Between around 1946 and 1964 there was a “baby boom” – a significant increase in the number of babies born. Sadly, we haven’t been so good at producing offspring, which will have a significant impact on our own future as that generation ages and retires. Population projections indicate that while there were one in eight New Zealanders aged over 65 in 2009, by 2031 there will be one in five. The number of people aged over 65 will exceed the number of under 14 year olds in the late 2020s.
NZ population projection - Statistics New Zealand (2009)
If the retirement age remains at 65, then as they move from contributing to the productivity of the country to being dependant on the country, our ability to maintain their needs diminishes with the proportional reduction in remaining workers.
The origin of our current superannuation system lies in the 1975 General Election. The incumbent Labour government had introduced a compulsory superannuation scheme and the election was largely fought over that issue. National introduced one of the first attack ads used in New Zealand, the Dancing Cossacks, suggesting it would result in the Government owning the New Zealand economy using the worker’s money – we would become a communist state. Watch the Dancing Cossack ad here.
National’s solution was a “pay as you go” scheme, where instead of funding future superannuation requirements from current tax, it could be funded by future taxpayers. National won the election, but as we’ve known now for some time, their plan was unsustainable.
Taking the pragmatic approach that people are demonstrably poor at saving for their retirement; parties don’t win elections by suggesting a reduction in superannuation entitlements; and we can’t afford to keep going the way we were, in 2001 the then Labour Government introduced the New Zealand Superannuation Fund – commonly called the Cullen Fund. The intent was to prefund a portion of the Governments future payment of National Superannuation from those taxpayers to the current generation.
Basically, the Government puts capital into the fund, which invests it and the income is used by the Government to then pay for National Superannuation. The table shows the projected costs of Superannuation without the fund (red) and with the fund (blue). The blue line is higher in 2009 and again around 2019 as it reflects funds going into the fund (funding being currently suspended by the government), dipping below the line where funds are projected to start to be withdrawn around 2031.
But that’s only part of the story. Currently these are the rates for NZ Superannuation for earners on the “M” tax code;
Could you afford to have the retirement lifestyle you want on that? And what sort of % of the average wage will NZ super be set at in the future? That means you may need to find additional funds if you want to have a secure and enjoyable retirement. A good place to calculate what you need can be found at sorted.org, the Retirement Commission’s website.
There’s lots of ways you can fund this, you can sell your house and move into a smaller unit, freeing up some capital, you can own a rental property, you can invest on the stock market …..
This post however is about a specific method of funding that retirement income gap: KiwiSaver.
KiwiSaver was introduced through the KiwiSaver Act 2006. It grew quickly, after 3 months there were 200,000 members. My anecdotal experience though, was that many of these people signing up for KiwiSaver were diverting money they were otherwise putting into an existing superannuation scheme. In fact, some almost 65's join before they are no longer eligible, but after their last paid employment, and pay the minimum $20 per week. In return they receive 100% subsidy from the government plus $1,000 at startup. After the minimum 5 years, in a fund that guarantees at least what you’ve put in - that’s close to a minimum 120% return. So the best return is actually short term, for people whom the scheme isn’t intended for, and relies on a taxpayer subsidy. This demonstrates one of the issues with the scheme; some of its benefits (and other conditions such as when you can withdraw your money) are reliant on the provisions of an Act of Parliament rather than the provisions of the trust deed. And KiwiSaver has to be one of the most amended Acts outside of tax legislation that I’ve seen.
The other issue with KiwiSaver is its complexity. I’ve talked to people who were surprised that money was being deducted from their salary after they signed up for it at their bank, and very few people seem to completely understand how it works. Part of the complexity arises because it’s a voluntary scheme – conditions such as its lock in and opt out provisions and attempts to ensure that employer subsidies are “real” employer subsidies and not being deducted from the employee.
When you compare the complexity of the scheme and the resultant compliance cost with the simpler compulsory Australian scheme, you have to wonder why we haven't gone down this route. The justification given at the time was that it isn’t guaranteed. However no investment strategy is, so unless you don’t intend to save for retirement you will always have this risk - and these schemes are lower risk than say … investing with a finance company. If it’s a compulsory employer contribution only it doesn’t preclude also putting surplus cash into another retirement investment. Other than helping with savings rates, a compulsory scheme would also help deal with the high percentage of financial assets held by banks here in New Zealand.
Probably my biggest issue with the current scheme, with its requirement for an employee contribution, is the expectation being placed on the current generation of taxpayers. We’re paying for current superannuitants in “pay as you go”. We’re paying additional tax which goes into the New Zealand Superannuation Fund to pay for part of the “government” contribution to our own retirement – and we need to save for anything on top of that we may require. Many are also paying back student loans – something previous generations didn’t have to do; we have some of the most unaffordable housing in the world, and even renting at a reasonable rate is now an issue in some cities. Financially, we truly have a “squeezed” generation.
