Jane Wrightson: Steady now, before we raid the future

Don't be hasty in raiding the money pot. Photo / 123RF

Opinion

COMMENT:

With public spending up due to Covid-19, it's natural to search for ways to cut back. The New Zealand Initiative's David Law has argued for knee-jerk changes to retirement income policies in order to make up for the country's higher debt levels to cope with the pandemic. Steady now.

As set out by the CFFC's three-yearly Review of Retirement Income Policies, most recently in December 2019, retirement policy settings are long term in nature and should be as stable and predictable as possible, with any changes based on sound evidence, signalled far in advance.

Five years is not a long lead time for the changes that Law proposes, such as lifting the age of eligibility for New Zealand Superannuation. A change of that magnitude would severely impact many New Zealanders heading for retirement over the next 5 to 10 years: those who do not own their home, have low savings, high debt, have had time out of the workforce, or are unable to work.

Our country's retirement income policy history has been turbulent, with many chops and changes from the 1970s on. We can be grateful that policy lurches have ceased recently, with a more measured approach now in place.

The economic and political stability of the entire retirement income ecosystem should not be targeted or threatened every time a fiscal crisis heaves into view. These seemingly "easy fixes" are not "easy" at all, affecting retirement outcomes for millions of New Zealanders over decades to come.

Setting aside the suggestions for the New Zealand Super Fund, which fall in a more political arena, here are some different views about NZ Super and KiwiSaver.

NZ Super

Avoiding pension poverty is just as important as avoiding child poverty. We have a system that provides dignity for older New Zealanders. Here's the trend: New Zealanders are going to need NZ Super more than ever before. In the next decade, more will reach 65 either renting or still with a significant mortgage, and many won't be able to pay the bills. Applying a wellbeing lens is particularly relevant here – NZ Super provides an economic backstop that keeps a large number of older New Zealanders off the breadline.

NZ Super is effective public spending. Since more retirees, not fewer, will need NZ Super by 65 in coming years, raising the age of eligibility doesn't make sense for either public value or the dignity of independent income. Lifting the age will not necessarily reduce demand on the public purse – there'll just be more people aged 65-plus on Jobseeker, disability and sickness benefits. And do we really want to force more older people to compete for jobs against younger people?

Avoiding pension poverty is just as important as avoiding child poverty. Photo / 123RF

Even from a fiscal responsibility perspective, NZ Super is sustainable. Based on the latest Treasury data and projections, NZ Super will cost less than 7 per cent (net) of national GDP by 2060. This is a rise in proportional cost, from 4.8 per cent today, but is still well under what some other OECD countries already spend on pensions and yet find manageable. (Law himself points this out, perhaps contradicting himself: " while superannuation costs as a share of GDP will continue rising, they won't come near the OECD average".)

Few OECD countries have actually lifted their retirement age. The suggestion is that New Zealand is behind its peers in not raising the retirement age, but in reality quite few have actually done so. Some that did later reversed their decision to do so.

NZ Super costs are offset. Superannuitants pay tax on NZ Super and all other income and contribute through expenditure to the local and national economies. NZ Super also enables many to undertake unpaid, voluntary work in their community. This is a huge contribution, relied on in many communities.

KiwiSaver

Don't punish Millennials (again). KiwiSaver's key first-home incentive helps many young New Zealanders. Law's proposal would hit them twice: they would have to work longer to receive superannuation, and their KiwiSaver would reduce with no government contribution.

KiwiSaver is not the fiscal drain it might seem. Law calls for the removal of government contribution to KiwiSaver, claiming that KiwiSaver costs the government a cool $1 billion each year. Yet based on the Financial Markets Authority's annual KiwiSaver report, the true cost to the Crown when you take into account taxation looks much less, closer to $476 million.

The tax on investment angle is important here, as we estimate that tax revenue from KiwiSaver through March 2050 – even when you take into account the government's incentive – could be as high as $35.5b in today's dollars.

Beyond saving, what would we be saying? Removing the KiwiSaver government incentives would have to lead us down the road to making KiwiSaver compulsory. This might not be a bad thing, but there needs to be more discussion about this.

The short of it is, we need to lift saving and investment levels across the board, whether through KiwiSaver or other vehicles.

The KiwiSaver studies cited are outdated. For example, the SOFIE study has not run since 2010, just three years after KiwiSaver began, so it can't have detected KiwiSaver's undeniable impact since then.

The urge to divert funds from long-term goals to short-term needs is indeed an old debate that will long continue, particularly every time a crisis emerges and pulls at the public purse. But let's keep sudden policy lurches and over-correction a thing of the past.

- Jane Wrightson is the Mana Ahungarua / Retirement Commissioner and heads the Commission for Financial Capability (CFFC).