A beefed-up KiwiSaver and a gradually rising age of eligibility for New Zealand Superannuation are the core of a proposal the savings industry says would put future retirement income on a sounder footing.
The Financial Services Council, which is the fund managers' lobby group, yesterday released a report, "Pensions for the 21st Century: Retirement Income Security for Younger New Zealanders", it hopes will inform debate on the issue.
It is not advocating changes which would affect those in or nearing retirement, but rather measures which would be phased in and which reflect increasing longevity and the superior efficiency of save-as-you-go over pay-as-you-go schemes for funding retirement income.
Statisticians' central projections have life expectancy for those who reach the age of 65 rising over time by just under one year every decade.
But the council's report says the central projections have consistently underestimated what actually happens and points to projections published in The Lancet which suggest the trend is closer to two extra years a decade.
If so, the burden on future taxpayers would rise even more than current official projections imply and could nearly treble, relative to the size of the economy, later in the century.
It is calling for a debate about what percentage of future economic output would represent a tolerable limit on taxpayer-funded public pensions and the implications of that, combined with rising longevity, for the age of eligibility.
To bridge the gap between fiscal limitations and a decent retirement income it proposes changes to KiwiSaver which would bring it closer to the scheme Australia has had in place for the past 20 years. The council proposes automatic enrolment for all employees, with opt-outs only for hardship, and voluntary enrolment for everyone else.
Minimum contribution rates are due to increase next year to 3 per cent from employees and 3 per cent from employers. The council wants that to be raised to five-plus-five by the year 2025, noting that in Australia the contribution rate is to be increased from a total of 9 per cent now to 12 per cent.
So that those who want or need to can still retire at 65, it proposes a requirement to buy a fixed-term pension for at least the value of New Zealand Superannuation to cover the period between 65 and whatever the future age of eligibility is. If someone does not have enough in his or her KiwiSaver account to cover the cost of that, the Government would top it up.
Underpinning the council's proposal is the economic argument that, provided the rate of return on investment is bigger than the rate of economic growth, and especially of productivity growth, save-as-you-go schemes will deliver in the long run a higher income in retirement than the same cost during a taxpayer's working life of a pay-as-you-go scheme like NZ Super.
"If you save 1 per cent of your income while you are working and leave it in an account earning 3 per cent a year after inflation, fees and tax, the effect of compound interest gives you a 60 per cent higher pension than if you give 1 per cent of your income as a pension to an older person and get 1 per cent of a younger person's income as a pension when you retire," it says. If the return were 4 per cent in real terms, the income gap would be wider still.
The council calls for a working party to verify that and other claims in its report, in the hope that it would form the basis for an informed cross-party and inter-generational debate.
Otherwise, it warns: "If tax rates have to continually increase to fund retirement incomes for more people in retirement living longer, paid for by fewer people in employment, then more and more of our best qualified young people will move to countries such as Australia where they can enjoy higher retirement incomes and lower taxes."