Chapter 5 - Retirement income

Key Messages

• From around 2011, as baby boomers start to retire, the cost of New Zealand Superannuation will start to accelerate. This, combined with the high number of retired persons relative to the working age population, means that meeting the costs of publicly funded superannuation will be a challenge for future governments.
• The issue of income adequacy in retirement is one that both government and private individuals have a strong vested interest in addressing.
• The present focus of the retirement income strategy is on the retention of current eligibility and entitlement levels for New Zealand Superannuation, and on forward financial provision by government to offset the future costs of this.
• A stable and secure income is essential for older people to be able to age in a positive and productive way.
• As a group, the current cohort of persons aged 65 and over fare relatively well in terms of adequate retirement income, but up to 15% are experiencing some difficulties.

Introduction

An adequate retirement income is fundamental to enjoyment of the opportunities retirement years can bring to older people and enhances their capacity to age in a positive and productive way. Lack of an adequate income has negative effects on health and general wellbeing, and on an older persons ability to remain an active participant in society.

On a range of levels, the issue of retirement income is enduring and critical. There are fiscal challenges for government in meeting the costs of ensuring a basic standard of living for all retired persons. For a minority of retired people there is the challenge posed by quite marked material hardship and limited ability to improve their situation. There is also the challenge for those in the workforce, who have the option, to choose between spending all their disposable income or saving it to augment their retirement income.

The population for whom the Senior Citizens portfolio has key relevance are almost entirely recipients of New Zealand Superannuation, half of whom rely on New Zealand Superannuation as their sole source of retirement income. For this reason, retirement income issues are of particular importance. Retirement income does however have much wider relevance as a matter of public policy and as a key contributory factor in the personal well being of current and future retirees.

In New Zealand, as in many countries, changes in the composition of the population, where a greater proportion of people are moving into the older age groups, generate significant implications for government, retired persons, and the working age population. This means that an enduring and widely acceptable strategy to deal with retirement income issues is increasingly important.

The process for finding a publicly and politically acceptable retirement income strategy has been unfolding in New Zealand for almost 30 years. A specific long term strategy for offsetting the future costs of New Zealand Superannuation is currently being implemented, but there remains no explicit across-the-board political agreement to the strategy.

Current retirement income policy is based on three key components. These are: the maintenance of the New Zealand Superannuation scheme, contributions to the New Zealand Superannuation Fund as the mechanism to partially pre-fund the future cost of New Zealand Superannuation, and the promotion of private retirement income savings by the Retirement Commissioner.

New Zealand Superannuation Scheme

The present New Zealand Superannuation (NZS) scheme, funded from general taxation revenue on a pay as you go basis, has been the cornerstone of New Zealands retirement income policy, with limited change in structure[1] , for 25 years. In the 10 years from 1992 the age of eligibility was raised from 60 to 65 years. The transitional provisions put in place at that time to accommodate those who were approaching the age of 60 will be phased out by December 2003.

NZS is neither income nor asset tested, and all persons aged 65 years and over who are ordinarily resident in New Zealand, are eligible. The married couple rate of NZS is set at not less than 65% of the average ordinary time weekly wage[2] , and is adjusted annually to reflect increases in the Consumer Price Index. The married couple rate is in turn used as the threshold for the single living alone and single sharing rates of NZS, which are set at 65% and 60% respectively of the married couple rate.

NZS is based on individual entitlement, which means that for a married couple where one partner reaches the age of eligibility, the non-qualified partner does not automatically qualify.

In such situations however, the qualified spouse has the option of either receiving the married person rate of NZS (and the non-qualified spouse receives no NZS related income), or the couple can choose to receive the married couple (non-qualified spouse) rate of NZS, which is lower than the rate received by a married couple where both partners qualify. If a couple receive the non-qualified spouse rate, their NZS is abated by any additional income of more than $4,160 per annum (or $80.00 per week) before tax.

The gross and net rates of NZS as of 1 April 2002 are as follows:

Type	Net Rate (Tax at M*)	Net Rate (Tax at M/S*)	Gross Rate
Single Living Alone	$238.80	$227.83	$288.31
Single Sharing	$220.43	$209.46	$264.90
Married Person	$183.69	$172.72	$218.50
Married Couple (both qualify)	$367.38 (total)	$345.44	$437.00
Married Couple (Non-qualified spouse)	$350.28 (total)	$328.34	$415.28
Married Person (Non-qualified spouse)	$175.14	$164.17	$207.64

*Tax at M is where NZS is the main source of income. Tax at M/S is where NZS is declared as the secondary source of taxable income and so incurs a higher rate of tax.

As at 28 June 2002, 450,456 people were receiving NZS. NZS currently accounts for 14% of total government expenditure and 39% of total welfare expenditure.

While it is the case that NZS is a significant expenditure item for the Crown, it is important that current and future cohorts of retired people are not given a message that they are a burden on the state. Such a message is inconsistent with the goals of the Positive Ageing Strategy and does not usefully contribute to the perennial policy issue of how to support the retired population.

