Pre-funding New Zealand Superannuation: Entitlements

This paper is one in the suite of papers on pre-funding New Zealand Superannuation (NZS). The aim of pre-funding is to ensure that NZS is fiscally affordable in the long term. Accordingly, the Fund to be established for NZS will not be available to the government of the day to use for any other purpose than payment of NZS. Therefore, we need to clearly specify what payments it will cover, and these include:

The coverage of the Fund would not include Veterans’ Pensions, Transitional Retirement Benefits, or supplementary assistance that superannuitants may be eligible for. I propose that these benefits remain under the existing pay-as-you-go system. They do not fit well with our overarching objective of providing long-term stability of a system of universal retirement income entitlements.

I propose we develop a new Bill to govern retirement income policy that would cover both NZS entitlements and NZS funding arrangements. The Bill will confirm existing NZS entitlements and these will continue to be paid through the Department of Work and Income. The Bill will also include a provision for agreement with other political parties on entitlements. I intend to begin discussions with other political parties once we have agreed to proceed with pre-funding.

There may be Bill of Rights implications associated with transferring the existing NZS entitlements to a new Act. Under the Bill of Rights Act, any discrimination embodied in existing entitlements that are re-enacted must be justified under the Human Rights Act. I propose we undertake further work, before introduction of the legislation, on abolishing the discriminatory provisions. I also consider we should review the portability provisions.

Earlier this year, we restored the relationship of NZS to a minimum of 65% of the average wage to ensure it provided an adequate income in retirement [CAB(00)1/7]. However, we also need to provide New Zealanders with a sense of security about the ability of governments to deliver NZS entitlements at this level now and in the future. It is important that we establish a means of financing the long-term costs of publicly provided retirement income.

The establishment of a pre-funding arrangement does not require us to make any changes to existing entitlements. In fact, pre-funding has the flexibility to accommodate any changes to entitlements parameters that may need to be made in future. Increased or decreased entitlement would be matched by increased or decreased contributions. However, to determine the level of pre-funding that is needed, it is necessary to be clear about the NZS entitlements to be funded.

The parameters of NZS entitlements to be funded will remain the parameters we have already agreed to, most of which are currently in place. The key parameters can be summarised as:

• The age of entitlement for NZS to be 65 (this is currently 64 years and 9 months, but will reach 65 on 1 January 2001);
• The net married couple rate of NZS is indexed to the CPI within a band of 65% - 72.5% of net average ordinary time weekly earnings net of tax and ACC levy (the bottom of the band is currently 60% in legislation);
• The single living alone rate and the single sharing rate of NZS to be 65% and 60% of the married couple rate respectively;
• Recipients must have spent at least 10 years in New Zealand after age 20, 5 of which are after age 50; and
• Payments to those who qualify for NZS would not be income-tested or asset-tested.

The Fund will not be available to the government of the day to use for any other purpose than payment of NZS. Given this objective, we need to clearly specify what payments it does cover. Part 1 of the Social Welfare (Transitional Provisions) Act 1990 specifies the payments to be made to the eligible superannuitants, or those close to eligibility. These include:

• New Zealand Superannuation;
• Veterans’ Pension; and
• Transitional Retirement Benefit.

Part 1 of that Act also specifies the arrangements for payments overseas of New Zealand Superannuation and Veterans’ Pension.

The Social Security Act 1964 specifies the supplementary provisions that are available to the retired and those close to retirement.

There are several universal rates of NZS :

There are several non-standard rates of NZS that should also be paid from the Fund:

• the alternative rate for a married couple where one person does not qualify for NZS;
• married couple rate with non qualified spouse included before 1991;
• partners in rest homes (with non qualified spouses included); and
• hospital rates of NZS.

There are also various proportional rates of NZS that are paid under social security agreements and portability provisions.

New Zealand has social security agreements with a number of countries. These agreements generally allow eligible former New Zealand residents living in other countries to receive a portion of NZS. The amount paid under social security agreements is related to the contribution people have made to the New Zealand economy. The proxy used for this contribution is the number of working life years they spent in New Zealand.

