NZ Super is becoming more essential, actuaries say

Saturday, 27 January 2024

Young people are likely to need NZ Super more than generations who bought homes in cheaper times, actuaries say.

New Zealand Super will become more, not less, important for future generations, and reforming it is unnecessary, retirement experts from the the New Zealand Society of Actuaries say.

“Retaining NZ Super at current settings is one way every generation can have similar financial security in later life,” the actuaries from the society’s Retirement Income Interest Group said in a new report on New Zealand’s universal pension.

There have been some suggestions on ways the rising cost of NZ Super could be kept down as the age profile of the population increases.

However, every proposed change to make NZ Super more affordable were problematic, said the actuaries, financial experts whose job it is to predict and assess the financial risks and impacts of future events.

“We see means-testing and flexible age of eligibility as particular fails,” the actuaries said.

Simply lifting the age of eligibility, or linking it to a longevity index, were bad options, and would ignore inequalities, and any changes should only be made after well-designed independent assessment.

Sir Michael Cullen was the father of KiwiSaver when he was finance minister in Helen Clark’s government. He also caused the NZ Super Fund to be created to help pay some of the future costs of NZ Super as the population ages.

“We are still of the view that it is not necessary to reform NZ Super,” they said.

“Debate usually focuses on the ‘cost’ of NZ Super, which is often portrayed wrongly as in crisis. Expenditure is a policy choice. Contrary arguments which stress the value and purpose of NZ Super are strong,” the actuaries said.

They suggested that instead of politicians trying to reform NZ Super, they would be better of reforming KiwiSaver.

“On current policy and settings, KiwiSaver account balances are not going to be high enough to allow any painless reform of NZ Super,” they said.

A contributing KiwiSaver member currently aged 45 with today’s median account balance of $156,900 would be able to draw down annual income at age 65 of $6280 a year in present day terms, the actuaries said.

“KiwiSaver is a top up to NZ Super of about a quarter.”

French youth rioted last year over a pension reforms that saw the pension age increase from 62 to 64. In New Zealand, proposals to lift the retirement age to 67 are on hold.

“If both members in a couple qualifying for NZ Super of $39,709 a year had KiwiSavers of the same amount, their combined income would top up NZ Super by about a third,” they said.

The blight on young workers lives of high rents and property prices limited their ability to save, and NZ Super was likely to be more, not less important to them, than it was to generations in which home ownership rates were higher.

NZ Super was so important to all New Zealanders that reforms should be principles-based.

It would remain the single most important source of income for the majority of retired people, and it effectively insured everyone from the risk they outlived their savings, ensuring everyone has a backstop income for later life.

Already people were working longer, which the actuaries thought was the result in people realising they were likely to live so long they ran out of savings, and so were attempting to further increase their nest eggs.

Around a quarter of people continue working after the age of 65, the actuaries said, but in the 65- to 69-year age range, just under half were working, or seeking work.

The report also contained a wake-up call for people of all ages planning their saving and retirements.

“People tend to guess or expect their own lifespan to be lower than is likely,” the actuaries said.

People tend to expect to live only as long as their parents. Most will live far longer.

“This seems to be because people take the age at which their parents and grandparents died as a guide, without allowing for the mortality improvements that have occurred since then.”

The figures used in the media may also be contributing to this, in part because they are averages across the population, and give no information about the range of likely lifespans.

The risk was that people would under-estimate the amount of money they need to save to pay for a comfortable retirement, the actuaries said.

“Everyone is at risk, no matter what cohort, gender, or ethnicity as it is impossible to say with perfect accuracy how long any individual will live,” they said.

Life expectancy has been rising more slowly than had it for previous generations, where there were big wins from a massive decline in smoking rates, and the loss of lives to heart disease.

Figures presented in the actuaries’ report shows the life expectancy at birth of the people born in 1978 was 82, rising to 88 for people who survive their first 65 years. However, the most common lifespan was now expected to be 90, and one in five would live until at least 94.