Should kiwis expect a change to the superannuation scheme?

Alongside increases to other benefits and payments, 1 April 2022 brings a small rise to the NZ Super pension payment (see the Work and Income website for new rates).

Coinciding with increases to the pension rates come increased calls for changes to be made to the scheme, to ensure its sustainability – especially considering the number of Kiwis aged 65-plus is set to hit 1.3 million by 2034 (more than a fifth of the population).

So, could kiwis be looking at changes to the pension in the future? And if so, what changes could be on the cards?

Retirement age increased?

In an interview on Q & A last year. Infometrics principal economist Brad Olsen called for the retirement age to be raised.

“Nearly $19 in every $100 that is paid in tax to the government goes straight to Super. It’s a huge amount … over time New Zealand Super is going to be a very expensive proposition. It’s going to cost a lot of money. Importantly it’s going to cost young people as we go forward.”

This certainly isn’t the first time the idea has been proposed (previous New Zealand governments have pledged to raise the retirement age) and it has been  successfully implemented in other countries. Netherland has a current of 66 years and 4 months (which will rise to 67 by 2024) while in Denmark people can claim a pension at 69, which will be raised to 74 by the end of 2070. Yet, Prime Minister Jacinda Ardern has previously ruled out raising the pension eligibility age while she remains in Government.

Jane Wrightson, the Retirement Commissioner, on the other hand, has cautioned approaching the pension purely in terms of affordability:

“What kind of society do we want and what kind of system do we want for our older New Zealanders. The age itself is only one lever and … if the system is too expensive, and that’s a big if, because these are projections not forecasts, then what do we want to happen?

“And the important thing I think is creating a system that involves dignity and mana for our older New Zealanders.”

Means and asset testing?

As it stands, New Zealand Superannuation (‘NZ Super’ or ‘pension’) is paid to eligible Kiwis over the age of 65, regardless of how much they earn through paid work, savings, and investments, what other assets they own or what taxes they have paid.

Some experts, such as economist Shamubeel Eaqub, think that means testing the pension could be the way forward:

“There’s no point in giving money to people who have lots of money. Universality is a wonderful idea if everybody puts loads in and everybody take some out, but we’ve got the worst of both. We don’t put enough in, but we give universal access.”

There is certainly precedent for a model like this: asset testing pension rates is used in full or in part in the United Kingdom, USA, Australia, Belgium, Italy, Austria, Hungary and Ireland among other countries. In the 1930’s, New Zealand introduced a means-tested pension (called Age Benefit) which has been dropped by successive governments. So too, is the Residential Care Subsidy (a subsidy to assist with paying for residential care) asset tested.

There has been no indication from the Government that means testing is on the cards but as the population continues to age, it may be something future leaders look to introduce.

Making changes to Kiwisaver?

NZ Super is supported by our voluntary Kiwisaver scheme, which was set up by the government in 2007 to encourage people to save for retirement. Yet, one of the issues with Kiwisaver is that is voluntary and only asks for contributions of 3 percent (although employees can choose to increase that to as high as 10 percent).

Australia, in comparison, has compulsory contributions which will hit 10 percent by the end of the year, while Malaysia takes 11 percent. Singapore takes 20 percent of wages until the age of 55. Setting contributions as high as Australia’s or Singapore’s would be unrealistic given the discrepancy in salaries (that is another story for another day) but making Kiwisaver contributions compulsory could be something we see down the track.

In New Zealand, people can also dip into their Kiwisaver when purchasing their first home or if experiencing financial hardship. While early withdrawals can be incredibly helpful for some (my wife and I benefitted used Kiwisaver withdrawals as part of a deposit on our first home), it can set people back in their retirement savings plan.

A case study from Sorted gives an idea of how much your final Kiwisaver balance can be impacted from early withdrawals:

Let’s say you’re 35 years old and have $22,000 in a KiwiSaver growth fund. If you withdrew $20,000 now, by age 65 you would end up having $74,000 less! That’s a lot to walk away from (even when you adjust for the effects of inflation over those 30 years at 2%, it would still be $41,000 less).

With house prices continuing to rise in New Zealand however – the average price of a house is now around the $1 million mark – an early withdrawal is the only way many younger people can afford to buy a home. While the hot housing market is a hugely complicated issue (and one that needs to be fixed fast), using funds designated for retirement on a first home can be economically detrimental in the long term. Certainly, food for thought.

About Mason Head

Content Creator and Publication Lead at Eldernet

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