The coming NZ Super crunch

Sunday, 6 July 2025

What is and isn’t fiscally sustainable in the retirement system remains an elusive and slippery concept.

ANALYSIS: It was one of the key underlying forces in the 2025 Budget - but it flew below the radar. The cost of NZ Superannuation. Slowly, but surely, the bill is inching upwards, at a rate of $1.4 billion each year

When Finance Minister Nicola Willis stood up in Parliament and handed down that Budget on May 22, she did two things. She announced the extension of the KiwiSaver contribution rate for employers would increase to 4%, and 16- and 17-year-olds would be able to get employee contributions.

But at the same time, she halved the government payment that tops up the retirement savings scheme, from $521 per year, to $260 per year. This was to make sure, Willis said, that the government contribution to the scheme remained sustainable.

KiwiSaver, as it happens, turned 18 this week.

Yet it is NZ Super, the slightly confusing name given to New Zealand’s universal pension, that is the single biggest growing pressure on the public purse.

What is and isn’t fiscally sustainable in the retirement system remains an elusive and slippery concept. This is the first in a several-parts series running over the coming weeks, which will look into New Zealand’s retirement system. Where it came from, what it is meant to achieve, how it is funded, what are options for the future, and how it compares to Australia’s system.

Retirement Commissioner Jane Wrightson thinks with some caveats, the status quo is affordable.

While the Budget rang in changes to KiwiSaver, boosting the effective proportion of the population’s saving to 8% of wages and salaries, it is the universal pension system that has many demographers, the Treasury as well as the current, past and any future minister of finance, worried.

That worry is far from universal. The Retirement Commissioner, Jane Wrightson, thinks that, with some caveats, the status quo is affordable, relatively equitable and very easy to administer.

According to a Treasury document, the proportion of tax revenue gobbled up by NZ Super will rise from 16.6% in 2022/23 to over 21% by 2036/37.

In practical terms, that means that, all else being equal, an extra 5% of the tax take will have to be redirected into pensions and away from other government spending.

And while the general cost of superannuation is often compared to GDP, for NZ Super, because it is cash the government needs to find to pay out, comparing it to the tax take puts it in a fiscal, rather than economic, context.

Next year, just shy of $25 billion will be spent on it and the average annual increase is $1.4 billion, according to the Budget. It’ll be $29 billion by 2028/29.

In France, in 2023, people demonstrated on the streets over public outrage over a pension-reform law that increased the country's retirement age from 62 to 64.

That pressure will mean that over the coming decade there will have to be either spending cuts, tax increases or larger Budget deficits (which are deferred taxes for younger generations). Or some mixture of all three.

In the current Budget, the proportion of government spending to GDP is forecast to drop. Something will have to give.

Now, with the election less than 18 months away - and with the changes made in the Budget - retirement will likely once again be on the political agenda in 2026.

Bill English’s Government raised the retirement age - before Jacinda Ardern’s reversed that.

In late June’s The Post/Freshwater Strategy Poll, those surveyed were asked both about raising the retirement age and means testing NZ Super. Forty-three per cent of those surveyed said that means-testing higher income or wealthy retirees would be the best way to reduce the financial impact of the Baby Boomer bubble, while 26% said that gradually raising the retirement age from 65 to 67 would be the way. Only 8% said that raising taxes on working age people was an option.

Meanwhile, 15% said the government should do nothing and continue as it is. From a fiscal perspective at least, that last one is probably not an option.

In 2009 Australian Labor prime minister Kevin Rudd announced that Australia would be boosting its retirement age to 67 by 2023 - over 14 years. That is now Australia’s retirement age at which eligible Australians can get the pension. However, Australia’s $4 trillion superannuation system, which has now been in place for over 30 years, has ameliorated the need for massive increases in pensions spending.

In 2017 the then Bill English Government in New Zealand announced that it would be raising the age of NZ Super to 67 over 20 years (so it would fully come in, in 2037). When the Ardern Government was elected - along with NZ First - it was changed back to 65.

The last time the retirement age was lifted was in the early 1990s, when the age rose from 60 to 65, over eight years between 1993 and 2001.

The politics of all this are complicated. The age will not rise while NZ First is in government. Means-testing, although popular with a larger slice of the population, also comes with problems.

One of the advantages of the current universal and non-means tested payment is that it doesn’t have any incentive effect. People can save or earn what they like above it without this affecting the payment. There is no incentive for anyone to try to structure affairs to get the payment. Although, NZ Super is income and depending on other earnings, could be subject to tax.

Obviously it does have the far larger incentive of people banking that the government will support them in retirement.

To give some comparisons with Australia, New Zealand spends slightly under half what the Australian federal government does on the age pension, but Australia has about five times the population. And, thanks to its superannuation system, the pressure on the age of the pension and the amount of the federal budget spent on it are expected to reduce. But, it spends instead on generous superannuation tax concessions that will increase.

New Zealand is in the opposite situation. In dollar terms, New Zealand will go from spending about $16 billion in 2020 to $29 billion in 2029 - a doubling in nominal dollar terms in less than a decade.

This is all money that has to be found and in an environment where infrastructure spending is also expected to run at 5% to 7% of GDP. Also while health spending - also driven by the ageing population - will increase.

The NZ Super Fund (also known as the Cullen Fund) is the fund which is now 23 years-old and was designed to help smooth out the amount of current taxes the government has to spend on the system.

By 2040 the NZ Super Fund is expected to contribute in net terms 3.3% of the cost of Super, 6.6% in 2060, 12.7% in 2080 and 10.8% by the turn of the next century.

Its contributions and withdrawals are governed by a complicated government formula, but it is expected to make a first modest payout out in 2028, spending the following years between modest withdrawals and contributions.

Peter McKee is a way off retirement - but agrees something probably needs to change.

Meanwhile, the extent to which NZ Super actually offers enough money to ensure dignity and a decent living in retirement will only become more politically important.

According to the retirement commission, NZ Super is the sole source of income for 40% of retirees, while another 20% have only a little bit more than that.

Because of the relatively new system, those who are aged 45-59 are only expected to have enough KiwiSaver to contribute about another quarter to a third on top of their NZ Super. This is worse for women, Pasifika and Māori.

Overall, New Zealand is at the low end of OECD nations in terms of how much of GDP is spent on pensions. The question is really about how fit for purpose the current mix of that spending is.

Will super still be there when the young retire?

At 20 years old, retirement is on the other side of Peter McKee’s working life and he's expecting that by the time he gets there superannuation will look pretty different.

But the student has hesitations about lifting the entitlement age.

“It’s kind of putting a finger in the face of many of our older workers that are nearing being able to use the super, then you just shove the goalposts a bit further.”

He said it was a tough issue for governments to deal with because “the math would say yes”to the entitlement age needing to increase even if he and others didn’t want it to.

“I guess maybe it has to go up but that doesn't mean that it should go up anytime soon.”

McKee was in favour of means testing “at the extremes”.

“In a way, obviously, it’s a beautiful thing that everybody gets the exact same amount. But at the same time if we are looking at how we can reduce the impact the super has on balancing the books, I think it’s fair to means test people that did earn a lot more money or have substantial assets accrued.'

He called the current weekly rate of $538.42 “pretty rough” and wouldn't allow for a fulfilling life.

“You can’t really live life on that, you can subsist on that.”

McKee hopes to own his own home by the time he stops working but says it wouldn’t surprise him if he didn’t - especially if he’s still living in Auckland.

– Additional reporting: Amelia Wade

The second part of this series will cover the cornerstone of New Zealand’s retirement system: NZ Super. Follow the remainder of this series online at thepost.co.nz.