Monday, June 24, 2024

Introduction to NZ Superannuation

The Retirement Commission, Te Ara Ahunga Ora recently released a paper providing a simple description of New Zealand Superannuation to aid discussion of NZ Super. Details are reprinted below.

SUMMARY

The paper aims to provide a simple description of New Zealand Superannuation [NZ Super] for the purposes of understanding the policy situation. It aids well-informed discussion of NZ Super by outlining the details of the policy, especially as there are a variety of superannuation systems around the world, and ours has some unique features.

KEY POINTS

  • Under the OECD’s classifications of retirement income schemes, which is based on the objectives they aim to achieve, NZ Super is a tier 1 scheme and it has served well to prevent pension poverty.
  • NZ Super is designed relatively simply with broad eligibility and administrative simplicity. It does not impact labour market participation.
  • NZ Super has been present since 1938 and no political party is suggesting removing it. There is no definitive reason why it will not be in place for future generations.
  • As of June 2021, there are 837,549 superannuitants, with females making up 53.5% and males 46.5%. Māori only make up 5.9% and Pacific Peoples 2.6%, whereas NZ European account for 62.4% of superannuitants.
  • Government gross expenditure on NZ Super for 2020/21 is $16.58 billion – 5% GDP.
  • As our population ages, the percentage of GDP represented by the expenditure on NZ Super will increase, but will be offset by drawdowns from the NZ Super Fund. This will provide a smoothed PAYG financing model for NZ Super.
  • Other options, such as increasing GDP, borrowing, or expanding the tax base (by taxing capital or wealth), are also available to assist in the financing of NZ Super. Any of these options would also help address other rising expenditure, such as healthcare.

MAIN MESSAGE

NZ Super is a foundational part of the retirement income framework in Aotearoa New Zealand but demographic and economic changes have implications for the policy.

There will be more superannuitants in future years, as we have an ageing population, and superannuitants will face different costs in retirement. For some these costs will include rent, as home ownership rates have fallen, and others will still be paying off their mortgages.

Whether NZ Super will continue to provide poverty alleviation for future superannuitants is uncertain but appears to be at risk. In addition, the expenditure on NZ Super will increase, and this has led to discussion of raising the age of eligibility or means-testing.

However, reduced access to NZ Super could simply result in government expenditure in other areas, or tax planning practises.

Further, any changes to retirement policy should always be based on a principled approach, and signalled well in advance, so that people have time to plan. They should also be considered in terms of the Crown’s obligations to Māori under Te Tiriti o Waitangi.

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