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Pension reform discussions


Two options as food for thought
 
At the Overseas Pension Forum in Auckland on 24 February 2010 the co-directors of the Retirement Policy and Research Centre (RPRC), Dr. Susan St. John and Michael Littlewood, presented two options for reform.
 
Both options were established after analysing the advantages of NZ Super and all other kinds of existing pension schemes. The spectrum of retirement incomes reaches from pure private to pure public funding.
 
Nobody would complain if the original simplicity of NZ Super was applied to all pensioners in New Zealand, as the law makers had intended. This simplicity is still praised as a success story. There were times when politicians honoured the principles the RPCR researchers would expect of a fair law. "Policy should be based on clear principles and be simple and transparent", they say.
 
The authors of the study describe the Direct Deduction Policy of Section 70 also as "increasingly out of touch with the modern immigration trends and [say that] it produces uneven results". Furthermore, New Zealand's inability to conclude Social Security Agreements with most countries in the world is seen as a sign of "discomfort by our trading partners that needs attention".
 
The Government has lost the plot
 
By introducing Direct Deduction in 1938, adding Spousal Provision in 1985 and doing some repair work in 2009 that created even more inequities, the NZ government has long lost the plot and left the path of simplicity that once defined NZ Super. 
 
For the researchers it was important to find common ground between the two extremes where people affected by Spousal Provision do not get a pension at all, and others who, according to Susan St. John, "think they should get two full basic pensions".
 
Editor's note: Here lies one big problem of these apple/oranges comparisons. New Zealand considers overseas pensions like the German and most European ones as state pensions because the technical term for the German pension on the Pension Reforms website is translated as Social Security, as if the state fully funded it. In fact the German word is Social Insurance, and that is exactly what it is. Each recipient pays big contributions into his compulsory Social Insurance on top of income tax and compulsory health insurance, and only receives a proportional amount to his working years as superannuation.
 
Beside this a state pension for civil servants exists. And what New Zealand calls NZ Super is considered a social welfare benefit overseas.
 
Not the name but the nature of the pension should count
 
This means: the "normal" pension is neither fully funded by the state, nor is it a full pension that - if at all - should be deducted as a 100%  pension from NZ Super, even if a Social Security Agreement between the states existed. Furthermore, by comparing other countries' pension systems to NZ Super it should not be the name that counts but the real nature of the pension.
 
There will always be these apple/oranges comparisons, no exception, because New Zealand Superannuation is such a rarity. No other major country has a comparable
Tier 1 (basic) pension that is based on residence only. Some countries even have two or three types of pensions.
 
Anyway, the university researchers worked out two models for reform. Both options recognise the individual and not the couple, so at least the Spousal Provision in Section 70 of the 1964 Social Security Act would become a thing of the past. And both recommendations try to find a way back to the transparency and simplicity that once made NZ Super such a success, and eliminate the apparent discrimination.
 
But already the presentations showed that even with the biggest effort it is impossible to meet everybody's expectations - although one option seemed fairer to most participants of the Forum and less open to critical comments than the other.  
 
 
Change of residency requirement vs apportionate pension
 
 
Option 1  Option 2

Raise the residency requirement for NZ Super from 10 to 25 years, achieved between the ages of 20 and 65.

Complete abolition of Section 70 and DDP and end of the "all our nothing" approach; payment of a portion of NZ Super, depending on years spent in NZ.

(Totalisation with countries where Social Security Agreements exist. In this case, only one basic payment. Countries affected: UK, Canada. No deduction if 25 years are achieved in New Zealand alone.) Any pensioner with an overseas pension applying for NZ Super would get a reduced amount of NZ Super, calculated by the formula: NZ Super minus (NZS multiplied by the months outside NZ between ages 20 to 65, divided by 540).
Reason: the current requirement sets up potentially perverse incentives for immigrants, and creates an unfair and potentially costly burden for New Zealand taxpayers. Reason: this honours the fact that most countries have entitlements that accumulate by reference to contributions, years of contributions, years of employment, or years of residence.
If 25 years residency is achieved without totalisation any other basic pensions would be ignored, other than for tax purposes.  If the overseas country's state pension age is higher than that of New Zealand, the test would apply from that country's state pension age. 
Where the 25 year residency requirement is not met at age 65, NZ Super would not be paid but an income-tested benefit, set at a level between a standard social welfare benefit and NZS. Any overseas pension would be taken into account in the benefit's household income-test. This option does not depend on having reciprocal Social Security Agreements with other countries because residence outside New Zealand is not taken into account. There is no need for a minimum residency rule or totalisation.
Everybody has access to at least a minimum welfare provision. Reflects contributions by immigrants to NZ and assures other countries of fairness.
 
Full reports on pages 42-47 of the Working Paper. Plenty of food for thought and discussion.
 
Option 1, presented by Susan St. John, would extend the current 10 year residency requirement to 25 years.
 
Pensioners we spoke to think that with this option new distress is programmed as nobody would understand why someone who has worked in New Zealand 24 years and contributed to the New Zealand tax base and society should not get any NZ Super. And with the household income-test a new direct deduction policy would be introduced.
 
