Column: NZ Superannuation not so super
Act MP Muriel Newman compares New Zealand superannuation with schemes around the world, and asks how we could ensure financial security in our retirement.
Thursday, March 18th 2004, 9:00PM
Earlier this month, concerns about the sustainability of pensions for our aging population hit the headlines as the National and Labour parties began shadowboxing over New Zealand superannuation.
Interestingly, the creation of individually-owned retirement savings accounts – the strategy being adopted by more and more countries –– did not even rate a mention, despite it being a mechanism which prevents the younger generation from being crippled by the burden of caring for the elderly.
The problem with our pension scheme dates back to its original design: established in 1898, the Age Benefit provided an income and asset-tested pension to those aged 65 and over deemed to be of good moral character and sober habits. As the world’s first tax-based pay-as-you-go scheme, New Zealand was labelled a ‘social laboratory’, and was set apart from other countries considering contributory insurance-based schemes.
Parliamentary debates at the time were heated, focussing on the long-term sustainability of a pay-as-you-go scheme. However, in a society with a large population of younger workers, where the average worker did not even reach retirement age – the average life expectancy was just 59 years – a shared risk pool did not appear to be too large a burden.
How times have changed!
Today, although only 450,000 people – or12% of the population – are retired, that number is expected to more than double to 1.1 million people, or 25%, by the year 2040. The average life expectancy is now 78 years – with those who reach retirement age living, on average, a further 18 years. However, by the year 2040, the average life expectancy is expected to increase to 84 years. Those reaching 65 are expected to live, on average, a further 22 years.
Longer life expectancies, better healthcare and a falling birth rate have resulted in fewer workers supporting an increasingly growing number of retirees. At the turn of the century, there were 11 workers to support each person in their retirement; today, that ratio is four to one – by the year 2030 it reduces to two to one. The cost of funding pensions at the current level far outstrips the ability of a dwindling pool of workers to pay for it.
The Labour Government’s answer has been to establish a "tax-smoothing" scheme that relies on higher taxes to create a state investment fund to pay for some of the pension top-up that will be needed. The problem, however, is that it will still not be enough. Future governments will have no option but to consider raising taxes, cutting benefits and increasing the age of entitlement.
Of course, it’s all happened before. By 1975, the starting age for the pension had been set at 60, and the level at 80% of the average wage. Muldoon promised the nation it was sustainable. But, over time, both National and Labour governments introduced changes, increasing the entitlement age to 65 and reducing the level to 65% of the average wage for a couple and 40% for a single person.
Around the world, as governments seek ways of averting the insolvency of their superannuation schemes - in order to preserve the right for workers to enjoy dignity and financial security in retirement - they are increasingly looking to the experiences of countries that have allowed their workers to invest in private superannuation accounts.
Singapore was the torchbearer, establishing private individually-owned social security accounts in 1955. As a result of these accounts, Singapore has the highest rate of personalised savings in the world and, since the accounts can be used to help fund house purchases, the world’s highest rate of home ownership.
In 1981, Chile adopted individual retirement accounts designed to encompass the three principles of freedom of choice, private-sector management, and property rights in retirement accounts. Seven other Latin American countries – Peru, Argentina, Colombia, Uruguay, Bolivia, Mexico and El Salvador – have adopted the Chilean model to some degree.
Other countries following suit include Mexico and Poland – which introduced private accounts in 1997 – and Hong Kong last year.
In the US, President Bush is currently campaigning on major Social Security reform, which involves individualised accounts. He has recognised that throwing more money at a Social Security system, which – like ours – is headed for insolvency, is not an option. Instead he is advocating a scheme to allow workers to privately invest their Social Security taxes into their own retirement accounts. In Galveston, Texas, where such a scheme has been in place for some 20 years, the annual returns have fluctuated from 50 to 200% higher than the national pension system.
Pension reform, which enables workers to contribute a proportion of their taxes into individually-owned private investment accounts, is based on the "magic" of compound interest.
To illustrate the power of the long-term compounding of interest, consider the case of a person who is able to invest $100 a week into a savings account: if the person starts at 50 and continues saving until they retire 15 years later, at a conservative 5% compounding of interest, their savings would be worth $115,000. If, on the other hand, they started saving at 20 and stopped 15 years later – but still left the savings to earn compounding interest at 5% until they reached retirement age – the fund would have grown to $500,000.
If $100 were saved every week from the age of 20 until retirement, the investment would be worth $850,000.
As well as providing financial security in retirement, individualised pension accounts are an important mechanism for enabling low and middle-income workers – who have difficulty finding the money to save and invest – to actively participate in wealth generation. By introducing a scheme that enables such workers to invest a proportion of their taxes into an investment account in their own name, the ever-expanding wealth gap between rich and poor would start to be reduced, giving those people a greater stake in society. Further, in the event of untimely death the wealth that they have accumulated could be passed on to their family.
In light of the problems that exist with our present superannuation scheme – and the fact that those countries that have adopted individually-owned retirement savings accounts have not only seen their workers retire with better, more secure pensions, at an increasingly early age, but have seen the scheme driving significant economic growth and raising their standard of living – I believe it is a scheme that needs thoughtful consideration here...especially since the Cullen Fund has been designed in such a way that it can be converted to individualised accounts to kick-start private savings here.
What do you think of this idea? Have your say either by sending an email to
editor@goodreturns.co.nz or making a post in the forum here<| « Super funds fees to be laid bare | Resistance to retirement saving reaching critical point » |
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