How the young can spare themselves retirement grief

Investing

Double shot interview: Amanda Morrall talks to Financial Services Council CEO Peter Neilson about money, death and the savings advantage of youth

25th Jun 12, 11:31am by Amanda Morrall

By Amanda Morrall

Two brothers graduate in 2011. One takes a job in Australia at the average wage. The other decides to stay put in New Zealand, also working for the average wage.

Which one ends up with a bigger nest egg for retirement?

According to calculations produced by the Financial Services Council, the Kiwi who takes flight theoretically ends up with two and a half times the retirement income owing to the differences in the retirement savings schemes and systems.

To narrow the gap, the FSC last week proposed a modification to the existing KiwiSaver scheme so that contribution are notched up .5% from the employer and his/her employer until they reach 10% of gross income over a period of 10 years.

In Australia, where workplace superannuation is compulsory, contribution rates are moving from 9% to 12% over the coming years.

A substitute poll commissioned by the Council found that about 52% of New Zealanders surveyed on the issue of retirement savings supported the idea.

Peter Neilson, chief executive officer for the Council said while KiwiSaver has been identified as the most efficient saving vehicle through which to boost personal savings, the Council wasn't taking a position on KiwiSaver being a superior savings route.

Neither is the Council taking a position of whether KiwiSaver should be made compulsory in order to boost savings, he added.

However the same survey, of 3,177 adult New Zealanders found compulsion is an idea that has broad support among the population. Among those surveyed 74% said they favoured the idea as a way to secure savings in old age.

Whether savings are voluntary or forced through the workplace or whether they're through KiwiSaver or by another means, was less important than the actual discussion among the under '40s, the target audience of the FSC's recent work in the savings domain.

The young are in a position to take action

Neilson said whilst older New Zealanders should also be concerned about whether they have sufficient money to last in retirement given identified pressures facing New Zealand Superannuation, younger Kiwis were in a better position to take offensive action now while they could. That's because the longer New Zealanders wait to save, the less time they have to save and the more they'll have to put aside.

Whereas older generations lived an average of 15-20 years past the age of retirement, younger generations are expected to live 30-40 years after they retire.

Between threats to New Zealand Superannuation, increased financial pressures faced by an ageing and ailing population, and longer life expectancy, younger New Zealanders had plenty to fear about getting old, said Neilson.

"In the past we used to say, don't spent more than 4% of your capital in retirement. That would see you out about 15-20 years. We're now going to have to look at saying, 'Don't spend more than 2% in order to get there."

'Raise the age'

To alleviate cost pressures posed by the upcoming increase in New Zealand Super recipients (which is expected to go from 500,000 in 2010 to 1.3 million by 2050), the Government is under increasing pressure to lift the age of eligibility for New Zealand Superannuation from 65 to 67.

The Commission for Financial Literacy and Retirement Income has proposed the age be raised two months per year starting in 2020 until 2033.

The FSC suggests that by boosting contribution rates to 10%, it may be possible to get the retirement age at 65.

"What we're saying is there is a positive alternative. It doesn't have to be total doom and gloom.''

Neilson said younger New Zealanders could spare themselves a lot of grief if they took action now or at the very least approach the subject of retirement with some foresight.

"Effectively we need a conversation between the generations."

"On one hand, there are concerns about keeping New Zealand Superannuation for those already in retirement; on the other making sure the cost burden isn't shifted onto a generation who won't receive the same benefit.''

The shrinking taxpayer base is a major problem, he said.

"When I was born there was seven people in the workforce looking after one person in retirement. By the time I finish on the planet, it'll be two people in work looking after one in retirement. So the cost of the old regime is increasing rapidly just as the population is also ageing, which makes it much more difficult to do what a relatively cheap and generous scheme did in the past to maintain it in the future."

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16 Comments

by notaneconomist | 25th Jun 12, 1:21pm 1340587285

"On the one hand, there are concerns about keeping New Zealand Superannuation for those already in retirement, on the other making sure the cost burden isn't shifted onto a generation who won't receive the same benefit."

And that statement above is the biggest problem that NZ faces. Shifting the cost burden onto a generation who are apparently struggling with the ability to purchase their own home - could turn this generation sour!! At least when they get sour they will get angry and maybe this anger will drive change. Governments will then have to make a sacrifice and I wonder who the sacrificial lambs will be? Well my guess is the biggest losers will be the smallest number of voters in an area regardless of their contribution to the system.

