In this Q&A Associate Professor Susan St John, co-director of the Retirement Policy Research Centre at the University of Auckland Business School, explains how we can protect our world-leading superannuation scheme in light of rising costs as the population ages.
You have been publishing books on New Zealand superannuation since the early 1990s. Why do you think retirement policy is such an important issue?
I think it is by good luck rather than, perhaps, conscious design that New Zealand has come up with a world-leading policy for retirement. We now worry about child poverty but elder poverty is not a major concern. That's worth protecting.
Why do we have the best system in the world?
It's world-leading in a number of ways. First of all, we probably have the simplest retirement system in the developed world and that has a huge advantage for people understanding and being able to work within the system.
The second thing is, we have treated women very equitably- they get it in their own right. Other countries tend to build their superannuation policies around contributions to paid work.
So, in New Zealand we have a system that gives the same pension whether you have been in the paid workforce or not - independent of your paid work contribution and independent of your partner's income. We have a very egalitarian approach.
Has this changed with KiwiSaver?
KiwiSaver is simple to use and doesn't have expensive subsidies, so in those ways it's really well designed. It's given people who did not have a savings plan access to a private super scheme. People not in paid work can also be in KiwiSaver.
The government announced it was scrapping the KiwiSaver kick-start payment at this year's budget. Do you think this will have any long-term consequences?
I think this is what happens when you have no forum for debate around retirement policies. You get knee-jerk reactions that have not been well considered.
My problem with getting rid of that kick-start payment is that it is going to have a generational impact. The people who were already in KiwiSaver (many of the baby boomer generation) have been the prime beneficiaries of generosity in KiwiSaver benefits, which the younger generation now won't have. It's really quite mean-spirited.
The kick-start also gave people out of the workforce a fee cushion. Imagine if someone was on a benefit, would they join up to KiwiSaver? If they put in $10 a week, after paying fees their returns could look very minimal even negative - but the $1,000 kick-start would help soften that.
Are there any major flaws in the current system?
Yes, for many years my colleagues at the Retirement Policy Research Centre and I have highlighted the growing inequities of the treatments of some of those with overseas state pensions.
One of the worst anomalies is that currently, a married retiree may lose all or part of their New Zealand Superannuation because of their spouse's overseas pension. This lacks fairness and balance. A person's pension should be theirs in their own right.
Is the current 65+ universal superannuation scheme sustainable?
I think that word "sustainable" is a tricky one, because we can do whatever we choose to do. If we choose to spend a large amount on superannuation and a small amount on working age benefits - then we can do that.
I think the sustainability argument is about whether it is morally or socially sustainable to have a generous universal payment for superannuitants no matter how wealthy or whether in full-time well paid work when many Kiwi families are in hardship. Families who can't afford to pay for a healthy home, electricity and nutritious food. That's where it is morally and social questionable.
Why is it important we debate superannuation now?
The baby boomer generation started to retire in 2010 so we are five years into that retirement. In 15 years all the baby boomers will be retired and the oldest ones start turning 85. This older category can be very expensive especially when they need long term health care. So in my view we can't act soon enough.
Do you think raising the retirement age is the answer to the demographic changes in New Zealand?
Raising the age gets all the attention as the solution. The Retirement Commissioner wants to index the age to longevity improvements, because people are spending on average longer in retirement.
But the length of time in retirement is extremely variable. This solution omits to grapple with the issue of people who are struggling to work at 65 for physical reasons or because of a downturn in the labour market.
It also requires a long lead-in time so people can prepare, which means there is not much money to be saved either.
How about means testing?
In New Zealand the idea of means testing is seen as being a punishment for hard work or savings. Culturally, it is a very difficult subject to talk about.
What this is doing is obscuring a discussion about a raft of non-draconian ways to means test that are far less obtrusive than auditing a person's wealth and income.
So, what do you propose?
In the current system, if you are over 65, still working and in the top tax bracket (income over $70,000), your super is taxed at 33%. So you get about 75% of the superannuation for a person in the lowest tax bracket, so there is some claw back for top earners already.
I think we have an amazing opportunity to restructure New Zealand Superannuation as a genuine basic income to allow us to retain all the world-leading features and also save some money.
I have proposed the basic income is called the New Zealand Superannuation Grant and set the current after-tax superannuation rate.
How would the New Zealand Superannuation Grant work?
It would work in much the same way as the current superannuation scheme. Everyone over the age of 65 would be entitled to receive this basic untaxed unconditional grant.
It would always be there regardless of other income and assets.
However, if you claim the grant, you would be placed on a separate tax scale for your other income.
What would this mean for people over 65 still in work?
So people over 65 who are still in highly paid work or have large amounts of other income would pay tax at a slightly higher rate if they claim the Superannuation Grant.
I propose using a superannuation tax scale of 17.5% on the first $15,000 earned, while income over $15,000 would be taxed at a rate of 39%.
Using these rates, superannuitants would still benefit financially from drawing the superannuation grant until they earn more than $147,000.
People who earn over $147,000 are better off not to claim the superannuation grant and to pay tax at the regular rate.
And by doing this you calculate it would save a billion dollars annually?
Yes, and, the majority would notice no difference. A few will be a little worse off than under current superannuation scheme, but those who choose not to claim the New Zealand Superannuation Grant are unlikely to miss it.
Read Susan St John's working paper Improving the affordability of New Zealand Superannuation