Income support

A number of people in the 65 and over age group receive second and third tier income support. The eligibility conditions for such income support are the same for superannuitants as they are for the working age population. This means that while NZS is not income or asset tested, a persons superannuation is counted as income for the purposes of assessing their entitlement to supplementary assistance such as the accommodation supplement, special benefit, and disability allowance.

Of the 450,456 people in receipt of NZS at the end of June 2002, 3.6% (16,084) were receiving an Accommodation Supplement, 21.8% (98,167) were receiving a Disability Allowance, just 0.1% (261) were recipients of a Special Benefit, and 71.1% (320,461) had a Community Services Card.

New Zealand Superannuation Fund

In 2001, the New Zealand Superannuation Act was passed. It established the financial arrangements for the New Zealand Superannuation Fund, which was set up in 2001 as the mechanism to accumulate sufficient savings to partially pre-fund future payment of NZS.

The rationale behind establishing the fund was that with the growing number of superannuitants and relatively fewer people of working age providing tax revenue, the absence of a reserve revenue pool would potentially require either increases in general taxation, or a lowering of the rate of NZS.

In 2002 an initial contribution of $600m was made to the fund with assumed transfers for the next three years of $1.2b, $1.8b, and $2.5b respectively. There is not general agreement across political parties in relation to the New Zealand Superannuation Fund.

Promoting private retirement savings

In New Zealand, as in many OECD countries, the focus for policies to provide for future population changes is to encourage self-provision, where possible. This allows better management of future government expenditure on state retirement pensions when changes in the age of the population indicate the greatest call on retirement income.

Among other things, the Retirement Income Act 1993 established the position of the Retirement Commissioner, and specified the roles and functions of the Commissioner in respect to retirement income matters.

The Office of the Retirement Commissioner is funded through Vote: Social Development to, among other things, promote education about retirement income issues and publish information about those issues. In the 2002/03 financial year, the Retirement Commission has been appropriated $1.68m (GST inclusive) for that function.

Effective public education about the need to make private provision for retirement income is becoming increasingly important. This is because NZS provides a basic income that on its own does not ordinarily provide the recipient with the financial means to enjoy a quality of life that is comparable to those who have private savings. NZS is set at not less than 65% of the average wage. If people want to enjoy the same or a similar standard of living as they did when they were working, it is unlikely that reliance on NZS alone, over an extended period, will enable this.

Currently, a common feature of people in or near retirement is the high proportion who own their own home. This effectively provides them with a financial resource in their retirement, but not generally one which is used by homeowners as a contribution to their retirement income. Reverse mortgages, that provide an annuity secured against a home as a mortgage, have not been widely accepted in New Zealand as a means of income supplementation.

Changes in the population

The rate of growth in the older population (currently just over 1% per year) is expected to increase over the next decade, accelerating to over 3% per year after 2011 as the oldest of the post-war baby boom generation begin turning 65. At the end of March 2002, there were 463,000 people aged 65 years and over living in New Zealand. By 2005 there will be around 490,000, and by 2010 there will be 551,000. This means that over the next three years there will not be any significant change in the older population or dramatic increases in New Zealand Superannuation.

The longer term scenarios in terms of population changes, if current patterns continue, are as follows:

• In the next 50 years it is projected that the number of people aged 65 years and over will be 1.18 million (26% of the population).
• By 2051, the labour force will number around 2.11 million, and persons aged 65 years and over around 1.18 million.
• By 2051, approximately 10.1% of the Gross Domestic Product (GDP) will be spent on New Zealand Superannuation. Currently, superannuation expenditure accounts for 4.5% of GDP.
• There will not only be more people entering the retirement age group, but, as life expectancy continues to rise, people will remain in that age group longer.

Potential changes to the Retirement Income Strategy

Much of the debate on retirement income strategies has been around the statistical evidence of an ageing population. In the main, this has tended to present the population changes in a negative light and portray the increasingly ageing population as a major looming problem.

This has led to many older people taking a defensive attitude to proposals to change New Zealand Superannuation to make it sustainable for future generations. It has also heightened generational differences in the attitudes and expectations of older people regarding retirement income, quite different from those of people of working age.

Notwithstanding the current retirement income strategy outlined above, the debate about the most appropriate long-term arrangements for retirement income has been protracted and, to date, inconclusive. The absence of political consensus on a particular long-term strategy means that any strategy could be reversed or altered.

Current retirement income levels

Research undertaken on the material wellbeing of older New Zealanders indicates that while they have a relatively low income, the majority are managing well.

Data derived from the 2001 Census[3] indicates that there is wide variation in the level and source of income received by the 65 plus population. In the year to March 2001 the median annual income for people aged 65 years and over was $13,100, whereas the median for all New Zealanders was $18,500. One-quarter of those aged 65 years and over received annual income of $10,000 or less, and two-thirds received $20,000 or less. Only 5% received more than $40,000 in annual income.

