Can New Zealand and Australia Get Closer On Retirement Income Policy?

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1 Can New Zealand and Australia Get Closer On Retirement Income Policy? Peter Neilson, Chief Executive Financial Services Council Presentation to ANZIIF Life Insurance Conference pm, Thursday 23 May 2013 Elliott Room, Crowne Plaza Hotel Albert Street Auckland

2 2 Australia has an income and asset tested age pension What and since the 1992 Report the Superannua7on is Not About Guarantee with compulsory contribu7ons. New the Zealand next 20 has years NZ Superannua7on so if you are already that is not income retired or or asset soon tested will and be, since it is not 2008, about voluntary you. KiwiSaver. What are the prospects of the two systems becoming more similar and what is the feasibility of including a base level of life and income protec7on cover in KiwiSaver?

3 3 Some numbers to put the current vulnerability of New Zealanders into focus For New Zealanders: made redundant. the next 20 years so if you are already 26% would not be able to pay their bills aoer just one week. Only 15% say they have sufficient savings to last six months if they were 54% have insufficient savings to last 4 weeks aoer being made redundant. Only 9% of New Zealanders think NZ Super ($349 per week maximum aoer tax for an individual and $537 for a couple) is sufficient to re7re on. (Horizon Dec 2012) Only 15% of New Zealanders have income protec7on insurance. (Horizon Oct 2012) The majority of New Zealanders are financially living close to the edge and unemployment, sickness or re7rement could put them quickly over that edge.

4 4 Retirement in the 20 th Century Funding retirement incomes in 1955 Over 65 population less than 300,000 Life expectancy at years for males and 16.9 years for females. Seven working age people support one pensioner. Age pensions cost 3% of GDP when the universal pension was available from 65. Retirement in the 21 st Century Funding retirement incomes in 2055 Over 65 population reaches almost 1.7 million. Life expectancy at years for males and 33.9 years for females. Two working age people support one pensioner. Age pensions will cost 9-10% of GDP if the age of eligibility for NZ Superannuation stays at 65.

5 The Current Pensions Gap with Australia Net Replacement Rate* Australia and New Zealand current net rearement income replacement rates at different income levels Times average wage Australia New Zealand Source: replacement rate is the percentage of your previous earnings that your pension delivers from the compulsory system in the respec<ve countries 15A

6 The Pension Gap with Australia in 2055 Assuming No New Zealand Policy Change New Zealand NZS pension in 2055 Australia pension for someone retiring in 2055 having earned the median income Ratio (AU/NZ) Retirement income Australia pension for someone retiring in 2055 in Australia having earned the average income Ratio (AU/NZ) Dollars $NZ $A * $A ** % per capita GDP 34% 52% % % 7.2% % 9.9% 1.34 Average % 9.2% 1.44 Contributions *This table compares the compulsory re<rement systems in both countries. Australia has its age pension and its Superannua<on Guarantee whereas New Zealand has New Zealand Superannua<on and no compulsory re<rement savings scheme. ** The ra<o of Australian and New Zealand incomes assumes an exchange rate of $NZ1 = $A0.85, close to average value since Source: Coleman (2012) Source: Australian Treasury 6

7 7 the next 20 years so if you are already Source: Comparison of the New Zealand and Australian Re<rement Income Systems Ross Guest 2013 Con7nued...

8 8 the next 20 years so if you are already Source: Comparison of the New Zealand and Australian Re<rement Income Systems Ross Guest 2013

9 9 the next 20 years so if you are already Source: Comparison of the New Zealand and Australian Re<rement Income Systems Ross Guest 2013

10 10 Best AGributes of the Australian ReArement Income Policy It will at maturity provide Australians with much be`er pensions in terms of What maintaining the previous Report levels of income is Not into About re7rement with the current 9% contribu7ons rate, lioing to 12% over the balance of this decade. It recognises that savings that produce compound returns are unfairly treated without compensa7ng tax changes, that is a lower tax rate on re7rement the next savings 20 within years the fund. so In if Australia, you are the nominal already tax rate on earnings in a superannua7on account is 15% and the effec7ve rate is even lower. It has made the Australian economy more resilient, less reliant on foreign capital and by increasing the amount of domes7c savings, lowered interest rates and the Australian currency, while boos7ng investment per employee to increase labour produc7vity and incomes. Increased the financial security of Australian employees by including a base level of life cover within the Superannua7on Guarantee Scheme. Australia has made the decision to move out its age of eligibility for the age pension from age 65 to 67 by 2020.

