Retirement Commissioner: Higher tax rate for working pensioners worth considering
Tuesday, 8 October 2019
A higher tax rate for wealthy pensioners could help defray the cost of New Zealand's superannuation scheme, the Retirement Commissioner says.
The commission is working through its three-yearly review of retirement income policies.
At present, the pension costs the country $39 million a day but that is projected to hit $120m in 20 years' time.
Researchers at the University of Auckland's Retirement Policy and Research Centre have estimated that would create an 'explosive' rise in national debt, making the pension unsustainable without a change in policy settings.
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Susan St John and Claire Dale said increasing the age of eligibility or reducing the amount paid in the pension could create problems.
Core Crown spending on superannuation and welfare benefit in New Zealand by category.
But they said there was merit in a new tax structure for high-income-earners aged over 65.
They suggested keeping NZ Super as a universal grant. But when other income was earnt on top of it, it should be taxed under a progressive tax regime so that the highest earners effectively paid back their pension.
In one scenario proposed, with a tax rate of 39 per cent, someone would have to earn $123,000 before they effectively paid back the value of their pension.
A two-tier tax scale, with a lower rate of 17.5 per cent, would protect the majority of pensioners with only modest extra income.
If their suggested tax regime had been in place in the 20118 financial year, together with an alignment of the single and married Super rate, around 16 per cent of the cost of NZ Super could be saved.
Interim retirement commissioner Peter Cordtz said St John and Dale's suggestions were worthy of consideration.
'Tax has always been about the redistribution of wealth, so it's worth looking at ideas where income could be redistributed more equitably, particularly between generations,' he said.
'Reductions in payments to high income superannuitants may release more taxes to fund services that benefit the population as a whole.
'NZ Super was established to prevent poverty in old age, and is still important to ensure all New Zealanders have an acceptable standard of living as they age. We want to make sure it remains as a backstop for future generations.'
Gareth Kiernan, chief forecaster at Infometrics, said the idea had merit.
'There's no good reason for NZ Super to be universal,' he said.
'It's clearly recognised that the current situation is unsustainable, but neither Labour nor National have shown the guts to address the looming fiscal problem.'
He said some form of targeting the scheme was appropriate.
'The proposal seems to avoid the high effective marginal tax rates that might place an unduly large disincentive on people to work or earn income.
'In another 20 years, it's also worth considering the role that people's KiwiSaver funds will play in retirement living given the scheme will have been in place for a generation,' he said.
'I realise there's a certain school of thinking among some people that they'd paid taxes all their lives so they should be entitled to as much superannuation from the government as everyone else.
'But that way of thinking misses the point that NZ Super is meant to avoid poverty in retirement. There is no link between the taxes that people pay and any money they get in return from the government, and that those same people have also received plenty of other services from the government over the years in terms of healthcare, education, roading.
'There's also a feeling that people don't like their savings or wealth being eroded in retirement by a targeted superannuation policy.
'But we're increasingly seeing the negative effects of greater wealth inequality, so any policy that mitigates this intergenerational accumulation of wealth needs to be considered. And if people are worried about passing on money to their children when they die, people's increasing life expectancies mean that inheritances are often being received by children when they are themselves retired and don't really need the money,' Kiernan said.
Economist Cameron Bagrie, of Bagrie Economics, said something had to be done.
He said the Government had made it clear it wanted to take an intergenerational view on policy – but then kept 'kicking to touch' the issue of the unsustainability of the superannuation scheme.
He said, the longer the issue was ignored, the tougher the decisions that were made would have to be.
St John and Dale's idea had merit, he said.
Cordtz will deliver his recommendations to Government in December.