Peter Neilson: Discussion needed around future retirement incomes

We need a fully informed national discussion on how we manage retirement incomes in future. Photo / Thinkstock

Opinion

So now KiwiSaver is six it's timely to look at where our income retirement scheme is at.

Rather than being content that we're on the money with what we've got, we need to be as clever as clever now and forever to get our savings scheme working to meet New Zealand's next boom.

It's the retiree boom and the outlook is poor.

We already have 100,000 more 65-plus-year-olds than were projected in the early 1990s and over the next 20 years our baby boomers will become the retirees. By 2055 New Zealand is forecast to have 1.7 million people aged 65 or older with an expected life span of 95.

Something has to give if we are to avoid huge tax hikes and inadequate incomes that in no way can match the living standards we had when we were employed.

Taxation-funded Superannuation alone and current rates of contributions for retirement under KiwiSaver will not cover the cost of this retirement boom.

While new employees are automatically enrolled into the scheme, don't rest easy. There's no immediate fix from any quarter to get retirement income up to liveable levels and in line with what Australian retirees can expect.

It's up to each one of us to change our own financial behaviour and make the effort to learn how we can save more and manage those savings so they grow for us the way we want and provide the lifestyle, the house, the car, the kids and holidays today and comfort and surety in retirement. But we can't do it alone.

Politicians need to be shaken and stirred to do what's right now.

The problem of so many Kiwis facing a big shortfall in an adequate income in their retirement is not going to go away. It is the elephant in the room and there is an urgent need for a policy framework that makes it easy, fair and attractive for people to save sufficiently today so they can live a quality life in the future.

A good starting point would be a more attractive taxation regime for long-term savings that gives parity at least with the taxation benefits from investments in rental properties, but a tweak here and there is not good enough.

We need a fully informed national discussion on how we manage retirement incomes in future.

We have to look at the measures we need in place fast so people can retire at age 65, if that's what they wish to do, and use KiwiSaver to fund the gap until New Zealand Super cuts in at a later age. It is likely that the age of eligibility for New Zealand Super will move as life expectancy increases as it has in other countries.

Scrapping the compulsory retirement savings scheme in 1975 is now one of the greatest regrets.

Hindsight is a wonderful thing and it is not too late for individuals and politicians to take action and help save the future of the vast majority of Kiwis who simply haven't or can't put enough away to fund their long life of retirement.

If we had the same contribution rates and coverage as Australia we would have more than $1 trillion invested in KiwiSaver by 2066.

Think about what that would mean for our future. If we expanded coverage and contributions into KiwiSaver we would have higher incomes, a lower dollar and lower interest rates, along with more money to invest in New Zealand businesses and jobs. Think about what that would mean for our country and our wellbeing.

Our independent research shows that at least 60 per cent of Kiwi adults are behind a compulsory KiwiSaver scheme - so is the Labour caucus.

National is non-committal but sees the benefits of having a healthy culture of savings contributing to a more resilient economy with investments in New Zealand's productive sector and a deeper pool of long-term capital available to allow infrastructure investment and keep taxes down.

No u-turns are required. The way is clear for cross-party agreement with the people already signalling their willingness for a universal savings scheme.

The Financial Services Council, whose 21 members manage around $80 billion in savings and provide financial services to more than 2 million New Zealanders, sees retirement savings as an urgent issue the country must recognise and address and is taking its arguments out to the community and the Beehive.

The council will host a major forum in October involving overseas experts and New Zealand decision-makers focusing on how to more than double retirement incomes - while continuing to give people the choice to retire at age 65.

The council is working on a proposal to increase contributions over a period of time to 10 per cent and expand KiwiSaver's coverage.

It'll be presented at the Future of Super Conference followed by discussions with politicians in a bid to win a national consensus for a new multi-party agreement on retirement income that updates the 1993 accord and provides secure policy for the future. We can't keep postponing the conversation.

There is no doubt that we need to urgently address the issue of how we are going to fund our retirements and all political parties have a role to play in creating the right policy and social framework to support the needed enduring changes.

New Zealanders need to know what they can expect from NZ Super and how much they need to save to achieve a comfortable retirement. It's only fair.

So where are we today? Six years on KiwiSaver has attracted more than 2 million employees - just over half of them women. Looks good, but many people signed up are not currently contributing any savings. Most KiwiSavers who are contributing to the scheme are doing so at the 6 per cent level - that's 3 per cent from the employee and 3 per cent from the employer - insufficient to fund a comfortable retirement even with Super.

Most New Zealanders are realists. Only 9 per cent believe that the pension (currently $357 per week after tax for a person on their own or $512 for a couple) will provide adequate income in retirement.

But don't wait for political action. Help yourself. Can you resist everything but temptation? Think of the chocolate marshmallow fish test - leave it alone and you'll be rewarded with another one. Psychological research found that the ability to hold off eating the sweet treat long enough to get a second one is a better predictor of financial success than your IQ.

A no brainer really and as unpalatable it may be, we need to save 10 per cent - 5 per cent from your pay pack and 5 per cent from your employer into KiwiSaver. So start now or talk to your employer to step up contributions by 0.5 per cent each a year until you reach 10 per cent total contributions. And you can do more.

KiwiSaver is becoming the bedrock to pay for the Kiwi dream, with many younger people obviously attracted by the ability to withdraw part of their savings to buy a first home.

If those same new homeowners were to increase their monthly contributions and take a more active interest in their KiwiSaver scheme they could move to one that offers higher returns, with a higher level of risk or volatility, to build a financial asset as important to them as their house and which enables them to reach their lifetime goals - including a financially worry-free retirement - and the chocolate fish.

Peter Neilson is chief executive of the Financial Services Council.