Mary Holm: If old Fred works, it means more jobs

Rising stars in the business world won't be condemned to begging if the retirement age rises. Photo / Getty Images

My main concern with raising the retirement age is that unless you have full or near-full employment it is self-defeating. If people aren't leaving at one end they cannot be taken on at the other. Rising stars in a company are also being held back from promotion as senior staff are not leaving. This is an issue already in both private companies and government departments that have been offering redundancy to older staff to ease the promotion congestion.

An important point is there is already high youth unemployment - this approach will make it even worse. The costs savings of raising the retirement age must be just about neutral, as, if you are not paying the pension, you will be paying the dole, work schemes, etc. Plus there's the social cost of not giving a good work ethic and start to the young. Their attitude to the workplace could be seriously impaired by being unemployed long-term. There is the real prospect of anti-social behaviour as they have little to do and little money. The chances of a 65-year-old mugging someone in the shopping centre is almost nil. The French have reduced the retirement age to 62 to promote youth employment.

On means-testing the pension, there has to be provision to access trusts, rental properties, etc. Otherwise it just is not fair, with everyone then off to the lawyers to open trusts as soon as they can.

Some people will invariably spend their money so they have some enjoyment from it and still pick up the pension. And when they get really frail, be calling on the health system as they'll have no money left.

The English say it costs more to administer a means test system than to keep it universal.

Let's look at raising the NZ Super age first. Your argument assumes there is a finite number of jobs in the economy. If 66-year-old Fred has a job, 18-year-old Sarah misses out. But that's not how it works.

Roughly speaking, everyone who has a job creates a job. In the course of working, Fred spends money on transport, clothes, work lunches, dry cleaning and so on. And because his income is higher than if he were retired, he spends more on leisure activities, luxuries and holidays.

In providing all this for Fred and his old schoolmates who are also still working, Sarah and other young people are employed.

How does this apply to the company in which you worry that rising stars won't be promoted? The added business generated from Fred and his mates' spending might well grow the company, making room for extra stars at the top.

That won't happen in every company, but across the whole economy it must work like that in the average workplace.

Not convinced? The same argument is sometimes made against letting immigrants come in and take jobs from New Zealanders. But if that's correct, how come New Zealand wasn't plagued with unemployment in the high immigration years of last century and the century before? As people came in and worked, they created jobs. Similarly, as older people stay in the work force, they create jobs.

Having said that, I agree that youth unemployment is a big worry for all the reasons you give. But I'm not convinced that refraining from raising the NZ Super age is the answer. How about, instead, people setting up businesses and hiring youths to provide the sort of goods and services Fred might want?

If we look internationally, I don't think your comment about the French is quite right. In 2010, Nicolas Sarkozy actually raised the retirement age from 60 to 62. What's been going on since, under Francois Hollande, is a little confusing. But in any case, France is only one country.

Elsewhere, the trend to raise the pension age is clear, says Simon Upton in a recent paper for Treasury. "In 2010, three OECD countries had pension ages of 67. Of the remaining 31 countries, 16 have since legislated increases in the pension age for men out to 2050 and 20 have legislated to do so for women ... While 65 remains the predominant age at which people normally draw their pensions, 67 is becoming the new 65."

Moving on to means-testing NZ Super, your worries about trusts and so on are addressed in Treasury's new "Affording Our Future" report on the ageing population. "The Government would have to examine people's private arrangements carefully to get a clear picture of their 'means'," it says. For more, see the report at www.tinyurl.com/affordingfuture.

I agree it may cost more to run a means test than it saves. Overall, I don't think means testing is a good idea. But I don't share your worry that it would lead to many people spending their retirement savings and then relying on the government.

As I've said before, I can't imagine any government setting things up so those without savings were as well off as those with savings, because that would send a strong anti-savings message to the young people at the time. In light of that, are many people really going to splash out, thus putting themselves in a weaker position - and at the government's whim - for the rest of their retirement?

I reckon the vast majority at that stage in their lives will value the security and independence that comes from having their own savings.

