David Chaplin 's Opinion

A personal finance columnist for the NZ Herald

Inside Money: Do we have to say goodbye to retiring at 65?

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Photo / Thinkstock
Photo / Thinkstock

The National government is once more coming under pressure to lift the retirement age, this time from coalition partner, the Act Party.

"We need honesty on the looming superannuation and healthcare affordability issue," newly-elected Act leader Jamie Whyte told the NZ Herald.

To be more honest, Act, unnaturally allied here with Labour on the issue, is calling for the lifting of the age of eligibility for the government pension from 65 to 67: people can retire whenever they want, if they can afford it.

Raising the age when the government pension kicks in would certainly save some money. Most other developed countries already have, or are considering, making people work for longer before hooking into a government pension.

Australia, for example, is already committed to pushing out the pension age to 67 with the country's Treasurer, Joe Hockey, arguing the limit should increase to 70 ASAP.

And while increasing the pension sign-on age isn't necessarily a bad idea, it's not the only idea to combat the fiscal costs of an aging population.

Hockey has other budget-cutting options, such as removing the massive subsidies the Australian government gifts to the country's privately-run compulsory superannuation system or even abolishing tax breaks on negatively-geared property.

The New Zealand Treasury has also been contemplating the pension affordability issue. In a just-published paper, author Andrew Coleman lists three ways the government could tackle the pension problem:

• raising the age of eligibility;
• reducing the average size of payments, or;
• maintaining the current age of entitlement and payment levels so long as it raised taxes early and invested the proceeds.

Coleman's paper is reasonably long and technically complex at times but it essentially makes the case for option three: arguing for a save-as-you-go (SAYGO) approach to funding the government pension via the New Zealand Superannuation Fund (NZS).

(Not surprisingly, NZS included the link to Coleman's paper in its latest performance report.)

"In the New Zealand context, the easiest way would be to fund any expansion of New Zealand Superannuation on a SAYGO-basis, using the New Zealand Superannuation Fund to invest additional funds," the Treasury paper says. "In this case almost all investment is risk is borne on the balance sheet of the government and ultimately shared across generations."

Coleman also notes that government-controlled investment funds tend to outperform private sector funds primarily because of "the much higher fee and costs structure of private funds".

"In the context of the current paper, it is perhaps worth noting that the New Zealand Superannuation Fund has outperformed its market-based reference portfolio since inception, and routinely outperforms the returns earned by private sector Kiwisaver providers," the paper says.

Private sector funds, of course, have higher marketing and distribution costs than NZS but Coleman's research suggests that the government would get more long-term value out of restarting contributions to NZS than introducing compulsion (soft or otherwise) for KiwiSaver.

David Chaplin

A personal finance columnist for the NZ Herald

David is a freelance journalist who has covered the financial services business on both sides of the Tasman for over 15 years. David has edited magazines and websites for the financial advice, investment and superannuation industries. Today, he contributes to various publications in Australia as well as his bi-weekly blog for the NZ Herald under the 'Inside Money' banner.

Read more by David Chaplin

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