(When I talk about embracing “supermodels”, I’m actually talking about embracing “super models”. As in, all Kiwis should care about the policy settings relating to NZ Superannuation. If you were expecting something more salacious, sorry for the bait and switch!)

NZ Super has an enormous impact on all Kiwis

Of the many financial uncertainties we face, one of the big ones relates to NZ Super.

Many younger people assume that NZ Super won’t be available to them when they retire. What they often don’t realise, is that this can have an enormous impact on how much you need to save to sustain a reasonable lifestyle. And if they did, they’d probably get a lot more interested and engaged.

In an article earlier this year, I modelled the impact of receiving NZ Super versus not receiving NZ Super, in terms of how much you need to save for retirement.

If my wife and I wanted to sustain a lifestyle of $52,000 per year (in today’s dollars) from age 65 to age 100, for example, the amount we’d need to save changes enormously, depending on whether we assume we’ll receive NZ Super or not.

If we receive NZ Super, we’ll need about $500,000 in investment assets (over and above a mortgage-free home).

If we don’t receive NZ Super, $500,000 would run out within 11 years. Instead of saving $500,000, we’d need to save $1.3 million to sustain the same type of retirement.

There are various other variables at play (eg in both cases we assume a real return on our investments of 2%, and we assume we won’t downsize/rightsize our home to free up capital). But at the end of the day, there’s no shaking the fact that this is enormous.

I’ve always assumed that my wife and I won’t receive NZ Super. But I’m a little more sanguine about the possibility now. Because there’s no way a Government can tell a couple in their late thirties that they need to increase their savings by that much to sustain a reasonable retirement. Most people at our age have already made commitments. We’ve established our careers. We have a mortgage. We have children. There’s no way you can tell us, and people like us, that we’re going to have to save an additional $800,000 to retire.

Well, a Government could. But they’d probably be committing political suicide.

This is especially the case if Kiwis were engaged with NZ Super’s policy settings. In other words, embracing supermodels. (Geddit?)

“The superannuation sky is not falling”

Last week The New Zealand Initiative published a detailed report relating to NZ Super. It was written by Jenesa Jeram.

(There’s one thing I’ll give to the New Zealand Initiative. It knows how to get its message across. It released the report on 4 December and within 1 or 2 days it was picked up by Stuff (Rod Stock), NZ Herald (Tamsyn Parker), The National Business Review, Radio NZ, Good Returns, Newshub (Duncan Garner), and RadioLIVE (Lynda Hallinan). It was also jumped on in press releases by The New Zealand Taxpayers’ Union and New Zealand First.)

For some reason, I was expecting to take issue with the report and its conclusions. But I was surprised.

It’s a thoughtful report, and I agree with almost all of what it has to say. It covers a lot of relevant areas – going as far as touching on Universal Basic Income (UBI), and addressing the potential issues (or at least, uncertainty) relating to lower rates of home ownership.

Instead of recommending major changes to NZ Super, the report states that the “superannuation sky is not falling”.

The report celebrates a lot of good things about the NZ Super regime. It’s simple, it’s efficient, and it doesn’t create distorted incentives – like encouraging people to stop working at age 65, discouraging people to save money, or encouraging people to structure their financial affairs in unusual ways.

Jeram also makes it quite clear that we should remove “affordability” from the conversation about NZ Super. Instead, the focus should be on priorities.

The report makes it clear that New Zealand can afford NZ Super as it currently stands into the long-term future – if we want to keep it. New Zealand will be able to afford it even when the demographics have changed, and the number of people between 18 and 65 has fallen considerably compared to the number of people 65 and over.

The cost of NZ Super currently stands at around 5% of GDP. By 2060 this is likely to increase by 8% if no changes are made. This is actually lower than what many countries are paying today.

This sounds like a big jump, but it’s important to remember that we should experience a lot of economic growth between now and 2060. If we experience economic growth of 2% each year, for instance, our GDP will be more than twice as large as it is today.

So although NZ Super might take a larger portion of the GDP pie, the pie should be considerably bigger. As the report points out, this is an important consideration – to the extent “affordability” is an issue, it is likely to be a function of economic productivity (growth) over the next several decades.

I also commend Jeram and the New Zealand Initiative for the following key sentiment:

“Affordability should not be the main concern about NZS in the future. The main concern should be that NZS could become a tool for redistribution from poor to rich.” 

The latter point reiterates the importance of priorities.

The report makes various recommendations. It stresses the importance of productivity growth, which is a no-brainer (you’d hope!). It points out that the NZ Super Fund is largely a red herring when it comes to the discussion of NZ Super policy – and I agree. (The report talks about the Government prioritising debt repayment over contributing to the NZ Super Fund. This makes sense. The best analogy I can think of is that in a household, in many cases it makes sense to prioritise repaying a mortgage over investing for a period of time – on the basis it provides a guaranteed, risk-free return that will put the household in a better position over the long-run, and better able to deal with other contingencies.

NZ Super is likely to change

The report includes a couple of recommendations that I think will occur at some point in the future.