Option 2, presented by Michael Littlewood, would favour a proportional payment of NZ Super, based on the months of a 45 year working life, so based on the share of a maximum of 540 months (45 years x 12 months = 540 months). Littlewood said that people leaving New Zealand and retiring in another country already get 1/540th of NZ Super for every month worked in New Zealand, "so why not people coming to New Zealand as well?"
 
To us and pensioners from overseas we spoke to, used to the payment of pensions that reflect the years of work in other countries, this seems a very straight forward proposal. Other nationals would complain because their overseas pensions are not adjusted to inflation, like in the UK. 
 
The Working Paper (page 43) states: "Both options reinforce the need for a review of the tax system to ensure that all income is taxed appropriately, including overseas pension income." However, despite not knowing all Double Taxation Agreements New Zealand has signed in detail, we can say for Germany that this agreement does not allow New Zealand to tax German pensions. Only Germany is allowed to do so - and does. Only a basic income is tax-free. 


A different approach to pension reform: Means-testing like in Australia

A totally different approach to overhaul New Zealand's superannuation scheme comes from the Financial Services Institute of Australasia's (Finsia), a lobby group for fund and wealth managers. They say that New Zealand's generous superannuation scheme cannot last and there should be some examination of means-testing or raising the age of eligibility from 65.

Several New Zealand newspapers reported on the issue on 24 February 2010. You also find an interesting media release (The wealth divide - trends and policy issues) of 23 February 2010 on the Finsia website. The following statements were published in the Fairfax media (The Press, Dominion Post).

Finsia chief executive Dr Martin Fahy is hoping to shape the debate on superannuation in the future. Kiwis needed to be encouraged to save more with tax incentives to shift more savings into KiwiSaver, he said. KiwiSaver has been a boost to the funds management industry which comes behind property and bank deposits in Kiwis' preference for investment.

Dr Fahy said New Zealand's superannuation was generous by world standards and unsustainable because of the increasing number of retired people living longer and the burden this placed on the tax system.

In 10 years NZ Super would cost 8% of the GDP, up from 4% now. In 10 years, 1.3 million New Zealanders would be older than 65.

New Zealand Superannuation was not means-tested and not many wealthy nations had such a pension system.
 
Retirement age rising to 67 years

Australia has announced its retirement age would rise to 67 in about 13 years.

Australians considered their decade-old compulsory superannuation scheme was not sufficient, Dr Fahy said. Workers had to contribute 9% of gross earnings a year. There had been calls to raise this to 11% and even 13%. It produced a pool of funds under management which could be used to support growth in the economy, not just through capital markets, but through products that invested in infrastructure, he said.

Finsia considered wholesale changes were needed across the entire superannuation scheme in New Zealand. New Zealanders needed to embrace the reality of changing New Zealand Super. "So look again at 65, look again at means-testing and look again at all the provisions within that", Dr Fahy said. Means-testing would include KiwiSaver.

Finsia has 17,000 members, including about 1,000 in New Zealand.

 
Sky Tower and marae, Auckland
 
Income spectrums in retirement
(as presented by the RPRC at the Overseas Pension Forum in Auckland)
 
- Pure private
- Pure voluntary saving
- Tax-subsidised private saving
- Mandatory private saving
- Tax-subsidised private saving
- Mandatory private saving
- Mandatory public saving
- Social Insurance
- Earmarked taxes
- Tax-funded flat-rate universal
    pensions
- Tax-funded flat-rate means-
    tested pensions
- Social assistance
- Pure public
 
 
 
 
 
NZ Super's success
 
The simplicity and transparency that once defined NZ Super was based on the fact that it was:
 
- paid on an individual basis
- not tied to work
- a taxable flat-rate
- not welfare
- and had low residential
   requirements


 

 


An unsustainable scheme

New Zealand’s Long-term Fiscal Statement released in October
2009 notes that by 2050, the
total population is projected to have grown by around 25 per cent, while the number of people aged over 65 years is expected to have increased by around 150 per cent.

1.1 to 1.3 million New Zealanders will be older than 65 by 2050 (currently 520,000). They are expected to make up 25% of the population of about 4.8 million (now about 12% of 4.3 million).

Net cost of NZ Super is 4.71% of  the GDP (= Gross Domestic Product) at the moment. By 2050 it will be rising to 8.02% (so 1.7 times higher).
 
According to Finsia research New Zealanders started thinking differently about retirement in the wake of the global financial crisis (GFC).

Before the GFC, 35% of working New Zealanders expected to retire between age 61 and 65 years. After the start of the GFC, 40% of working New Zealanders thought they would have to work until age 66 to 70 years.

Before the GFC, 54% of working New Zealanders expected to be retired by age 65 years, but in the wake of the GFC this number fell to 37%.
 
Projections by Statistics New Zealand, published in The Press on 26 May 2010, show that workers of retirement age will account for more than a fifth of the labour force in coming decades. A peak is expected in 2028 with 23%, up from 6% in 1991 and 12% in 2006. By 2061 the proportion is expected to be at 21%. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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