Pros and cons of planned super changes
NZ Super and other parts of our national retirement income policy must change, Retirement Commissioner Diane Maxwell says.
In addition, people will have to accept waiting longer before getting the state pension, Maxwell, who released the three-yearly review into pensions policy from the Commission for Financial Literacy and Retirement Income today, said.
The changes could be made fairly without making any generation feel they had lost out, she said.
The proposals, which the Government is not commenting on, call for gradual change. They propose raising the age of eligibility rising to 66 by 2036, 67 by 2046 and 68 by 2056 - giving everyone time to prepare.
The proposed changes would mean people taking more responsibility for paying for their retirements.
Here are the pros and cons of the commission's 10 key proposals:
1. Peg the age of eligibility for NZ Super to average life expectancy so every generation can expect to draw NZ Super for the same length of time.
Pros: No generation gets to draw NZ Super for longer than any other. It will save billions of dollars and secure NZ Super as a universal state pension. The rise would be gradual compared to other countries.
Cons: Some groups with poorer health and life expectations such as Maori and Pacific Islanders will not get very long retirements, unless their life expectancies dramatically increase. Those in manual occupations may be worn out by 67 or 68.
2. Use some of the savings to pay for benefits for people who are unable to carry on working.
Pros: This is crucial to making the longevity-pegging acceptable. Tradespeople and poor people would otherwise face falling into a gap, unable to find work and consuming what little assets they have, and eking out a miserable existence until the age of eligibility for NZ Super finally arrived.
Cons: It would consume some of the savings, which are designed to make NZ Super affordable as the population ages.
3. Re-index NZ Super, which would save more than lifting the age of eligibility.
Pros: It would make NZ Super more affordable as the level would be pegged to an average of the rise in the consumer price index (CPI) and average wages. It should still stay ahead of prices.
Cons: Old peoples' standing and relative purchasing power would decline. CPI is also a broad measure of inflation, and it is clear that old people experience much higher real inflation.
4. Keep the KiwiSaver maturity age to 65 to allow people to retire early if they want.
Pros: People could use KiwiSaver balances to retire early.
Cons: Poorer people would not have that luxury.
5. Have a day on which all employees are enrolled in KiwiSaver, but allow them to opt-out, if they want.
Pros: Many more people would be saving, thereby providing more capital for them to supplement NZ Super, because it is only enough to scrape by. More people would have the choice of retiring early as well.
Cons: The cost. Say that 500,000 people joined up. That's an awful lot of $1000 kick-starts so it's unsurprising the Government has "deferred" doing this.
6. Establish a group to study building an annuities market.
Pros: People could use annuities to turn their KiwiSaver deposits into lifetime incomes.
Cons: Annuities have made financial services companies rich, and have been poor value for ordinary people, especially when interest rates are being kept artificially low in a bid to stimulate growth. There is the spectre of politicians deciding KiwiSavers must buy annuities to provide themselves with a long-term income, something the commission does not support.
7. Reduce tax on simple savings products like bonds and term deposits.
Pros: Savings would grow faster, and people would be encouraged to save.
Cons: Critics say savings and bonds providers would make better offers to investors as result but are also likely to take a good chunk of any tax windfall for themselves.
8. Have a better strategy to lift financial literacy.
Pros: Not everyone thinks Kiwis are poor with money, but there is clearly room for improvement, and kids should be taught this in schools.
9. Build places the old can live in.
Pros: It would provide more suitable housing as New Zealand houses are generally large and draughty and little housing is specifically designed for older people who struggle to maintain large homes.
Cons: New Zealand has a poor recent record of building quality housing at reasonable prices.
10. Stop reducing NZ Super for people whose partners happen to be getting a large pension from overseas.
Pros: NZ Super should be universal. People should not have their payments cut just because they married someone with an overseas pension.
Cons: It would cost the Government, though not that much, and would end a deep unfairness in the system.