Increase in retirement age inevitable: ISI
An increase in the retirement age is ‘inevitable’ and earlier access to KiwiSaver funds “would reduce the long term fiscal cost of NZ Superannuation”, according to the ISI.
Thursday, January 27th 2011, 8:12AM
by Benn Bathgate
In its submission to the Savings Working Group the Investment Savings & Insurance Association of New Zealand (ISI) also argues for the development of an annuities market to facilitate earlier access to KiwiSaver funds for retirees.
"Public concerns about the later age of eligibility could be alleviated by allowing access to at least a portion of KiwiSaver savings as an income stream from age 55 or 60, possibly with a minimum contribution period," ISI said.
"That would encourage accumulation of a pool of savings to fund the period between the date of retirement and the date of eligibility for NZ Superannuation."
The political repercussions of an increased retirement age were acknowledged by ISI communications manager Stephen Leslie, saying the increase was "not very palatable from a political perspective."
However, he cited the Retirement Commission Review of Retirement Income Policy from 2010 which referenced previous changes to the retirement age as a precedent for further increases.
The retirement age was reduced from 65 to 60 in 1977 with the introduction of National Superannuation, then raised back to 65 "in a rapid series of steps" in the 1990s.
"ISI, like the Retirement Commission, believes the Government needs to lift the age of eligibility to 67 and that there is still time to do so in a gradual process," Leslie said.
The submission paper suggests the SWG considers a gradual increase of the retirement age and setting a date in the future, five years hence is suggested as a possibility, when "the transition to a later qualification age for NZ Superannuation should commence."
Arguing a case for KiwiSaver compulsion exists the ISI cited the example of Australia's compulsory savings regime, noting that while compulsion led to an ‘offset' that saw a reduction in investing in other assets, nevertheless, "the pool of institutional savings available for investment in Australia has grown enormously."
"Even without an increase in the level of national savings, policy changes that redirected savings into funds management institutions would improve the quality of investment and facilitate investment in productive areas of the economy."
A number of measures to amend KiwiSaver are also outlined by the ISI to increase the flow of savings into schemes without resorting to compulsion, including the development of an annuities market, the removal of tax distortions and moves to increase investor confidence through more transparency.
The removal of some KiwiSaver incentives is also suggested, including "Phasing out the first home purchase option so that members default investment option has a risk/return profile appropriate to long-term investment."
The key recommendation for the development of an annuities market would, the ISI argues, alleviate some of the concerns surrounding an increased age of eligibility for NZ Superannuation.
"The market for ‘decumulation' products is underdeveloped in new Zealand at the present as there has been no incentive for retirees to forgo a lump sum in favour of an income stream. A policy change enabling access to KiwiSaver funds from age 55 or 60 in the form of an income stream would lead to product innovation in that area," ISI said.
"ISI has long considered that annuities should play a significant role in providing a continued saving in retirement option to individuals as they reach retirement age. An active and viable annuities market is necessary to support KiwiSaver and would ensure the benefits from KiwiSaver are maximised through continued and known saving during retirement."
Taxation is another area where the ISI believes changes could benefit long term savings, particularly moving from a TTE (tax, tax, exempt) model to an ETT (exempt, exempt, tax) model.
The submission notes New Zealand is unique among OECD countries in adopting TTE for taxing retirement income, and that "It is absolutely essential that the SWG reviews the appropriateness of this now."
ISI cites research from AMP and the May 2007 Treasury Report, "A synopsis of Theory, Evidence and Recent Treasury Analysis on Saving" stating, "international evidence suggests that tax is likely to have only a modest impact on how much people save and invest, but that it can have a very significant impact on how people save and invest."
The AMP analysis found, "an increase in both personal retirement income and total tax revenue over a life time, resulting from the compounding effect the gross investment returns has on the accumulated lump sum at retirement."
Increasing investor confidence is highlighted as a means of boosting KiwiSaver participation without resorting to compulsion, as "potential members are likely to be encouraged to join if they are confident of the security of their savings."
While recommending a number of changes, ISI acknowledges the important role KiwiSaver plays in New Zealand's retail savings environment.
"We believe that KiwiSaver brings significant current and future value to New Zealand and the rapid take up of KiwiSaver by individual New Zealanders indicates that they have an appetite for the concept of personal savings and investment."
Benn Bathgate is a business reporter for ASSET and Good Returns, email story ideas to benn@goodreturns.co.nz
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