11 11 Worst AGributes of the Australian ReArement Income Policy The basic Age Pension is not sufficient on its own to keep most Australians out of poverty in re7rement but over 7me this will no longer the next be a problem 20 years as the so Superannua7on if you are already Guarantee system matures lioing re7rement incomes well above the Age Pension level. The income and assets tests on the Australian Age Pension discourages the labour market par7cipa7on of those aoer age 65, discourages savings and strongly incen7vises moving savings into areas to escape the income and assets tests. The overall system has such complexity that it appears to need con7nuous change.

12 12 Best AGributes of the New Zealand ReArement Income Policy The first 7er pension NZ Superannua7on is the most generous in the developed world and provided you own your own home debt free at re7rement, it will keep you out of absolute poverty. the next 20 years so if you are already The absence of an asset or income test on the basic pension provides a strong incen7ve to con7nue working, if that is your 2. choice, Relitigating and to save the without debate reducing about your pension. National KiwiSaver has achieved 2 million voluntary par7cipates, no one has lost a dollar in KiwiSaver during the worst financial market crisis in more than 70 years. Overall the system is fairly simple to understand and operate.

13 13 Worst AGributes of the New Zealand ReArement Income Policy Most New Zealanders will not find themselves on a comfortable income by What the 7me they get Report to re7rement is on a Not combina7on About of NZ Superannua7on and voluntary KiwiSaver contribu7ons. Only 9% of New Zealanders think NZ Superannua7on on its own is enough to re7re on, only a li`le over half of New Zealanders are ac7ve KiwiSaver contributors and most are at the 6% level which is insufficient to fund a comfortable re7rement income at around the next 20 years so if you are already 2 7mes NZ Super. Most New Zealanders will get to re7rement regrefng that they did not save 2. enough Relitigating for re7rement. the Procras7na7on debate and about iner7a, National along with underes7ma7ng our likely longevity means that even the well inten7oned frequently end up with inadequate re7rement savings. New Zealand has the most nega7ve tax regime for re7rement savings through intermediated financial products that the FSC has been able to find. The Savings Working Group was advised by the Treasury that the effec7ve tax rate on rental property in New Zealand was 15 to 20% according to the marginal tax rate of the investor, whereas the effec7ve tax rate on KiwiSaver or other PIE products was 50%.

14 How we 80.0 will provide retirement incomes in 70.0 NZ: the next 20 years so if you are already 60.0 NZ: retired 50.0 or soon will be, it is not about NZ: 65+ you. % Labour Force ParAcipaAon Rate Comparing New Zealand and Australia Aus: Aus: Aus: Source: SNZ and ABS, unweighted means of quarterly and monthly data respec<vely

15 How the Systems Could Become More Similar 1. On the age of eligibility for NZ Superannua7on moving out with longevity, I think most New Zealanders see that as inevitable and will change when there is next a change of Government. 2. There is a less chance that New Zealand would adopt the Australian asset and income tests, although the New Zealand Treasury is looking at gradually replacing NZ Super with KiwiSaver, that would require income tes7ng NZ Super if it was to reduce Government expenditure in 1. the How future. we will provide retirement incomes in gradually the increasing next 20 the contribu7on years rate so to if 10% you of incomes. are This already level of contribu7ons 3. There is wide public support for making KiwiSaver universal or compulsory for employees and would enable all New Zealanders to achieve an income in re7rement of at least 2 7mes the level of NZ Super. 4. In New Zealand most people with a mortgage have a life insurance policy to repay their mortgage in the case of their premature death but less than 20% of New Zealanders have income protec7on insurance. In contrast, we all have ACC cover for accidents when we are 2.6 7mes more likely to be off work for six months or more because of sickness rather than an accident. When we produced our Pensions for the Twenty First Century report last year, we es7mated that life cover and income protec7on cover could be bundled into KiwiSaver for about 1% of income premium. A future Government may decide to extend KiwiSaver in this way if it becomes universal and help avoid hardship claims making withdrawals from KiwiSaver. AOer age 45 the dispersal of rates across the popula7on would probably make bundling income protec7on insurance infeasible, but the 1% of income could then be used to purchase more individually tailored coverage, including possibly advanced purchase of supported care. 15

16 16 How the Systems Could Become More Similar 4. Neither countries systems currently require part of the re7rement lump sum to be taken in the form of a fixed term pension. This will eventually be recognised as essen7al if we are to have income security in our 20 to 30 year re7rement. the next 20 years so if you are already re7rement retired in or KiwiSaver soon rather will than be, inves7ng it is in not rental about property. you. If we 5. New Zealand will need to address the tax disadvantages of saving for don t address this anomaly we will con7nue to bid up land prices and under invest in areas that will increase the countries produc7on. The FSC has work underway on how a level playing field could be achieved between KiwiSaver and rental property investments. The wedge is made up from the effec7ve exemp7on for capital gains for most private rental property investments, the deduc7bility of both the real and the nominal components of interest and the taxa7on as income of the return of capital from compounding return investment products.

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