Should New Zealand Superannuation continue to exist as it is?

Moneyworks was established in 1997, which was the same year that the referendum on compulsory superannuation was held as a result of Winston Peters negotiations to form a Government. 

This referendum confirmed the role of New Zealand Superannuation as a political football – in 1993 New Zealand politicians had come up with a ‘cross party accord’ about the future of NZ Super (well, all politicians except for Winston).  That accord included the continuation of the superannuation surtax – which had been imposed to ensure that New Zealand Superannuation remained viable for the future.

While the referendum on compulsory superannuation failed in the September 1997 vote, Winston was able to remove the surtax, and with MMP Governments, any surtax is unlikely to be introduced in the future.

In addition, both John Key and Jacinda Ardern stated that while they are Prime Minister, the age of eligibility for New Zealand Superannuation will not be changed.

What is NZ Superannuation?

New Zealand Superannuation is one of the most generous public pension entitlements in the world.  If you meet the residency requirements of NZ Superannuation (currently living in New Zealand for 10 years with 5 of those from the age of 50, and residing in the country for more than half a year), when you turn age 65, you are entitled to receive the NZ Super income regardless of

-       how much you have earned during your life

-       how much you earn after the age of 65

-       how many assets you have

-       whether you are male or female.

All of these factors are generally used to calculate public pension incomes in other countries, New Zealand is unique.

The amount that you receive will depend on whether you are single and living alone, single and living with others, married with one person eligible or married with both people eligible.  The amount is increased each 1st April to keep up with the cost of living, and if you are earning other income, you may well get less paid ‘in the hand’ as your marginal tax rate will be applied to the NZ Superannuation gross income level to work out what your after tax income should be.

If you are entitled to a public pension payment from another country, this payment is likely to be used to offset the level of income that you receive from NZ Superannuation.

What is the issue?

The problem is that because NZ Super is so generous, it is very expensive and is not ‘funded’.  A ‘funded’ scheme would mean that money had been put aside for years and built up to be able to be used in the future.  While the ‘Cullen Fund’ – official name is The New Zealand Superannuation Fund (not to be confused with New Zealand Superannuation income) - was established to fund future NZ Super income entitlements and has around $50 billion invested in it , there is not enough money to pay for the income into the future. 

The NZ Super income is estimated to cost nearly $20 billion each year by 2024 and is increasing in cost by $1 billion each year, as more people reach the age of 65.  As the scheme isn’t ‘funded’, and the New Zealand Superannuation Fund is nowhere near big enough to fund these costs, the cost of the NZ Super income has to be paid by those people who are still working and paying tax.

As more people get older (the baby boomer and older generations), there will be less people working and paying tax and more people retired and receiving the income.

KiwiSaver was introduced to ensure that people provide for their own retirement, but the levels of contributions to KiwiSaver are too low to ensure that KiwiSaver could fund retirement income needs and relies on the NZ Super income to ensure that kiwis can have a financially comfortable retirement.  (In fact to have a financially comfortable retirement most people need more than NZ Superannuation and your KiwiSaver, which is why our clients have investment portfolios as well.)

What are the options?

As outlined above, it is unlikely under an MMP Government that a superannuation surtax will be introduced as it is politically unpalatable, as it would appear are any kinds of ‘means or asset testing’ (reducing the NZ Super payments based on your income or assets when you are receiving the income.)

With the Prime Minister indicating that they won’t support changing the age of eligibility of NZ Super, other mechanisms to reduce the cost in the future need to be explored. In fact, a 2019 report indicated that this tool is no longer likely to be effective as it would have to be brought in gradually and if introduced now would mean that the bulk of baby boomers would still receive NZ Super at the age of 65.

The Retirement Commission recently proposed doubling the residency requirements for eligibility (from 10 years total and 5 years from the age of 50 to 20 years and 10 years respectively).  A Bill has been floating around since 2018 with this proposal with a staggered introduction, meaning that anyone born before the age of 1975 wouldn’t be affected.

Another option to ‘tweak’ NZ Super is to change the mechanism that links the annual increase in income to the cost of living.  At present, this increase is based on 66% of the ‘average ordinary time wage’ after tax.  The mechanism used could be changed to a different basis which would see smaller increases in NZ Super each year, and could possibly be more politically palatable than means or asset testing.

Summary

New Zealand Superannuation is a generous entitlement and core to kiwi’s financial planning strategy.  It is not currently income or asset tested and it is unlikely that the age of eligibility is going to change in the foreseeable future.  But the income is a significant part of the Government expenditure each year and increasing at around $1 billion each year.

If moves are made to make the income more affordable in the future, the best options appear to be changing the residency requirements (as per the existing Bill) or tweaking the formula for increases each year (which doesn’t appear to be being discussed).

Make sure that you make clear assumptions in your financial planning about your expected income from NZ Super, so that you can ensure that you have sufficient other assets to have a financially comfortable retirement.