Most people in the 65 and older age group were in receipt of New Zealand Superannuation (93%)[4], but more than half also received income from other sources. Four in every 10 received income from interest, dividends and rent, while 15% received income from other superannuation and superannuities. Six percent reported income from wages and salaries in the 12 months prior to the Census and 6% also reported receiving income from self employment.

In 1999, the Super 2000 Taskforce initiated research on the living standards of older people[5]. The sample consisted of 3060 people aged 65 years and over, plus a supplementary sample of 542 Māori aged 65-69 years. There was also a sample of working age people to permit a comparison between the living standards of older people and the population as a whole.

The results of the survey analysis suggest that around 5% of the sample were experiencing quite marked material hardship and restrictions, and a further 5-10% were experiencing some material difficulties. In terms of self assessed income adequacy and overall living standards, around 80% of the sample rated their income as enough (40%) or just enough (37%)[6] , and more than 90% rated their standard of living as medium or better.[7]

The survey also examined the factors that predicate variations in living standards of older people. Those factors were identified as net annual income, value of savings and investments and accommodation costs; exposure to past and present economic stresses; and social background, which includes household composition, age, ethnicity, and socioeconomic status.

These factors acted cumulatively so that an individual most at risk of poor material well-being was characterised by a mix of low income, no savings, high accommodation costs, a history of economic stress, being at the younger end of the 65 plus population (65-70 years), Māori or Pacific ethnicity, and having held lower paying jobs.

The survey findings send an important signal in terms of retirement income policy. The findings show that what determines material wellbeing in old age is not only net annual income. An accumulation of factors representing the individuals current circumstances and previous life history have a strong bearing on their living standard as an older person.[8]

Future directions

Retirement income has been an issue of major political, social and economic significance for some 30 years. The increasing influence exerted by the greater proportion of the voting population at or near retirement has ensured retirement income is a public issue.

As public education increases public awareness, retirement income is also likely to become a matter to which individuals give more considered attention, and, to the extent they are able, make provision for private retirement income.

The issue of retirement income involves much more than the Government finding ways to meet the increasing costs of a universal superannuation scheme. It is about the capacity of the current cohort of retired persons to age positively, which in part is contingent on their retirement income. Further, the issue of retirement income is about the economic wellbeing of the generations moving into retirement and consequently their ability to age positively.

The capacity of future generations to supplement a state pension through private income, and to have sufficient accumulated assets to buffer against changes in personal circumstances, will be a significant factor in the development of future retirement income strategies. Generally we can expect to grow old and in turn contribute to, and be recipients of, state-funded retirement income. In the absence of political consensus, the strategic approach taken to retirement income is exposed to change and amendment. If, in future, changes are contemplated, the way any changes are managed will not only be important from an economic perspective, but will also have social implications.

The approach taken will need to recognise and accommodate the attitudes and expectations of different generations, and take into account the fact that relationships between generations are important to maintaining a cohesive and harmonious society.

Endnotes

1. Changes include raising the age of eligibility from 60 to 65 years between 1992 and 2001, and the introduction of portability provisions. The rate of NZS relative to the average wage has also gone through changes.

2. The married rate of NZS is currently 67% of the average wage. The average ordinary time weekly wage measure comes from the Statistics NZ Quarterly Employment Survey (QES). The QES is designed to measure quarterly estimates of change and levels of average hourly and average weekly (pre-tax) wages, average weekly paid hours, and the number of filled jobs. QES statistics are derived quarterly from approximately 19,000 surveyed business locations in a range of industries and locations throughout New Zealand. Information relates to the pay week ending on, or immediately before, the 20th of the middle month of the quarter (that is, February, May, August and November). Average ordinary time earnings include all shift, penal and other allowances, bonuses, paid leave, and commissions earned in the survey pay week.

3. 2001 Census Snapshot 9: 2001 Census of Population and Dwellings : Statistics New Zealand: 29 May 2002.

4. This figure is derived from Census night data. The 7% not in receipt of New Zealand Superannuation will be a combination of visitors, tourists, permanent residents receiving an overseas pension who had not applied for New Zealand Superannuation, new immigrants, or others not ordinarily resident in New Zealand.

5. In 2000, the Super 2000 Taskforce was disestablished and the research it had initiated was transferred to the Ministry of Social Policy to be completed.

6. There was some variation in how single and coupled respondents assessed their income adequacy and living standards. For instance 38% of single people and 36% of couples assessed their income as just enough.

7. Living Standards of Older New Zealanders: A summary: Ministry of Social Policy 2001, pg 29.

8. The text in this paragraph and the preceding three paragraphs is paraphrased or directly quoted from: Living Standards of Older New Zealanders: A Summary: The Ministry of Social Policy 2001: pages 49 and 50.