Fund reality check

As we debate the merits or otherwise of the proposed super fund, people need to know what exactly it will do – and what it won’t.

There are some aspects of the scheme that haven’t yet been publicly discussed. The big one is that it will look after the bulk of the baby-boomers’ retirement income. It won’t. At most it will fund about 14 percent of future pensions.

Another aspect is linked to the same factor. The Government says the fund will provide certainty for the future. But when future governments still have to find at least 86 percent of the funding for superannuation from general taxation, they will still be under huge pressure.

All of which begs a question: why did the Government say the scheme would solve the future

problem of funding superannuation? Why didn’t it present it just as a tax-smoothing proposal to shave a little off the peak of superannuation funding?

It’s a monster to feed, but it won’t buy a lot

The Government says the fund guarantees certainty and security. When Cullen talked about "partial funding" there was a general assumption that he was talking about funding something of the order of 60 – 75 percent of future pension costs.

In fact it will be a long time before the fund delivers anything. While it will start building from next financial year, it will not start paying out until around 2025.

For someone aged 65 today, the fund will not make any contributions to their retirement income until they turn 90.

People who are 50 today, who retire at 65, will see their taxes go towards a fund that will start

contributing to their pensions when they turn 75.

In its first year of paying out, in 2025, the fund will only contribute around 1percent of the costs of superannuation. That means 99percent will still be funded on a pay-as-you-go basis, by taxpayers at the time.

At its peak around 2040, the fund will contribute around 14 percent of the current costs of superannuation. About 86percent will still be funded from general taxation. For someone aged 40 today, the most this fund will contribute towards their retirement income will

Officials say fund will reduce Kiwis’ saving

The Government appears to have ignored officials’ advice that the super fund could lead to lower levels of private savings. Treasury papers obtained by National under the Official

Information Act show that the private advice from officials was at odds with the material released when the scheme was launched. The papers released on 10 October when the scheme was announced said it was ‘not clear whether the establishment of the fund will affect

household saving.’

Treasury gave that advice in June but by 2 October Treasury was saying clearly that the international evidence suggested that moves to claim greater certainty in retirement

income could lead to lower private savings.

Even if the establishment of a super fund did increase public savings this could be offset by lower private savings.

House as nest egg?

Half of New Zealanders are planning to sell their family home when they retire, and another 13 percent are thinking about it, according to research by AMP. A staggering two thirds of these people are relying on making a profit on the sale to help fund their retirement.

Forty nine percent of people say they are saving for their retirement, over and above what they expect the government to provide. But only 33 percent of those earning under $50,000 are saving for retirement – which has led AMP to ask whether the right incentives exist to encourage all people to save.

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