People born in other countries, including those covered by social security agreements, who retire in New Zealand can bring public pensions from those countries. Where these people are eligible for NZS, a payment from the Fund should top up their entitlement to the level of NZS. The same treatment should apply to New Zealanders who work in other countries, retire in New Zealand and bring in such public pensions.

Definitions of what constitutes a public pension in other countries are changing and the treatment of such pensions by the New Zealand government is currently under review. Social security agreements may therefore be amended in future. Further, new social security agreements may be negotiated with other countries. The Fund should therefore be capable of amending the payments it makes in such cases.

The agreement New Zealand has with Australia is different from other social security agreements. Former New Zealand residents in Australia receive the Age Pension and the New Zealand government reimburses the Australian government for a portion of their costs. The same arrangement holds for Australians in New Zealand. Reimbursement to Australia for Age Pensions paid to New Zealanders should be paid from the Fund. Reimbursements from Australia for NZS payments to Australians resident in New Zealand should be paid into the Fund.

New Zealand has portability provisions for superannuitants who move to countries not covered by social security agreements. Under these provisions, superannuitants receive all or a portion of NZS while living overseas. The amount they receive depends on whether the country they are living in is covered by the Pacific Island portability provisions or the general portability provisions, and on the number of working age years they spent in New Zealand. People who receive NZS payments under portability provisions are required to meet the NZS qualification criteria and must have been resident in New Zealand when they applied for NZS. I propose we review these provisions before introduction of the Bill.

People in receipt of Veterans’ Pension receive the same amount of weekly payment as people in receipt of NZS. However, Veterans’ Pension is subject to some different eligibility criteria and lump sum payments. People who qualify for Veterans’ Pension and NZS currently have a choice about which payment they receive. They can choose to give up their right to NZS in exchange for the greater advantages associated with the Veterans’ Pension.

Veterans’ Pension and the other payments available to veterans are a means of recognising the special status of veterans with significant disabilities. All payments associated with veterans would continue to be funded in Vote: Veterans Affairs to reflect the special nature of these benefits and should continue to be paid by the Department of Work and Income on the current basis.

The Transitional Retirement Benefit is an income-tested benefit paid to people who were approaching the age of 60 when the age of eligibility for NZS was increased. The people that receive this payment do not meet the eligibility criteria for NZS. This benefit is being phased out and will cease when the last of this group of people reach age 65 in 2004.

Supplementary assistance is part of the income support system and aimed at achieving social goals, such as alleviating poverty, rather than providing a base income to those in retirement. Many forms of supplementary assistance are available to New Zealanders of all ages and not specifically to superannuitants. The supplementary assistance that superannuitants may receive includes Disability Allowance, Accommodation Supplement, Special Needs Grants, Special Benefit, and Tenure Protection Allowance (including Special Transfer Allowance). They may receive recoverable assistance, in the form of advances, for certain purposes. They may also receive assistance through the health system and assistance by subsidy rather than as income, such as the Community Services Card.

In summary, the following payments will be made from the Fund:

• the married couple rate of NZS;
• the single living alone rate of NZS;
• the single sharing accommodation rate of NZS;
• the non-qualified spouse married couple rates of NZS (those paid to people qualifying both before and after 1991);
• the partner in rest home rate (with non-qualified spouses included);
• hospital rates of NZS;
• retirement income related payments made under social security agreements; and
• NZS payments to people covered by portability arrangements.

The following benefits will not be made from the NZS Fund:

I propose that a new Act be established to govern retirement income entitlements and related funding. The Act would have two key Parts, the first Part would be related to NZS entitlements and the second Part would be related to funding arrangements.

The first Part of the Act would contain the NZS entitlements as they are currently set out in the Social Welfare (Transitional Provisions) Act 1990 and elsewhere, with the exception that the wage floor (currently specified at 60%) would be restored to 65% of average ordinary time weekly earnings.

While we will confirm existing NZS entitlements in the new legislation, to avoid significant swings in policy by future governments, it would also be worthwhile for us to explore establishing an agreement on retirement income policies with other political parties. We should develop a process for other political parties to "sign up" to the current entitlements and how they are funded, and a process for developing policy in the future. Parties could agree to entitlements without agreeing to funding arrangements. However, this would raise questions about the fiscal responsibility of those parties.

