Do We Still Have a Super Future?
Crystal ball gazing about the survival of the pension is vital for Kiwis planning their retirement, writes Ed McKnight.
8 November 2023
Many Kiwis assume you spend your working life paying taxes, the government takes that money, invests it, and gives it back to you when you retire (through the pension).
But this is not how it works. In reality, the taxes you pay are given to people who are already retired.
So, when you retire the government will pay you with taxes taken from the working force.
Here’s the problem: We’re living longer and having fewer babies. So, more retirees than ever need to be supported in retirement, but there are fewer babies being born to support them.
This conundrum is leading some property investors to ask: “Will NZ Super still be around in 20 years?” Because, if you’re a property investor planning your retirement, you need to think carefully about whether you want to rely on superannuation (or not).
In 1983, the average Kiwi was expected to live to 74. Forty years later, it’s 83 (nine years longer). In another 40 years (2063) that is expected to grow to 88 (another five years).
While that’s a good thing, it does mean retirees are becoming more expensive. Let’s spell it out.
In 1983, if you retired at 60 and died at 74 (the average life expectancy in 1983), you required superannuation for 14 years. In 2063, you require superannuation for 23 years if the age of eligibility does not change.
Too few babies
In 1957 there was a massive “baby boom”. At that time, the average female had four babies. That was great at the time because the baby boomers have been working over the last few decades and that means lots of workers to pay for superannuation.
But here’s the issue: 1958 was exactly 65 years ago. All those baby boomers are retiring this year and will be eligible for NZ Superannuation.
But now, the average woman has 1.8 babies. And fewer babies means less people entering the workforce. Currently, each retiree is being supported by four working people. This means you and three other people must pay for a quarter of a pensioner’s superannuation each. Not too bad.
But in 25 years each pensioner will be supported by an average of 2.7 people. So, each taxpayer is now paying for more than a third of a retiree’s income. This will not be affordable over the long term if NZ Superannuation stays in its current form.
Retirees are voters
But there are clear arguments that NZ Superannuation won’t be substantially changed.
Why? Retirees vote. They make up a quarter of the people who vote (not just those who say they do). In addition, people aged 45-65 make up another 35 per cent of voters. So, changing NZ Superannuation is not politically possible, and that’s not for lack of political will.
In 2011, Phil Goff tried as leader of the Labour Party to raise the age of eligibility from 65, as did his successor David Cunliffe.
In 2017, Bill English tried when he was Prime Minister (but didn’t get re-elected). And now, Christoper Luxon wants to do it in 2023.
The Retirement Commission
The Retirement Commission (representative of retired New Zealanders) has flip-flopped on this issue.
In 2016 they came out strong, saying the age of eligibility should be raised to 67 because of unaffordability. But in 2019, they revised their stance, suggesting it should stay the same.
In 2022, they took a hard stance against raising the age even though the OECD recommended the age of eligibility be linked to life expectancy.
The Retirement Commission specifically made this recommendation because not all retirees are the same. For instance, some people reach the age of eligibility and don’t have as much wealth.
The future of Super
What actually happens to NZ Superannuation is anyone’s guess, but it is likely to be somewhere in the middle.
No, it probably won’t be cancelled. But, yes, there will likely be changes.
For starters, the “age of eligibility” is likely to be raised. And at some point, some form of means testing will be introduced.
Means testing is where, if you have wealth above a certain level, you might get a smaller pension or not get any government support at all.
Means testing is used (at least in part) in the UK, the United States, Australia, Belgium, Italy, Austria, Hungary and Ireland. So, it’s not without precedent. If a means test is introduced, the government might say something like: “If you have assets over $1 million, you get a reduced amount.”
Property investors beware
Crystal ball gazing about the future of the pension is vital for Kiwis planning their retirement.
If you are investing in property, and a means test is introduced, there is a good chance you might not have access to it. This will have a significant impact on your desired lifestyle because you’re unable to live on the same income you wanted.
So, if you’re a property investor and want to remove any uncertainty, plan for superannuation not to be there. That way, you don’t have to worry about whether you will have enough assets.
And if it’s still there, you’ve got a nice bonus.
New Zealand superannuation is a government-provided pension scheme for Kiwis aged 65+
Here’s how much you get per week (as of April 2023) after tax:
- $496 a week for a single person living alone ($25,811 per year).
- $764 a week for a couple ($37,744 per year).
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