Peter Dunne has dunne it again. Like his floundering Income Sharing Bill, Flexi-Super looks like a solution to something - but to what?
The policy is being promoted as giving "choice", so that a person could choose to retire between 60 and 65 and get a correspondingly smaller state pension (Super). For those retiring at 60, the report suggests 73 per cent of the basic amount. A greater amount would be paid if a later date is chosen, rising to a possible 160 per cent when the pension is delayed until age 70.
This proposal may look superficially attractive but is poor policy because it is unclear about the problem that needs to be addressed. In fact it will make it harder to talk about the real problem of the looming costs of super as the population ages. There is no cost-saving motive in Flexi-Super as it is designed to be fiscally neutral.
Is the intent of Flexi-Super greater fairness and choice? If so, will all those who "choose" to retire at 60 understand the economic consequences of that one-off "choice"? Once the choice is made to get the pension at the younger age, the percentage amount is fixed no matter how long the person lives.
We know that superannuitants today are most likely to be in significant or severe hardship if they do not own their own home and have poor health. A large group, barely above the poverty line, may manage, but only with other resources of family or modest savings to call on. This suggests the basic pension is far from over-generous.
Full superannuation at age 65 is $275 for a married person and $357 for a single person living alone, after tax at the lowest rate. The figure suggested in the Flexi-Super document of 73 per cent for a 60-year-old works out to just $200 per week for a married person. This is less than the married rate for the invalid's benefit (now called the Supported Living Payment), of $215. For those who are single and living alone, the reduced Flexi-Super amount is $261 while the single rate for the Supported Living Payment is $258.
It would be a great mistake for those populations with lower average life expectancy such as Maori and Pasifika to view access to an early retirement on a lower rate of pension as a panacea. Flexi-Super has the potential to lead to a greater marginalisation of already poorer groups.
So rather than create more fairness and choice, the policy will see two classes of pensioners: those on barely subsistence rates falling further behind acceptable living standards the longer they live, while others who have the good fortune to work until later enjoy an enhanced super. Given the likely increased life expectancy of this latter group, because of higher wealth and better health, and the lower tax that will apply to the higher pension once work ceases, a class of privileged super wealthy will emerge. This will intensify rather than improve issues of fairness.
If the intent of the policy is to help people who are "worn out at 60" or who have health problems that mean they cannot work, then this problem may be best addressed by improving the welfare system. The present system works appallingly. Recipients feel stigmatised and face harsh means testing of welfare benefits. Under recent reforms, they are continually hassled to get paid work and fulfil obligations to Work & Income. Why do we condone this treatment for anyone let alone older, less healthy people?
While overhaul of benefits for those aged 60-65 is necessary on fairness and humanitarian grounds, it does not have to be tied to a policy that delivers more to those already advantaged based on some arcane view of actuarial fairness.
One of the real dangers of this policy is that welfare recipients aged 60-65 may be pushed off the benefit on to Flexi-Super. So much for choice. Even if this is called "early retirement", it is not going to be treated that way. Dunne does not envisage, for example, that early retirement will be accompanied by the benefit of the gold card. The gold card can, however, go at age 65 to those who defer retirement to a later age.
It is time to talk about real fairness in superannuation. The winners at the moment are those who enjoy their work, and have plenty of other income and assets. Instead of devising ways to enhance their position, policy should focus on achieving fiscal sustainability with fairness to all, including the working age population. There are three possible levers to reduce costs of super: raising the qualifying age, changing the pension amount (for example, changing the way the pension is adjusted for wage and price growth), and some kind of clawback from higher income people, perhaps through a better designed tax system.
If the Dunne proposal is adopted, people will be on different rates of super, starting at different ages. That will make it much harder to reform than our present simple system. Flexi-Super should be disregarded as a sideshow while we get on with talking about the real problems and well-conceived solutions.
Associate Professor Susan St John is co-director of the Retirement Policy and Research Centre, Auckland Business School, University of Auckland.