The cost of independence is high to the individual BUT the cost of state dependence is astronomical. Maybe the bureaucratic empire of NZ should be taking a different approach in their costings analysis and allow people to be independent. However we first need to protect Freedom and enshrine Individual Rights across every area in life for this to work.

There is more than one way to stop a bolting horse but which ever way you choose you have to ride it.

by Boatman | 25th Jun 12, 3:23pm 1340594635

You can blame Local Council Authorities and the utterly stupid Resource Consent Act for the lack of affordable land for housing , NOT the Baby Boomers.

Land in Auckland is (on an income parity basis ) as expensive as London , and yet there is no physical shortgage of land for development in and around Auckland .

Instead the councils effectively tax Land Subdivision to such a degree it doubles the price for anyone wanting to buy a section.

I am surprised ( and disappointed ) that the National Government has not adressed this rort by Local Authortities, becasue no one else can.

by powerdownkiwi | 25th Jun 12, 8:20pm 1340612437

Nobody owns the land, then Boatman?

Nothing happens on it now.

Good stuff. Nothing like an infinite country on an infinite planet.

But one smells a developer who wants to duck service-establishment costs.

by notaneconomist | 26th Jun 12, 9:01am 1340658095

Boatman - I fully agree with your statement that the RMA and Local Councils are raising the cost of land. It is the Councils interpretation of the RMA that is at fault. Common sense is completely missing from the decision making processes and Councils have been provided with an enormous income stream from both their interpretation and lack of comon sense.

The purpose of the RMA is to:

Purpose

(1) The purpose of this Act is to promote the sustainable management of natural and physical resources.

(2) In this Act, sustainable management means managing the use, development, and protection of natural and physical resources in a way, or at a rate, which enables people and communities to provide for their social, economic, and cultural well-being and for their health and safety while—
- (a) sustaining the potential of natural and physical resources (excluding minerals) to meet the reasonably foreseeable needs of future generations; and
- (b) safeguarding the life-supporting capacity of air, water, soil, and ecosystems; and
- (c) avoiding, remedying, or mitigating any adverse effects of activities on the environment.
It is my view that Councils and Government are both unsustainble in managing any of the above as Social, cultural well-being, economic needs are not being met. Since the inception of RMA, NZ appears to have declined in all areas that the RMA was supposed to protect. Water quality is appalling, air quality in some areas is problematic and the list of places with contaminated soils grows. This means that the RMA has not assisted one bit in providing for the health and safety needs of the people or the comunities.

It is all in what they decide to measure. Like the woodsmoke particles in Canterbury that have now been proven to not affect human health and human health suffers more from being cold - really, where are these paper shuffling, coffee supping gits in short pants now? They will be fanning the breeze somewhere else in another corridor.

I am not blaming the BB's for the fiasco of retirement costs. They worked and paid their taxes which were heavily invested into infrastructure that everyone gets the benefit of. The BB generation has also paid heavily for Treaty settlements etc. Alot of the Treaty Settlement money spent was because of poor decision making by previous political factions.

The problem we now all face whether a BB or not is that there is very low growth and productivity and high unemployment. The unemployment side of the equation will be assisting inflationary pressures and that is why Govts like a level of unemployment. High inflation, low growth = stagflation.

Low growth and productivity are from Government interference in all systems. The capitalism/socialism mix fails the majority of people. The free market is no longer a free market and can't adjust to normal business cycles. Governments dislike the ups and downs of the markets and keep meddling offering an incentive here and there, changing legislation that promotes one concept over another and as a consequence we have the GFC which is now a long drawn out affair.

The point I made above in my original posting is highlighting whichever group of people the Govt decides is the loudest and largest will be the group who gets change. And whatever that change is it will affect another group of people as all people are not treated equally.

Equality in itself has come to mean something entirely different. This is why taxation is not equally applied across the board. The provisioning of most Govt services are not equal for all people. Until Government and Local bodies step back from the control levers nothing will change.

by powerdownkiwi | 26th Jun 12, 9:13am 1340658827

not an E - you hit the nail on the head.

