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Public pension policy options

Monday, April 30th 2001, 4:06PM

Public pension policy options

These population prospects have major implications for the cost and feasibility of retirement income systems.

Public debate over the best way to adapt retirement income policy to meet these changes has included proposals to modify the existing New Zealand Superannuation system over time, and to replace it with entirely different arrangements.

This section summarises the major options raised so far. More information can be found in the 1992 reports of the Taskforce on Private Provision for Retirement, and the 1997 reports of the Periodic Report Group. A number of options are also explored in the 1988 report of the Royal Commission on Social Policy.

Altering the parameters of New Zealand Superannuation
The Taskforce on Private Provision for Retirement endorsed the general principles of public pension provision in New Zealand, including retaining the tax-funded public pension. However, it noted the need to review and modify the scheme to maintain its viability.

The 1997 Interim Report of the Periodic Report Group explored three major proposals:

  1. Further increasing the pension entitlement age next century
  2. Gradually lowering the pension-wage ratio
  3. Reintroducing some element of targeting into the public pension system

The Group also proposed some smaller-scale changes for medium-term policy, notably gradually phasing down the single person rate of New Zealand Superannuation to parity with the married person rate.

For longer-term policy, each of these three major proposals can be implemented in different ways.

Age of entitlement
The current policy involves raising the age of entitlement for New Zealand Superannuation to 65 by the year 2001, and leaving it at this level after that.

This is the same pension age as set in 1898, although life expectancy was shorter then and more jobs involved hard, physical labour. In 1898 people also entered the labour force several years earlier than today, spending less time in the education system.

An issue related to higher life expectancy is how much years of healthy life have increased, compared with an extended period of frailer old age. Perhaps a further rise in pension age could be contemplated. There are several options:

  • an across-the-board increase in pension age: the Royal Commission on Social Policy suggested a possible age of 68 for any universal payment. The Periodic Report Group analysed the financial implications of phasing the pension entitlement age up to 67 or 68 years after the year 2015, but made no recommendations for any early change in the current target age of 65.
  • a two-tier retirement age, such as applied under the Social Security Act 1938: this approach was suggested by the Royal Commission on Social Policy. It could be supported by an income test on earnings for the first tier pension (as applied under the 1938 Act) or by lower pension entitlement rates for the first age bracket. A two-tier approach was announced in 1991 but did not proceed.
Lowering the pension-wage ratio
New Zealand's longer-term trend has been rising productivity and real wages. This means it would be possible to lower the pension-wage ratio over time by not lifting real pensions as much as real wages.

This approach has been part of the adjustment policy for New Zealand Superannuation over the past decade. Current policy allows the married couple rate of New Zealand Superannuation to phase down to 65 percent of net wages by adjusting superannuation only to compensate for price increases. After that the rate is scheduled to move in line with real wages after tax.

It would be possible to allow the pension-wage ratio for any universal superannuation payment to decline below this level. The Periodic Report Group examined the financial implications of longer-term floors of 55 and 50 percent, but made no recommendations for any immediate change to the pension floor of 65 percent of net wages. The Group also explored a universal payment adjusted by prices only, with some form of additional supplementary assistance to those who had only New Zealand Superannuation as a retirement income.

Targeting
For 92 of the past 102 years, New Zealand has had some form of targeting in its main public pension system - mainly through income tests and for much of the period asset tests. Other targeting has worked through the tax system.

Even before the surcharge era, the special income tax treatment applied to Universal Superannuation under the Social Security Act 1938 meant tax was partially recouped through higher tax payments. Strictly speaking, tax can still be partially recouped with New Zealand Superannuation, when receiving the pension payment pushes part of the recipient's other income into a higher tax bracket. However, this tax bracket effect is now much smaller than in the past, as top income tax rates have been reduced from 67.5 percent, with the current top tax rate being 39 percent.

The Periodic Report Group advocated the eventual reintroduction of an element of income testing in the public pension system, and suggested a debate on an appropriate targeting mechanism.

The Periodic Report Group's options for applying targeting included:

  • targeting the whole pension payment, as happened with the 1898 Old Age Pension and the 1938 Age Benefit
  • targeting only part of the existing pension, which would amount to a part-universal, part-targeted system
  • a more generous supplementary assistance system in conjunction with a lower pension-wage ratio for universal payments of New Zealand Superannuation
  • the choice of taking the alternative of a low universal payment, linked to inflation, or an income-tested benefit
  • payment in the form of a tax credit which abates at higher income levels.
 
Other approaches
The Taskforce and Periodic Report Group have also commented on a number of other options for coping with the longer-term rise in the proportion of older New Zealanders. These include:
  • increasing future taxes
  • accumulating fiscal surpluses to pre-fund future costs
  • shifting to a compulsory social insurance system
  • tax concessions for private provision.
 
Future tax increases
One option is to rely solely on continuously raising tax rates to fund something like the present New Zealand Superannuation system, without making any other adjustment to compensate for the ageing population.

The Periodic Report Group noted that this option's long-term fiscal implications were "quite uncomfortable, involving historically high tax revenue requirements and close attention to non-NZS expenditure reduction and control". However, higher future tax rates may be part of the adjustment process to an ageing society.

 
Collective pre-funding of future costs
This option means the Government would pre-fund all or part of future superannuation costs by running large fiscal surpluses for the next one or two decades, using this money to repay the national debt and/or build up a collective investment fund to service superannuation costs.

The option was noted by the Periodic Report Group in 1997 and would require a sustained policy of budgeting for large fiscal surpluses by successive governments.

This is the option which has been adopted by the Labour-Alliance Coalition Government. The proposals are described in more detail on page 22-23.

Compulsory social insurance
As an alternative to the pre-funding approach, a compulsory savings or social insurance scheme would require all earners to save part of their earnings in individual accounts invested in income-earning funds. This approach could save future New Zealand Superannuation costs as long as the receipt of social insurance pensions reduced New Zealand Superannuation entitlements.

As noted earlier, a proposal for a Compulsory Retirement Savings Scheme was put to New Zealand voters in 1997 and rejected.

Incentives for private provision
This option, based on the concept of pre-funding, gives tax incentives to individuals to save for their own retirement pensions.

The Taskforce on Private Provision for Retirement noted that:

• this option would have significant up-front costs which would cause a deterioration in the Government's budgetary position

• the option would mean abandoning the "level playing field" towards different types of investment or use of savings, and this could affect the average return on investment in New Zealand

• a high proportion of the tax concessions would probably be claimed by people who would have saved extra for their retirement irrespective of the tax concessions.

The Taskforce doubted that tax concessions would actually increase net national saving.

For increased private provision to save future government costs, it would be necessary to reintroduce targeting. New Zealand Superannuation payments to individuals would need to be reduced to complement the income from their voluntary superannuation investments. Given people's ability to switch money into investments offering the most favourable impact on the net amount of New Zealand Superannuation they receive, this would imply the application of targeting to other sources of income also. However, introducing targeting does not require tax concessions as a prior condition.

The Taskforce's 1992 report advised against the tax concessions option, a view reiterated by the 1997 Periodic Report Group.

Summary
New Zealand has a variety of ways to adapt to the realities of a rising proportion of older people in the population.

Even with recent developments, the future form of New Zealand Superannuation is far from certain. In December 2000 all parliamentary parties, with the exception of the Greens supported the referral of the New Zealand Superannuation Bill to select committee. However there is no guarantee that the Government will be able to secure a majority to pass the Bill in its current form - or even in an amended form. New Zealanders would be well advised to inform themselves on the issues to enable a constructive debate on the proposals.

« English airs concerns over pre-fundingAMP & Good Returns launch superannuation website »

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