Beyond the Budget: Fixing NZ’s retirement math problem

Wednesday, 21 May 2025

Katie Wesney is a financial adviser at enable.me.

OPINION: The truth about New Zealand's retirement system is stark: it's mathematically unsustainable in its current form.

Our politicians know this. Treasury knows this. Economists know this.

Yet election after election, we collectively pretend otherwise, kicking the can down a road that's rapidly running out.

As we approach this year’s Budget announcement, we need to confront reality. Not because it's politically expedient - it certainly isn't - but because ignoring it won't make it disappear.

It will only make the inevitable corrections more painful and disruptive when they come.

The demographic reality we cannot ignore

The math is simple but sobering.

In 2025, approximately 16% of New Zealanders are aged 65 or over. By 2050, this will surge to nearly 25%. Meanwhile, NZ Super costs are already growing by approximately $1.5 billion annually.

While the recently-announced plans to begin withdrawals from the NZ Super Fund in 2028 show foresight, these withdrawals alone cannot solve the fundamental imbalance.

Let's be clear about what NZ Super is: it's not a savings account you've paid into throughout your working life. It's welfare - a transfer from current taxpayers to those over 65. NZ Super cost $21.6 billion in the June 2024 year, making it our single largest welfare expense.

Our system works on a pay-as-you-go basis. The taxes you paid during your working life funded the pensions of those who were retired then, not your own retirement. Your NZ Super will be paid by tomorrow's workers, who will be fewer in number and shouldering a heavier burden. This fundamental misunderstanding, that people have “earned” or “paid for” their pension, has made meaningful reform politically toxic.

The question isn't whether we need to reform our retirement system, but how we do so in a way that's fair, inclusive, and compassionate - not simply as a cost-cutting exercise. Any successful approach must balance fiscal responsibility with social justice, particularly for our most vulnerable citizens.

Possible solutions for a sustainable retirement system

New Zealand could consider action across four key areas:

1. Adjusting the NZ Super eligibility age

Possible approaches include:

• Gradually increasing the eligibility age to reflect longer lifespans.

• Announcing changes well in advance (10+ years) to allow for planning.

• Grandfathering provisions to protect those nearing retirement.

• Creating early access provisions for physically demanding occupations and health conditions.

• Implementing specific considerations for population groups with lower life expectancies.

2. Enhancing KiwiSaver as a retirement pillar

Options worth considering:

• Gradually increasing the default employee contribution rate.

• Reviewing employer contribution levels.

• Expanding auto-enrolment to include more workers.

• Enhancing government contributions for low-income earners.

• Introducing support during unemployment, caregiving, and study periods.

• Developing flexible access options based on individual circumstances.

3. Reviewing NZ Super eligibility

Potential adjustments could include:

• Creating a more coordinated transition between KiwiSaver access and NZ Super eligibility.

• Exploring options for targeting support where it’s most needed, possibly including modest income thresholds for very high earners.

4. Promoting financial literacy and personal responsibility

Government policy alone cannot solve this challenge. As a nation, we must embrace greater personal responsibility for retirement planning:

• Strengthening financial education in schools.

• Developing workplace based financial education programs for adults to back-fill knowledge gaps, as employers are uniquely positioned to support practical retirement planning.

• Encouraging flexible work arrangements for those transitioning to retirement.

• Supporting pathways to homeownership, as mortgage-free housing significantly improves retirement security.

Why a balanced approach makes sense

A comprehensive framework addressing these areas would:

• Respond to demographic realities through measured, gradual adjustments.

• Promote personal responsibility and equity through an enhanced KiwiSaver approach.

• Maintain flexibility through coordinated retirement pathways.

• Protect vulnerable groups through targeted support.

Implementing thoughtful changes now would allow New Zealand to avoid the drastic cuts and chaotic adjustments that other countries have faced when delaying pension reform too long.

These suggestions represent just a starting point. A truly robust solution will require broader consultation and more detailed policy development. What's critical is that we begin the process of engagement across political and industry divides.

A call for bipartisan action

Any successful reform requires bipartisan agreement to provide stability and certainty. The conversation should be framed positively. “We're not just asking Kiwis to work longer - we're giving them stronger tools to build better retirements with smarter KiwiSaver settings and a more flexible NZ Super system, more people can create the retirement they want on their own terms”.

The upcoming Budget presents an opportunity to begin this conversation honestly with New Zealanders. Our parents and grandparents built a superannuation system that has served us well. It's now our responsibility to ensure it remains sustainable for our children and grandchildren. The time for pragmatic, compassionate and inclusive action is now.