Retirement Age and Superannuation
There was an article in the NZ Herald on Thursday 10th September in which David Law, Senior research fellow at the New Zealand Initiative said the government should consider raising the retirement age to 67, winding up the New Zealand Superannuation Fund early and stopping all KiwiSaver subsidies to get debt levels back under control.
The Government response to the economic challenges of Covid 19 had a primarily focused on new spending, which will increase public debt from 19 per cent of GDP last year to nearly 54 per cent by 2024.
“Getting debt under control is the most important thing, especially when the next crisis requiring large debt is as unpredictable as Covid, such as earthquakes”
Labour has announced it would bring in a new top tax rate of 39% for those earning over $180,000, bringing in predicted $550 million a year.
David Law makes the point that the expected revenue from this tax change will take 26 years to pay off the debt accrued by the wage subsidy and the new revenue may not even be enough to service the interest on our total Covid-19 recovery.
My first question is why do we need to raise the retirement age? We all have to retire at some stage and shouldn’t we stand aside to allow the younger people to come through? One perverse effect from raising the retirement age eligibility to 67 is that more people will stay in the workforce longer and therefore reduce the job opportunities for the younger population.
The idea behind the raising of the eligibility for superannuation is to reduce the government liability for payment of superannuation. Yet we have a situation where everyone is entitled to superannuation whether they are employed or not. For those still employed after the eligibility age then the tax regulations are supposed to cover this situation and level the playing field.
A better suggestion would be that when a person reaches the age of entitlement for super and still wishes to work then they should be allowed to claim the super only if their income from primary employment is below the countries average income level. Once it rises higher than the average income level then the entitlement should stop. This should have the effect of reducing the liability for persons who are still able to work and support themselves or conversely encouraging them to cease work and create vacancies for younger persons.
Those earning more than the average income level should be able to support themselves adequately on that income and if they decide to stop working then they should immediately be eligible to claim the superannuation. Those earning below the average income level would not be penalised due to their eligibility to claim the superannuation to top up their income levels to equate to the average and to claim the full superannuation at retirement.
In relation to the KiwiSaver scheme the government puts in 50 cents for every dollar a person contributes to KiwiSaver up to maximum of $521.43 for every year. The interest isn’t great but the government still takes up to 33% of taxes from the interest received. Now if you take the tax off the money put in this could put more money into people’s retirement funds.
Why doesn’t the Government cut the subsidy to KiwiSaver but take the taxes off savings for retirement? Cutting the tax on all savings accounts will allow people to make their own decisions on where they want to spend their money therefore adding to the upward movement of the economy.
David Law said two studies on KiwiSaver had showed only a third of contributions to the scheme were new savings while the rest would have happened without it and KiwiSaver’s effect on national savings was negligible.
“Overall, KiwiSaver has performed poorly and Government subsidies represent poor value for money. In the current dire economic context, it would make a great deal of sense to end Government subsidies to saving through KiwiSaver.
If this were to happen in 2021, Government debt as a share of GDP in 2034 would be approximately 4.5 percentage points lower, all else equal.”
In relation to the suggestion about winding up the Super fund, David Law said the New Zealand Superannuation Fund held $44 billion for a rainy day. It was set up to help pre-fund part of the cost of future New Zealand Superannuation payments.
“Despite the Covid-19 situation, the Government still plans to borrow an additional $10.4 billion over the next five years to make further contributions to the [fund].”
Law said at the least contributions to the Super Fund should be suspended, as happened during the 2008 Global Financial Crisis, and serious consideration should be given to winding up the fund early.
Labour re-started contributions to the Super Fund when it got into power in 2017.
I agree with the suggestion that the contribution to the Super Fund should be suspended but do not agree with the suggestion that it should be wound up. If the fund was wound up this would free up approximately $50 Billion (less than the total amount the government will spend on the Covid 19 support and recovery) but we would still have the obligation to fund the ongoing future New Zealand Superannuation payments without the buffer of the fund and any income that it provides.
Andy Loader
Co-Chairman P.L.U.G.