Younger generations of New Zealanders are likely to be more reliant on a universal state-funded pension than current retirees despite rising KiwiSaver balances, according to a new report.
The paper, published by retirement specialists in the NZ Society of Actuaries (NZSA) last week, backs the status quo on government pension rules given intergenerational saving trends.
While the Retirement Income Interest Group (RIIG) study says younger members may build bigger KiwiSaver pots over time, they face greater uncertainty around home ownership and more urgent drawdown pressures during their working lives.
A RIIG analysis shows NZ Superannuation (NZS) will remain the most important source retirement income with KiwiSaver offering minor top-ups for all but a handful of members.
“Even KiwiSaver members aged 45-59 with the highest account balances at the 95th percentile, will find NZS provides more income for life than their KiwiSaver,” the report says.
The RIIG study says the universal state pension offers the best method of managing ‘longevity risk’ for most New Zealanders with mooted changes to the system unlikely to solve the core retirement savings problem.
“All proposed reforms to NZS are problematic, and none are simple enough to be ‘silver bullets’ to any perceived problem with retirement income policy,” the paper says. “We see means-testing and flexible age of eligibility as particular fails when assessed against RIIG’s principles for reform.”
But if the pension eligibility age were to rise, RIIG says the policy would need a long phase-in period with no automatic upward adjustments indexed to simple longevity data.
“[Indexing] would not take politics out of the decision; it would ignore inequalities and it would not work as intended as it could be highly sensitive to assumptions which can change frequently,” the paper says. “Instead, we favour a well-designed independent assessment of relevant factors including longevity trends.”
RIIG notes, too, that most New Zealanders support the existing state pension model, rending reforms “politically difficult”.
“When forced to consider trade-offs between distinct aspects of the retirement income system, higher taxes are preferred now rather than later, suggesting partial pre-funding through the New Zealand Superannuation Fund is valued,” the report says.
Overall, RIIG says the universal NZ pension is sustainable in spite of growing fiscal pressures set to weigh on government accounts in the coming decades.
“There is no need to change NZS,” the study says. “Change would be a policy choice. At least part of any cost ‘saving’ made would need to be spent on addressing the impact on the considerable number of New Zealanders who would be hard hit by the change.”
RIIG has published a string of papers over the last couple of years investigating topics such as retirement drawdown rules-of-thumb, longevity and KiwiSaver account trends.
The NZSA sub-group includes convenor, Ian Perera, along with Alison O’Connell, Christine Ormrod, Dinushi Jayasuriya, Fraser McKay and Kelvin Prisk.