Steps to secure future pensions
Although this website is about New Zealand Superannuation, it should be mentioned that NZ Super is not the only source of retirement income, at least for future retirees.
In addition to NZ Super, which is the main source of retirement income for about 60% of New Zealand pensioners, personal savings and investments (funds, shares, property) play a significant part in covering elderly people's cost of living. A third source of retirement income beside savings and NZ Super is KiwiSaver, an individual savings scheme. It is a personal choice to join the scheme, i.e. KiwiSaver is not compulsory. And, of course, some people keep on working to supplement their income.
As NZ Super is tax-funded and the cost for future taxpayers could become a heavy burden in the face of changing demographics, the former Labour Government introduced the New Zealand Superannuation Fund.
Only the future will tell if both changes were brilliant ideas.
KiwiSaver – a work-based, contribution-funded Tier-2 pension
KiwiSaver is a voluntary, earnings-based savings initiative aimed at people who work, encouraging them to maintain a regular, long-term savings pattern. It was initiated by the Government in 2007. The scheme includes a NZ$ 1,000 kick-start payment from the Government, requires regular contributions from both an individual and his or her employer, and comes with the reward of a tax credit.
Savings will generally be locked in until the person becomes eligible for NZ Super, i.e. currently until age 65, or has paid into the scheme for at least 5 years if they joined over the age of 60. There are, however, provisions for early withdrawal of part or all of the savings under certain circumstances.
Although KiwiSaver is a Government scheme it is managed by private sector companies. Those who join are free to choose which KiwiSaver provider they invest their money with. However, KiwiSaver is not guaranteed by the Government. This means that people make investment choices in a KiwiSaver scheme at their own risk.
What is particularly interesting to note: the Government points out that joining KiwiSaver does not affect a person’s eligibility for NZ Super or reduce the amount of NZ Super they will be entitled to. This is relevant to the discussion on the Government’s Direct Deduction Policy applied to NZ Super because KiwiSaver is, in essence, very similar to many work-related, contribution-funded Tier-2 overseas pensions. They are deducted, KiwiSaver isn’t. This is fuzzy logic and one of the many inconsistencies of the New Zealand pension system.
The NZ Superannuation Fund – a Government investment scheme
Other than KiwiSaver and successful private investments, the NZ Superannuation Fund does not increase your retirement income. It is only a way for the Government to generate monies by investing current taxes. This should, if successful, reduce the tax burden on future New Zealand taxpayers in the face of the ever-increasing cost of Superannuation.
The New Zealand Superannuation Fund was created in 2003. Those currently (in 2010) aged 44 will be the first to have part of their NZ Super paid from the New Zealand Superannuation Fund. However, payments into the fund were suspended by the National Government in May 2009 for up to ten years, due to falling revenues and rising Government spending.
In mid April 2010 Finance Minister Bill English announced that Government contributions to New Zealand's retirement nest egg could resume within six years. English said that an improving economy could lead to resumption earlier than expected.
The key facts of the fund
An article published in the New Zealand Herald on 21 July 2009 sums up the key facts of this fund. Following is a part of this article:
“The New Zealand Superannuation Fund, which started investing at the end of September 2003, is designed to partially pay for the future cost of New Zealand superannuation. Because the population is ageing, the cost of providing super is predicted to double over the next 50 years. It was designed to make its first payout in 2031.
Also known as ‘the Cullen Fund’ after its founder, former Labour finance minister Michael Cullen, the fund was valued at NZ$ 13.1 billion at the end of May. The National Government, in its first Budget, stopped the annual NZ$ 2 billion contributions into the fund, saying it could not be afforded in the current climate.
The Treasury has estimated that by 2050, with an 11-year contribution 'holiday', the fund would pay for 8 per cent of New Zealand's superannuation bill that year, compared with 11 per cent if there had not been an 11-year holiday. - NZPA”
An ongoing topic of discussion - "Dump the white elephant"
The Cullen Fund is an ongoing topic of discussion, with avid supporters on one side and others who rubbish it completely. Economist and fund manager Gareth Morgan, for example, said after the suspension in June 2009 that "the Government should dump the 'white elephant' New Zealand Superannuation Fund and give about NZ$ 3000 back to people through KiwiSaver". Morgan suggested that putting NZ$ 12.5b from the fund into KiwiSaver would effectively make KiwiSaver compulsory overnight. "The alternative would be to give the NZ$ 12.5b back to people in tax cuts, though that may be too radical for the Government."
Calculations from April 2010 showed that the freeze of the fund might have cost taxpayers NZ$ 30 billion. The Press reported that "the Government paid NZ$ 250m into the fund this year. Under Treasury's normal track it would have paid NZ$ 15.5 billion. [...] That would mean by 2050 the fund would be worth NZ$ 49 billion less than if contributions were maintained."
As the history of the fund suggests, Labour criticises National for being "stupid" (party leader Phil Goff): "It has undermined the certainty and future of the Super Fund. It was a short-term decision taken for purely ideological reasons because National has never been committed to the super fund." National justifies the suspension of payments as the right economical move in tough times. Some analysts argued it was the wrong time to stop contributions, because it was best to invest more when prices were low.
And so it goes on. It will not be the last argument.
KiwiSaver is often described as New Zealanders' nest egg for retirement. It is surely a nice supplement to NZ Super - if the policy stays as it is now - but not as huge in proportion to NZ Super as a kiwi egg is to a kiwi.
Kiwi lay the biggest eggs of the bird world in proportion to their body weight and size. "Operation Nest Egg" in bird terms is the attempt to save the species by taking eggs out of kiwi nests in the wild, breed them in breeding centres and after hatching raise the chicks on predator-free islands until they weigh 800 to 1000 grams and are strong enough to fight enemies. Then they are transported back to the woods where the eggs have once been taken from.
In the breeding centres eggs are turned, weighed and their air sacks controlled daily.
Occupational pensions (employer-funded and employer/employee-funded schemes) do not play a big role in New Zealand. The main reason probably is that the residency-based NZ Super provision is relatively generous, given that New Zealand residents do not have to make any contributions to it.
In 2007 only 13.4% of the workforce in New Zealand made provisions into employer-sponsored superannuation schemes. At the same time 90% of Australians were covered by such occupational pensions - as Australian Age Pension is means-tested.
The number of employer-sponsored superannuation schemes has fallen dramatically in the past 20 years, from 2,242 schemes in 1990 to 258 in 2008.
The topic of transferring pension funds from, for example, Australia or the UK to New Zealand is complex. Here is an interesting NZ Herald article on the issue, urging people to consult a finance and tax adviser before paying hefty transfer fines and taxes.