The NZ retirement savings system should be tweaked to help middle-income earners, according to Mercer senior partner, David Knox.
Knox, a keynote speaker at the Mercer conference in Wellington last week, said NZ middle-income earners faced the biggest risk of retirement lifestyle shock under current policy settings.
Poorer people were well-served in NZ under the universal government pension system that delivered an “incredibly high” payment equating to 40 per cent of the average wage, he said.
“Higher income people will always have the capacity to save,” Knox said. “But middle-income earners will need to save more if they want to have retirement lifestyles that are broadly similar to what they’re used to.”
On average, in NZ low-income earners receive about 80 per cent of pre-retirement income after age 65 while the same statistic for middle-income earners is 50 per cent.
As well as providing further incentives for middle-income earners to contribute to KiwiSaver, he said NZ should consider raising the pension age, introducing some form of pension means-testing and backing innovative retirement income solutions.
“The age of [pension] eligibility will have to increase,” Knox said. Under the previous National government, the pension age was set to increase slowly to 67 – a policy since rescinded by the Jacinda Ardern-led Labour coalition government.
NZ was one of only three countries – along with Sweden and Canada – in the OECD group not raising the pension age, he said.
“No-one has gone to 70 but many are going to 67,” Knox said. But rather than leaving the decision to politicians on an ad hoc basis, he said the pension age should be automatically increased in line with actuarial life expectancy tables for each country.
“Say, you could increase the pension age by half a year for each year life expectancy goes up,” he said. Any changes would be slowly phased in, giving people time to adjust to higher retirement ages.
NZ could also benefit by imposing a means-test on the current no-questions-asked government pension, Knox said. However, he doesn’t recommend copying the Australian pension means-testing model, which “hurts middle-income earners”.
The complex Australian means-test system, which claws back pension payments based on both assets and income, has created an avoidance industry while also providing a disincentive for the middle-income cohort to save.
Instead, NZ could consider a part means-test that included, for example, half as a universal pension with claw-back provisions based on pre-retirement income levels and a single asset/income assessment.
“It can be done simply,” Knox said.
Currently, NZ Superannuation consumes about 4 per cent of the annual government budget but will rise to 7 per cent over the coming decades.
Even at 7 per cent of the budget NZ Super was reasonable compared to many countries, Knox said, but it would put pressure on other government spending priorities.
KiwiSaver, too, should include more incentives to help middle-income people contribute more, he said. The KiwiSaver system currently includes only a couple of modest incentives, namely: a flat annual $521 ‘member tax credit’ (assuming members contribute a minimum $1,042); and, a 5 per cent tax discount for those in the top marginal rate bracket (available to all portfolio investment entity – or PIE – investors).
Under proposals included in the just-published Tax Working Group (TWG), KiwiSaver members earning up to $48,000 would receive relief in the form of PIE tax discounts and waiving the employer superannuation contribution tax.
While he favours compulsion, Knox said the KiwiSaver auto-enrolment system could work more effectively if the “nudges” were right.
“There should be some incentives to contribute more if you have the capacity,” he said.
But KiwiSaver compulsion could also capture the self-employed, who tend to be overlooked in many retirement savings system, including Australia.
With the self-employed cohort set to grow across the world – as the so-called ‘gig economy’ takes hold – the retirement savings gap for this group would only get bigger, Knox said.
He said the Finnish retirement savings model could work here too.
In Finland everyone pays a savings contribution based on estimated annual income that is reconciled against actual earnings at year-end.
As more people move into retirement globally there would also be an increasing push to develop better retirement income products.
“No-one is doing decumulation right,” Knox said, with many retirees unsure of how to eke out their lump sum savings over an indeterminate life span.
Australia is poised to introduce the comprehensive income products for retirement (CIPR) regime to superannuation. But CIPR, which will push super funds to offer some kind of income stream product to retiring members, won’t be compulsory, Knox said.
“Members will be nudged through the pensions means-test,” he said.
The expanded retirement income product range could ignite enthusiasm for ‘pooled longevity’ products – such as one designed by Knox. He said pooled mortality products can offer a cheaper way to fund a guaranteed lifetime income than annuities.
Similar to a tontine, surviving investors of a pooled longevity fund accrue any money left when other members die.
“If you have just 1,000 in the pool it can be fairly stable,” Knox said.
Mercer is due to release its 10th Global Pension Index next week. Included for the first time in the last report, NZ was ranked ninth out of 30 jurisdictions covered in the study.
Knox said there would be some changes in rankings in the new report.