KiwiSaver concerns

Having just read David Jenkins' article "KiwiSaver must avoid Oz pitfalls" in a recent Herald, I now have some serious concerns regarding KiwiSaver. It would seem our Aussie cousins are racking up debt nearly equal to their superannuation on the basis that the lump sum payout will clear the debt upon retirement.

This of course leaves them with no retirement savings or income other than taxpayer-funded national super, which is totally contrary to the intention of both the New Zealand and Australian Governments.

Jenkins' answer appears to be that KiwiSaver should be paid as an annuity or regular payment.

My question is what, if anything, is there to stop the Government from introducing such measures or fiddling with the terms of KiwiSaver?
Nothing, except the fact that more than half New Zealand's voters are in KiwiSaver and the number keeps growing. It seems unlikely that a government would do anything wildly unpopular to the scheme.

Still, let's just say for argument's sake that a future government says half of everyone's KiwiSaver balance at retirement has to go into an annuity - which would make regular payments until you die. I suspect most people would be fine with that, as they were planning to spend most of their KiwiSaver savings gradually anyway.

Even so, I doubt if a government would change how retirees can spend money saved in KiwiSaver so far. That would be changing the rules mid-game.

A more likely scenario is for a government to launch a new model of KiwiSaver. Let's call it KiwiSaver 2. It might work something like this: From the next January 1, all contributions would go into separate new KS2 accounts. When you reached NZ Super age, a portion or all of your KS2 money would go into an annuity. But you could withdraw the money in your old account - the current one - any way you wanted to.

That would preserve the "deal" under which you currently contribute. And if you didn't want to continue contributing under the new rules, you could just take repeated contributions holidays until you retire.

By the way, Jenkins' comments about Australians running up large debts, to be repaid with their retirement savings, are interesting. That suggests the Australian compulsory savings rate is too high.

People basically want to smooth out their consumption over their lifetime.

If they feel they are being deprived of too much now, and will end up with more than they need in retirement, the logical response is to borrow to boost current spending.

The New Zealand Government should take note of this if it's thinking of raising the rate of KiwiSaver contributions or making KiwiSaver compulsory. If people don't want to save, they find ways around it.

Leaky-home dangers

Re your article, "Property investors may be in more danger of a nasty fall than they realise", two friends of mine each bought property to rent. One had owned his property a fortnight when he found it was a leaky home and the repair cost was $375,000. And that was even though he had had the property signed off by a home inspector, registered valuer and real estate agent that it was not a leaky home.

The other has just discovered the leaks after a lot of rain in Hawkes Bay. The first estimate to repair is $150,000. Water has soaked all the fibreglass insulation, gib board and wood in the dwelling. It will require the removal of the roof to commence the work, not a cheap exercise.

I think these signals will enhance your excellent article as a real warning to people who purchase either to reside in or rent.

Remember that a leaky home is not covered by insurance, because it is not sudden and unforeseen. The damage in both cases is to be met by the buyer. Nasty falls in both cases.

Indeed. Thanks for the warning. Scary stuff.

Savings anomaly

More a question out of curiosity rather than anything else.

I opened up ASB KiwiSaver accounts for my son and daughter a few years ago. I completed and handed in the applications at the same time, for the same scheme and for the same amount for both. But ever since, my son's scheme has always had a balance of $25 to $30 more than my daughter's. Any possible reasons?

Sexism! Or perhaps just happenstance. "Without looking at your children's KiwiSaver account details, it sounds like your contribution or the Government kick-start of $1000 have been applied to the accounts on different days," says ASB's Blair Turnbull. "We calculate the value of underlying fund assets and strike a unit price daily, so if contributions are processed one day apart, they'll purchase a different number of units."

Maybe your son's application was the last one processed on one day and your daughter's the first the next day. ASB invites you to discuss this with it, but it doesn't sound as if you're too bothered about it.

Still, it might be an idea to just plonk an extra $30 in your daughter's account to avoid ill feeling when the kids retire. The difference will add up over the decades. In 50 years, if $30 earns an after-fees and after-tax return of 5 per cent, it will grow to more than $360. And in 60 years it's almost $600.

* Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.