Time to fix NZ's retirement savings system - Mercer launches white paper

28/07/2009
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Provided by Mercer.


The double whammy of an ageing population and global financial crisis has highlighted the urgent need for the New Zealand Government to address the adequacy of retirement savings in New Zealand and reduce reliance on NZ Super – and the issue needs to be addressed holistically rather than piecemeal by different government departments, according to a report by Mercer.

But there are solutions that could potentially address the issues. These include increasing the age at which individuals are eligible to receive the aged pension to 67 (Mercer's model shows this could result in savings of at least $100 billion by 20611), and removing disincentives to encourage the take-up of annuity products.

Mercer's report "Securing Retirement Incomes – Time to Act" examines the challenges and risks facing New Zealand and a range of possible solutions designed to increase confidence in the retirement savings system, improve the quality of life for New Zealanders' in retirement and reduce the economic burden of funding our ageing population.

"The solution to our retirement savings conundrum rests in both growing the economy – ultimately increasing the size of the funding pie - and addressing the social and welfare issues associated with an ageing population and ensuring all New Zealanders can live comfortably in retirement," said Martin Lewington, Head of Mercer in New Zealand.

"It's time for the government to take some decisive action and balance the politics in the current debate with what's ultimately best for New Zealand – particularly in regards to the 'hot potato' issues such as raising the eligibility age for NZ Super.

"We need a holistic – not a piecemeal solution – from a consolidated government body to address the issue of an ageing population and the challenge of ensuring the adequacy of our retirement income system," Mr Lewington said.

"NZ Super is 66 per cent of the average wage for a married couple and we don't think people realise this won't be enough for the type of life that most want in retirement.

"And KiwiSaver has been a good start but it has a long way to go before we'll see a serious improvement in the adequacy of New Zealander's retirement savings and their ability to manage their accumulated capital in retirement," he said.

NZ Super is a pay-as-you-go system and Mercer argues that against the backdrop of a rapidly ageing population – where the ratio of retirees to the total NZ working population will shrink from its current level of one in four, to one in two by 2051 - the government's ability to support NZ Super will be severely affected. Furthermore, we do not have the framework or products to help people manage their money through their retired life as well as their working life.

"We are living longer which is obviously good, but this also increases the risk of running out of money before we die" said Mr Lewington.

Mercer believes securing New Zealand's retirement income system is dependent on improving the three pillars of government-funded aged pension, savings via the workplace including KiwiSaver and encouraging more people to contribute additional voluntary savings.

In the report, Mercer has provided a number of recommendations that broadly cover improving the sustainability, fairness and adequacy of the retirement savings system. These recommendations include a range of options outlined below:

Improve sustainability and protect against longevity risk by:

  • Increasing the age of eligibility for NZ Super from 65 to 67 or alternatively fixing the NZ Super age of entitlement as a percentage of life expectancy; or
  • Introducing means testing for NZ Super, or
  • Creating an annuity products market, or
  • Providing allocated pensions to provide a guaranteed source of income in retirement years and remove the disincentives, that is, tax for life annuity products

Improve fairness by:

  • Allowing people to defer the receipt of NZ Super and remain in the workforce and then remain in the workforce and then receive a one-off increased payment later on
  • Reinstating the administration fee subsidy for KiwiSaver accounts with low balances to improve protection of small accounts
  • Introducing a single preferential tax rate for investment earnings within KiwiSaver that is aligned with the PIE regime to simplify taxes and encourage savings to be transferred to KiwiSaver

Improve adequacy of individual's retirement savings by considering options such as:

  • Encouraging salary sacrificing into KiwiSaver by lowering front-end taxes on employee contributions
  • Introducing greater incentives for higher employer contributions into KiwiSaver
  • Possibly introducing compulsory savings, via KiwiSaver, for higher income earners
  • Improving financial literacy

People can register for Mercer's report "Securing Retirement Incomes – Time to Act" at www.mercer.co.nz.

1Mercer's modelling shows that the potential cumulative cost impact if the age of entitlement for NZ Super was increased to 67 from 2031 - more than 20 years away is estimated to be $100 billion in 2060, assuming 2% average wage growth or approximately $155 billion, assuming 3% average wage growth.

 

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