While we do not see any need to change NZS entitlements now (except for the discriminatory provisions discussed below), future governments may wish to make changes in light of circumstances at the time, for example evidence of lengthening life expectancy. Any changes should be made in a measured and predictable manner, avoiding the swings in policy of the past and giving people time to take the changes into account in making their private retirement provision. Any changes made to entitlements would be matched by a change in the funding requirements. Those who agree to increases in entitlements need to demonstrate how the entitlements they support can be afforded.

Current legislation requires six yearly periodic reports on retirement income policy. It would be possible to incorporate something along these lines in the process for making changes. This would ensure that any future changes were made in a gradual manner with the benefit of independent advice. This would also give the public an opportunity to have input into the process.

Transferring existing NZS entitlements into a new piece of legislation will open up entitlements policy for discussion during the Select Committee consideration. There may be Bill of Rights Act 1990 and Human Rights Act 1993 implications associated with the entitlements, and specific issues for Maori.

Bill of Rights Act (and Human Rights Act) implications associated with transferring the existing NZS entitlements to a new Act will need to be considered. Under the Bill of Rights Act, any potentially discriminatory provisions embodied in existing legislation must be able to be justified under that Act, even if it is simply a case of the Bill re-enacting existing legislation. The Ministry of Justice advises that the proposal gives rise to two potential issues:

The NZS rates for couples classified as ‘married’ and couples classified as ‘single sharing’ are different. Under the current legislation, same sex couples can only be classified as single sharing. The present discriminatory provisions should be abolished. I propose to report back to Cabinet on how this should be achieved before the introduction of the new Bill. If this is done, it removes a potential inconsistency with the Bill of Rights Act on the grounds of sexual orientation.

The use of age as a means of determining qualification for superannuation would also need to be considered. Indirect discrimination arguably arises out of the longer life expectancy of pakeha women, pakeha women arguably benefit to a greater extent than any other demographic group. Because women receive a proportionately higher share of the fund, based on the average life expectancy for this demographic group, they would be entitled to superannuation for a longer period of time. The potential issue of inconsistency with the Bill of Rights Act is, however, not clear-cut and would need to be examined carefully.

As a group, Maori are less likely to live until the age of eligibility for NZS than non-Maori. This is the most significant influence on the retirement income of Maori. In this regard, policies associated with the period prior to retirement play an important role in retirement outcomes for Maori.

The accompanying paper, Pre-funding New Zealand Superannuation: Funding Arrangements, covers the publicity requirements associated with pre-funding and provides a statement of the consultation undertaken in developing this policy. A Regulatory Impact Statement is also attached to that paper.

I recommend that the Cabinet Policy Committee:

a) agree that the Fund would cover the standard New Zealand Superannuation allowances (married couple, single living alone, single sharing, non-qualified spouse (NQS)), non-standard NZS allowances (married couple with NQS included before 1991, partners in rest homes (with NQS included), hospital rate), and the related receipts and payments made under international agreements;

b) agree that payments for Veterans’ Pension, Transitional Retirement Benefit and supplementary assistance not be made from the Fund and continue to be funded by an appropriation to the relevant Vote;

c) agree to transferring provisions related to NZS entitlements from the Social Welfare (Transitional Provisions) Act 1990 to new legislation on retirement income policy that will bring together entitlements and funding arrangements;

d) note that I plan have officials review the portability provisions for New Zealanders living overseas before introduction of the Bill.

e) agree that the present discriminatory provisions in NZS entitlements relating to marital status and sexual orientation should be abolished;

f) note that I plan to report back to Cabinet with proposals for how the abolition of the discriminatory provisions in recommendation (e) should be achieved before introduction of the new Bill; and

 

g) note that the issue of potential inconsistency with the Bill of Rights Act concerning the use of age as a means of determining qualification for superannuation would need to be carefully examined before the Bill is introduced.

 

Hon Dr Michael Cullen, Minister of Finance

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