New Zealand’s publicly provided Retirement Income
The Super 2000 Taskforce explains what NZ Super is and the pros and cons for of entitlements and benefits.
Thursday, October 21st 1999, 12:00AM
What is Retirement income?
Retirement income means all forms of income in retirement, whether regular, lump sum, monetary, non-monetary, goods or services.
The current New Zealand system of retirement income consists of two tiers:
What is New Zealand Superannuation?
New Zealand Superannuation is a flat rate pension funded from general taxation. The scheme is funded on a pay-as-you-go (PAYG) basis. This means that current taxpayers fund the pensions of those who are now retired. Pension payments are met as they arise. This contrasts with a funded scheme where funds are accumulated in advance to meet expected future pension payments.
When is New Zealand Superannuation payable?
Every New Zealander who meets the age and residency criteria can receive New Zealand Superannuation. The residency criteria require a total of 10 or more years residency in New Zealand, with five years from age 50. The age of entitlement for New Zealand Superannuation is currently 64 years. It is being gradually increased until it reaches 65 years on 1 April 2001.
How much is payable now?
New Zealand Superannuation Rates from 1 April 1999
|
Weekly Rate |
Gross |
Net |
Net Annual |
|
Married Person |
$192.14 |
$162.79 |
$8,465.08 |
|
Single Sharing |
$233.80 |
$195.84 |
$10,183.68 |
|
Single Living Alone |
$255.27 |
$212.69 |
$11,059.88 |
In addition there are special rates of payment that apply for people eligible in their own right, but with a spouse who is not eligible. Also, superannuitants may be eligible for some of the assistance programmes designed to help overcome unmet needs. These programmes include the accommodation supplement, community services card, disability allowance, etc.
How does New Zealand Superannuation increase to keep pace with inflation?
The after tax rate of New Zealand Superannuation is adjusted annually in line with increases in the Consumer Price Index (CPI). If the after tax amount received by a married couple lies outside 60% to 72.5% of the after tax average wage, it is adjusted to bring it within that range. Single rates are adjusted in line with changes in the married rate.
As average wage inflation typically exceeds price inflation over time, it is expected that the married couple rate will settle at 60% of the after tax average wage.
New Zealand Superannuation is the single largest item of Government expenditure
For the year ended 30 June 1998 Government expenditure on New Zealand Superannuation (and the Veterans Pension) amounted to $5.3 billion (gross of taxation) in respect of over 454,000 superannuitants.
Gross expenditure on NZS is currently 5% of GDP (Gross Domestic Product). Without policy change this is expected to initially decrease and then increase to over 10% by 2050.
New Zealand Superannuation is our most significant source of retirement income
One third of New Zealand Superannuitants have total annual income of less than $11,140 per year and, on average, depend on income from New Zealand Superannuation and other social welfare benefits for 98% of their total income.
Percentage of before tax income received by NZ Superannuitants, for the year ended March 1998. Source Statistics NZ
|
Income Band |
Annual income |
NZ Super & Social Welfare Benefits |
Other income |
|
Bottom 1/3 |
Under $11,140 |
97.8% |
2.2% |
|
Middle 1/3 |
$11,140 to $15,269 |
90.8% |
9.2% |
|
Top 1/3 |
$15,270 and over |
43.3% |
56.7% |
New Zealand Superannuation is currently a universal entitlement
Every New Zealander who meets the age and residency criteria can receive New Zealand Superannuation.
Universal flat-rate pensions are the least common form of public pension internationally. New Zealand is unique among developed countries in having a universal pension as its only form of public pension for those who have reached retirement age. Several countries do operate a "part universal" pension system, where older citizens receive a modest universal pension from the state in conjunction with earnings-related pensions.
NZ history and the role of means testing of public provision
Unlike other state-provided benefits, New Zealand Superannuation is not currently subject to any form of targeting, such as means or income tests. This was not always the case. For most of the past 100 years, New Zealand’s primary public income support has been means tested.
The 1898 Old Age Pension provided a small (about a third of a working man’s wage and twice this for a couple) old age pension to those over age 65, subject to residency and a rigorous means test that covered both income and assets.
Other provisions included evidence of good character (designed to exclude criminals, drunkards and wife-deserters) and the requirement to apply in a public court session. Overall, slightly more than one-third of the population aged 65-plus qualified for the pension.
From 1940 to 1975 a means tested old age pension was available to those over 60 with low incomes, with a (lower, until 1960) universal pension payable from age 65.
The funding for the universal pension component during that period was on a pay-as-you-go basis. However a special social security tax of 1/6d in the pound, on top of normal income tax, was paid into a ‘Social Security Fund’, giving the impression that the fund had an actuarial basis. In fact, the amount raised by the social security tax was insufficient to pay for the full annual costs of the scheme. The Social Security Fund was abolished in 1964 and the social security tax was absorbed into PAYE tax rates by 1969.
In 1975, the existing old age pension was replaced by National Superannuation, payable from age 60 without any form of means test.
In 1985 a taxation surcharge on the other income of National Superannuitants was introduced. While this was not legally an income test, it had a similar effect.
With the removal of the surcharge from 1 April 1998, New Zealand Superannuation again ceased to be income tested.
Many New Zealanders are unaware that New Zealand Superannuation is no longer income tested
In the latest survey of public awareness commissioned by the Super 2000 Taskforce, 54% of those respondents not yet retired thought that New Zealand Superannuation payments were still subject to some form of means-testing against other income.
It is possible that some New Zealanders over the age of 64 have not applied for New Zealand Superannuation in the belief that the surcharge still applies.
The 1997 Periodic Report Group recommended wide public debate on income testing
The 1993 multi-party Accord on Retirement Income Policies supported a targeting mechanism based on income testing. Section 2.4.1 of the Accord states that:
"The net amount provided from public funds for a retired person should reduce as that person’s total income increases."
The 1997 Periodic Report Group (PRG) considered that the link between public and private provision was a key factor in considering future changes to New Zealand Superannuation. They considered that:
"There is a strong case for reintroducing an element of income testing on equity grounds, and in the interests of integrating public and voluntary private provision. However, there is no immediate need to act on this matter, since the demographic and fiscal pressures are still some way off. What is more urgent is the need to establish a clear and public agreement on a process for determining the extent to which, and how, targeting NZS should be reintroduced at some time in the future. We suggest that the next periodic report, in 2003, should reassess the matter. In the interim, there should be wide public debate and examination of the merits of different types of income test."
Universal or means tested pensions?
Some commonly stated advantages of means testing of public pensions are that it:
- is likely to reduce fiscal pressure on public provision, enabling Government to reprioritise expenditure for other purposes or to reduce taxes
- may encourage greater self-provision for retirement by those who are able to save during their working lives
- may increase the ability of the working population to save for their retirement by increasing their disposable income
- involves a degree of redistribution from high earners to others.
Some common advantages of universal pension provision are that:
- universal pensions are relatively simple to administer and appreciate
- if set at an adequate level, universal pensions can reduce dependency on other supplementary benefits
- means testing may encourage individuals to change their behaviour to avoid the means test.
The Super 2000 Taskforce
The Super 2000 Taskforce has been established by the Government to develop a long-term retirement income policy that is fair, affordable, efficient, sustainable and politically durable.
The above information is intended to inform and stimulate debate about this issue. The Taskforce does not yet have a view about the type of retirement income policy it will propose to Government in November 2000.
The figures quoted are sourced from the Department of Social Welfare and Statistics New Zealand.
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