cashes nearly all of them in, no matter what.

Anyway, the university researchers worked out two models for reform. Both options recognised the individual and not the couple, so long before the Spousal Provision was finally scapped in 2020, they suggested to abolish the punishment of pensioners who were in a relationship with the "wrong" partner. And both recommendations tried to find a way back to the transparency and simplicity that once made NZ Super such a success, and eliminate the apparent discrimination.

But already the presentations showed that even with the biggest effort it is impossible to meet everybody's expectations - although one option seemed fairer to most participants of the Forum and less open to critical comments than the other.

Change of residency requirement vs apportionate pension

Option 1, presented by Susan St. John, would extend the current 10 year residency requirement to 25 years. [Update: On 15 November 2021 Parliament passed a law which raises the residency requirement to 20 years over an extended period from 2024 - but nothing was done to address the issue of overseas pensions still being deducted.]

Pensioners we spoke to thought that with this option new distress was programmed as nobody would understand why someone who has worked in New Zealand 24 years and contributed to the New Zealand tax base and society should not get any NZ Super. And with the household income-test a new direct deduction policy would be introduced.

Option 2, presented by Michael Littlewood, would favour a proportional payment of NZ Super, based on the months of a 45 year working life, so based on the share of a maximum of 540 months (45 years x 12 months = 540 months). Littlewood said that people leaving New Zealand and retiring in another country already get 1/540th of NZ Super for every month worked in New Zealand under the Portability rules, "so why not people coming to New Zealand as well?"

To us and pensioners from overseas we spoke to, used to the payment of pensions that reflect the years of work and contributions in other countries, this seems a very straight forward proposal. Other nationals would complain because their overseas pensions are not adjusted to inflation, like in the UK.

The Working Paper (page 43) states: "Both options reinforce the need for a review of the tax system to ensure that all income is taxed appropriately, including overseas pension income." However, despite not knowing all Double Taxation Agreements New Zealand has signed in detail, we know that due to the provisions in the respective Double Tax Agreements pensions from a few countries, including Germany, France and the USA, cannot be taxed in New Zealand. These pensions can only be taxed in the country that pays them.

A different approach to pension reform: Means-testing like in Australia

A totally different approach to overhaul New Zealand's superannuation scheme came, at the time, from the Financial Services Institute of Australasia's (Finsia), a lobby group for fund and wealth managers. They said that New Zealand's generous superannuation scheme could not last and there should be some examination of means-testing or raising the age of eligibility from 65.

Several New Zealand newspapers reported on the issue on 24 February 2010. There was also an interesting media release (The wealth divide - trends and policy issues) of 23 February 2010 on the Finsia website; unfortunately the link does not work anymore. The following statements were published in the Fairfax media (The Press, Dominion Post).

"Finsia chief executive Dr Martin Fahy is hoping to shape the debate on superannuation in the future. Kiwis needed to be encouraged to save more with tax incentives to shift more savings into KiwiSaver, he said. KiwiSaver has been a boost to the funds management industry which comes behind property and bank deposits in Kiwis' preference for investment.

"Dr Fahy said New Zealand's superannuation was generous by world standards and unsustainable because of the increasing number of retired people living longer and the burden this placed on the tax system.

"In 10 years NZ Super would cost 8% of the GDP, up from 4% now. In 10 years, 1.3 million New Zealanders would be older than 65.

"New Zealand Superannuation was not means-tested and not many wealthy nations had such a pension system.

Retirement age rising to 67 years

"Australia has announced its retirement age would rise to 67 in about 13 years.

"Australians considered their decade-old compulsory superannuation scheme was not sufficient, Dr Fahy said. Workers had to contribute 9% of gross earnings a year. There had been calls to raise this to 11% and even 13%. It produced a pool of funds under management which could be used to support growth in the economy, not just through capital markets, but through products that invested in infrastructure, he said.

"Finsia considered wholesale changes were needed across the entire superannuation scheme in New Zealand. New Zealanders needed to embrace the reality of changing New Zealand Super. "So look again at 65, look again at means-testing and look again at all the provisions within that", Dr Fahy said. Means-testing would include KiwiSaver.

"Finsia has 17,000 members, including about 1,000 in New Zealand."

(Last update: 20.11.2021)

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