Long term vision the key for NZ Superannuation
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Planning for retirement is a long term challenge heavily influenced by psychological factors.
It is difficult to overstate the importance of people starting to save for retirement when they start work. The money saved before age thirty will be dwarfed by the compounded investment return (such as interest) at retirement time.
In other words, at age 65, for every dollar actually saved, there will be an extra $3 of interest on top of it (35 years return of four per cent compounded quarterly).
Yet the motivation to save for retirement when young, compared to say, a house, a holiday or a car, is modest.
Conversely, at age 55 the reality of fortnightly pay ceasing in ten years begins to influence the balance between spending and saving. For every dollar saved then, there will be less than fifty cents of interest gained after 10 years with the same rate of return.
The point being made here is that the psychology of saving for retirement works against the most efficient use of savings.
Overseas, this is recognised by governments. For example, in the UK there are tax incentives to save out of earned income and the retirement savings funds have special tax treatment to assist the compounding effect.
Closer to home, legislation was passed in Australia in 1993 making contributions to registered superannuation funds by employers for employees compulsory.
New Zealand has suffered from poor Government leadership on this critical issue. The Norman Kirk Labour Government introduced a compulsory superannuation scheme in 1975. This was scrapped by the incoming Muldoon Government.
Ever since, retirement planning or superannuation has been a political football in New Zealand. The Helen Clark Government established a non-partisan panel to study the options. This was axed by the incoming National Government. And here is another key psychological influence: if the rules keep changing, potential savers will be put off and perhaps, at a sub-conscious level, will not take it seriously – as has been the case by successive leaderships.
The latest example of misguided leadership has just been introduced by the National Government.
It has taken the simplistic approach of saying that “the cost of national superannuation will blow out due to the baby boomers, so let’s make savings to this budget expense by increasing the age of eligibility by two years beginning in 20 years’ time”.
No attempt is made to take ‘Super’ out of politics. No recognition has been made of the inability of many workers to work on beyond age 65. No thinking is evident of lessons learned from overseas countries that have created a longstanding retirement savings environment and sought to incrementally improve on it. No glimmer of an insight into an awareness of the psychology of retirement savings.
Two positive solutions are required.
Firstly, we need a Government to show leadership by creating a non-partisan body to be staffed by appropriately experienced people from the private and the public sectors.
The body is to study the existing options overseas and consider the flaws in the current Kiwi Saver plus NZ Superannuation model.
The objective has to be a) legislation that fences retirement savings from party politics (the Fiscal Responsibility Act seemed to fall into this category) and b) introduce a model that has a fifty year vision for achieving financial security for all retiring New Zealanders at age 65 - as a right.
Secondly, the benchmark to beat should be the following New Zealand Superannuation design which results from an understanding of overseas examples and the psychology of investment and retirement saving:
* Compulsory contributions to KiwiSaver Funds at 12 per cent of income;
* Phase in commences 2018 with contributions at 8 per cent increasing to 12 per cent over 10 years;
* Earliest age of Access age 60;
* Access limited to 10 per cent tax-free cash sum and “sustainable payments test” where the accumulated fund must be able to generate a sustainable flow of regular payments to the expected age of death as a minimum;
* The Retiree may opt to receive a lower level of payments that do not decrease the fund’s value, for example, a rate such as 4 per cent per annum net, drawn from an accumulated fund of $1 million, generates $40,000 net per annum and is highly unlikely to reduce the capital value of the fund;
* Fund balance to be part of their estate so residual value at the time of death, is directed by their Will to their spouse or family – unlike the UK pensions-based system. For example: A person earning $50,000 per annum for 45 years has 12 per cent contributions paid into their super with a net return of 4 per cent, compounding half yearly with wage and contribution being inflation adjusted. Result: $1 million.
* Benefits to individual: retirement financial security without state interference or largesse;
* Benefits to NZ: eventually, with a stable retirement savings structure in place, we would not be so dependent on overseas investment due to substantial long term pool of savings capital.
But, the critical point and the critical benefit to all this is that after 20 years, that is by 2037, the state pension, currently called New Zealand Superannuation, should then be means tested with complete fairness to all.
Over the subsequent 20 years, the cost to the taxpayer of New Zealand Superannuation would fall until eventually, only those who had suffered prolonged unemployment or disability would retain the state superannuation.
The result would be to reduce one of the largest single costs in the Government budget to a fraction of its current size, thereby allowing scope for increased health care spending which itself will be a requirement of an ageing population.
Critics of this may quickly refer to the impact on a person’s ability to save for a house and pay a mortgage. This ‘housing affordability’ is another debate but readers should note that there are many factors that influence house prices, many of which come down to Government policy settings.
Jeremy Thompson trained and worked as a financial planner in London for 7 years before migrating to New Zealand in 1986 where he established one of New Zealand’s first independent financial planning firms.
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