Retirement Commissioner: Consider KiwiSpend

The idea was originally proposed by Susan St John and Claire Dale at the University of Auckland’s Retirement Policy and Research Centre.

In the past year, the amount of money being withdrawn by people aged 65 and over increased 43%, to just over $1 billion.

St John and Dale said that left retirees without protection from the risk of outliving their savings, unsuccessful investments, inflation, financial exploitation or spending their money too early.

Overseas, annuity schemes that drip-fed regular income to members were common, they said, and in some countries, such as the Netherlands, compulsory. Annuities are mandatory in six of the member states of the European Union and voluntary in 15 others.

St John and Dale said New Zealand Superannuation was the “perfect annuity” because it was a secure basic income for everyone at age 65. It was protected from inflation, kept up with wage growth, and continued as long as a person lived. But it was not enough for some people to live on comfortably and did not cover some forms of health care.

They suggested KiwiSpend, which KiwiSaver members would be defaulted into at 65.

They could opt out after taking advice but those who remained in it would receive up to $12,000 a year based on their savings, on top of the pension.

The KiwiSpend amount would increase when they entered a period of high health costs, such as having to go into rest home care, rather than have their other assets depleted to the low threshold required before state support for care kicked in.

Cordtz said the idea was worthy of discussion.

“Many people we’ve spoken to in our research for the Review say they’re worried that they’ll run out of money in retirement.

“An annuity scheme like the KiwiSpend product suggested by St John and Dale may provide members with the peace of mind of a guaranteed income stream in addition to Super. With a long-term health care rider, it could also remove a person’s future health care costs from families and taxpayers in general.”

Ralph Stewart, founder of Retirement Income Group, questioned whether it was right to ask taxpayers to accept the commercial and longevity risk of an annuity product.

“I’m not sure the Government would be that keen on expanding the balance sheet any further.”

He said the private annuity market had flourished in areas where the Government safety net of the pension was not as generous.

The ideal could be for the Government to partner with private annuity providers to share the risks, he said. “I don’t think the taxpayer should do all of it.”

Comments from our readers

On 22 October 2019 at 3:51 pm Murray Weatherston said:

Nuts.
What would a $12,000 p.a. guaranteed annuity for life for (a) 65 year old male and (b) 65 year old female be.
Given today's low interest rates, my guess is it would be in excess of $250,000 for the male and more for the female without any inflation indexing of the annuity. If the annuity was to be indexed, then add more.
How many 65 year old kiwisavers will have a balance that large.
Even recognising Ralph's self-interest he is right, the risk for Government would be large.
If we wanted to be more nanny state, it might be better to raise NZ Super by 50% and increase tax rates on everybody by whatever amount was required to fund that increase!

On 22 October 2019 at 3:58 pm Murray Weatherston said:

PS reflecting an earlier story I read somewhere, isn't the Government extremely clever allowing the situation to occur where the Acting Retirement Commissioner (who I understand is a staffer promoted to the seat until a proper Retirement Commissioner is appointed - (waiting for the desired appointee to finish some existing commitment?) - to have the power and responsibility of delivering the required triennial retirement income review.

On 23 October 2019 at 8:58 am Michael Chamberlain said:

KiwiSpend is an idea for a solution to a potential challenge -what happens when you might live longer than average and have limited resources? But before we rush into this there are some simple questions. Is the potential challenge a real problem? If yes, how many people are financially embarrassed as a result? If it is a real problem for some, is the cost and risk to the taxpayer the most efficient way to solve the problem?

The first point to note is that in the absence of tax incentives/concessions, annuities are not a good solution to the retirement income challenges. With the presence of tax incentives, they are still not a good solution, but the tax incentives may make it a reasonable investment. In the countries where there is a large annuity market there are large tax incentives or compulsion. People buy the annuities because they are bribed or compelled. A large market is not evidence that they are good – it is evidence that the bribe is large, or they have no choice.

Annuities lack the flexibility required. If a retirement lasts 25 years (ie 65 to 90) they need to survive 8 to 9 elections, cope with good health and poor, low inflation and higher inflation, low returns and higher returns etc. Peoples income needs change over time and annuities lack flexibility. Even if the annuity lets you withdraw some capital, the cost (lost returns through effective higher fees for that privilege through lost insurance premiums) makes it a poor investment.

The annuity provide has to be financially sound to be able to provide the guarantee and to incur large compliance costs demonstrating that it is financially sound. This means that it requires large capital and the providers of that capital want a good return on their money. That return can only come from giving the buyers of the annuity a lower return. Given where interest rates are a lower return is close to a zero return in NZ and in some countries a negative return. Yes, having the government (taxpayers) provide the guarantee might make this cheaper to provide but will not change the fact that it is still a poor return relative to the alternative.

What needs to happen is someone needs to gather evidence that potential theoretical problems are real problems for more than a few. They then need to demonstrate that an annuity backed by the government and the cost and drag on the economy makes it the better solution for those affected to solve the problem.

We do not know how many people are affected as we do not have good data. It will be relatively easy to conclude that the proposed KiwiSpend solution is an expensive and inefficient solution to the taxpayers.

On 23 October 2019 at 9:13 am w k said:

murray, ks can be a very useful tool if structured correctly. there's more than one way to use it.

On 23 October 2019 at 12:56 pm w k said:

the govt is already providing super, which may or may not be enough for retirement. annuity plan / schemes to supplement the super already provided should be the sole responsibility of the individual, bought via an insurance company. the govt, more accurately the taxpayers, should not be held responsible for individuals who failed to plan for their own retirement.

insurance companies have various annuity plans - annuity certain, guaranteed annuity, immediate annuity, deferred annuity, etc. individuals may purchase the plan/s that suit their needs with their ks or bank savings. the insurers are the expert in this area, not the govt. hence, the govt should not even attempt to venture into this field.

the concept of ks is good, but it does need an overhaul.

Retirement Commissioner: Consider KiwiSpend

Acting Retirement Commissioner Peter Cordtz is lending support to the idea of KiwiSpend – a Government-administered annuity to help people turn KiwiSaver savings into an income.

Tuesday, October 22nd 2019, 6:00AM 5 Comments

Comments from our readers

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