The amount we receive from NZ Super may reduce over time

It says that NZ Super should be indexed to CPI (the consumer price index) rather than to a combination of the CPI and the average wage. It predicts that this will have an enormous impact on the future cost of NZ Super – from the predicted 8% in 2060 down to 5%.

This means that NZ Super will keep up with the cost of goods and services, but the value of NZ Super won’t increase beyond this. It would become relatively less compared to what the average worker receives.

I suspect something like this will happen. Unless Kiwis embrace supermodels, changing the indexing policy seems like an esoteric change that won’t change our day-to-day lives. I can’t imagine this tweak getting much media attention, because who is going to click on an article on that?!

But it will have a big impact. Think of it this way: if it costs just 5% of GDP rather than 8%, it means NZ Super recipients will be receiving only two thirds as much in retirement.

The age of entitlement will rise

At the moment, Kiwis are entitled to NZ Super at age 65. The report points out that this is the same age of entitlement as when the pension was introduced in the 19th century (1898). At the time, the average life expectancy for a male was less than 65.

There have been moves to increase the age to 67 (gradually) in recent years. The current Labour Government has committed to keep it at 65. But I think that increasing the age of eligibility is inevitable.

In the report, Jeram recommends aligning the age of entitlement to “health expectancy” rather than “life expectancy”. I can understand the rationale for this distinction, but I wonder if adding this nuance was a mistake. I think it unnecessarily confuses what might otherwise be a simple matter of increasing the age gradually at some point in the future.

I personally have a preference, as some have suggested, of the age of eligibility increasing by, say, one month every 12 months until NZ Super reaches a specific age of entitlement (say, age 70).

I also want to acknowledge that increasing the age of eligibility is, in some sense, regressive. For example, it is common for people in more physically demanding professions to be less well-off, and to also have shorter life expectancies. This means they will receive NZ Super for a shorter period, while wealthier people with less physically demanding professions may continue to receive it for many additional years. There is room for good faith debate.

Why I’m against means testing NZ Super

One of the things that surprised me about The New Zealand Initiative’s report is that I expected it to recommend means testing for NZ Super. It hasn’t done this.

There was a time when I thought NZ Super should be means tested. Now, I’m against the idea.

A universal NZ Super scheme is simple, efficient, and doesn’t create distorted incentives – like encouraging people to stop working at age 65, discouraging people to save money, or encouraging people to structure their financial affairs in unusual ways. To my mind, these are huge benefits of our current regime. And the older I get, the more I value keeping things simple.

I’m influenced by my time in Australia, where Australia has taken a very different approach to New Zealand. In Australia, the pension (its equivalent to NZ Super) is heavily means-tested. However, it encourages people to save for retirement by providing them with tax benefits for contributing to Australian superannuation (which is like KiwiSaver – let’s call it AussieSaver).

AussieSaver is really complex. I often describe it as an “onshore tax haven”. I’ve also heard other people referring to it as “legal money laundering”. And that’s what it is – it’s laundering money from people who need it to people who don’t need it.

The tax benefits people receive through AussieSaver now exceed the payments the Australian Government pays in the pension. The majority of people who receive these tax benefits have enormous amounts of money in AussieSaver. They don’t need it. It’s upper-class welfare, and it’s regressive.

(People aren’t receiving this money directly, but tax saved that you’d otherwise have to pay is the same as getting money. It’s sometimes called “spending through the tax code” or “submerged spending”. This type of Government benefit tends to be more opaque and harder to get rid of than, say, direct benefits. It usually favours wealthier people who can afford professionals to help them jump through loopholes.)

However, because the system is so opaque, and the idea of spending through the tax code is so abstract and boring and unlikely to get clicks on a news site, there is very little public awareness of this. Consequently, there isn’t much political will. The financial services industry also has strong incentives to keep the current system in place.

In my view, it’s a terrible system. The Grattan Institute recently released a report that discusses the AussiveSaver regime. A similar regime in New Zealand would great for financial advisers like me, not to mention other financial services providers. But I don’t think it would be great for Kiwi consumers and tax payers.

In contrast, I adore the simplicity of New Zealand’s superannuation regime. I’d prefer a universal NZ Super scheme, which doesn’t create bizarre distortions. As a result of this, I’m also against additional incentives for people to contribute to KiwiSaver – because as soon as we see this, I fear we’ll start to see means-testing relating to NZ Super.

But I’m open to other arguments. (Remember my philosophy: “strong opinions, weakly held”!) And I believe there’s room for good faith debate on this matter.

As I’ve mentioned, NZ Super policy will have an enormous impact on us. It’s something we should be engaged about. We should consider lots of different possibilities.

In other words, we should embrace a lot of supermodels. We should maybe even share them around.

Sonnie Bailey

Sonnie is an Authorised Financial Adviser (AFA) and former lawyer with experience in the financial services and trustee industries. Sonnie operates Fairhaven Wealth (www.fairhavenwealth.co.nz).

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