The RMA as written is oxymoronic. You can't have 'economic wellbeing' (if that means exponential growth) and hand the planet on as a going concern. The two are incompatible.

The 'current' part ( 'economic wellbeing') was inserted when the Nats took over from a dithering Palmer. The move rendered the thing oxymoronic - something no legal eagle has pointed out (to my knowledge), to their shame.

Relying on that unresolved wee bit of classic dissonance, then, is a bit pointless. Better stand back, and see the biggest picture you can. Exponential growth in all things - dairy demand, housing - cannot continue within a finite sphere of operations. The only question was - and always was - when will it end?

Supplementary question being: what is the linch-pin? The crucial resource?

by KH | 25th Jun 12, 2:12pm 1340590343

Same old comment again.

1. Kiwisaver compulsory for absolutely everyone. Incude those on benefits. To protect the responsible people from the silly people.

2. 15%

3. Cut out national super as kiwi cuts in. A forty year stepped process for that.

4. A rock bottom hard to get benefit for the very few truely left over.

by notaneconomist | 25th Jun 12, 10:27pm 1340620034

KH - other countries who do have compulsory retirement packages have lost huge amounts of the funds. This is an enormous problem in the US and Australia where many people have lost over half of their retirement savings from their accounts.

Why would KS be any different?

Mist42nz is correct in his post below. If you have debts you are better clearing those debts first for not to do so is to not understand money very well.

There's a plethora of issues surrounding the cost of retirement and some of us have highlighted the issues on both sides of the argument in other postings.

While I congratulate you for at least posting what you see as a solution I am not so sure that compulsory KS is actually a solution. There are a couple of issues first as Mist42nz has pointed out and secondly all this money that is being poured into KS is being invested somewhere and that may well be contributing to increasing house prices.

Government organisations also have investments in property and shares. For example the RB holds a large quantity of Fletcher shares. Fletchers is in the building industry and also happens to have the Govt contract for EQC work.

ACC owns a significant amount of property as do many other Govt/private partnerships.

I strongly advocate that Govt should only be involved in core projects like police, justice, prisons, the legislative process etc and that the private economy and people will take care of itself once a clear direction is provided.

The economy is holistic but for some strange reason everyone sees all the areas as being seperate and that is one the fundamental errors that everyone is making.

by KH | 25th Jun 12, 5:57pm 1340603848

Mist - I assume you are a reponsible person who provides for you own retirement. But the point of universal compulsion is not to catch you as such. It's to protect you from the irresponsible people who don't provide for themselves. And the way the world works, you then end up paying for them, or your children end up paying for them. Compulsory KS protects you from them.

by BATOOH | 25th Jun 12, 6:04pm 1340604256

I reckon its a waste of time worrying about the young kids, they will be better off than many boomers, they get good salaries if they are prepared to work hard, admittedly they find it harder to save because of the many distractions but lets face it most will get a handsome inheritance. I see alot of panic about the young but ask yourself how much you will be leaving behind for them!

by Silversurfer | 25th Jun 12, 8:07pm 1340611624

In order for us to be better off than the boomers, there will need to be some extraordinary breakthroughs in technology. Quite possible - bring on free energy.

However without it we face an uncertain future. Rising populations with a diminishing amount of resources.

I earn a good salary (higher than the household average) and limit my spending, saving about 30% of my salary after tax. Still I have a limited chance of buying a reasonable house (although I am the sole income earner as we have a young child).

The only way young kids will be better off than the boomer generation based on current trends is by owning their own business. A job = just on broke even if you are a professional. The amount you can save on a wage is minimal even when you limit your spending and save.

I have a better job and education than both my parents, but there is no way I can accumulate the amount of wealth they have made by earning my current salary.

Both my parents are wealthy and I receive no assistance from them even though they did from their parents at a younger age than I am. Sure one day I will get an inheritance, but how old will I be then. Sixty or seventy - a bit too late to enjoy some financial freedom.

by powerdownkiwi | 25th Jun 12, 8:30pm 1340613011

SS - your parents had more resources per head, than any generation has consumed before, or since. That is the sole source of all 'wealth'. There are more than twice the number of folk inhabiting the planet now, than there were when I was born. That makes my echelon half as wealthy, in real terms. Someone in their 20's, will start from that back-marker, and halve it again, even as the stock depletes at never-before rates.

Don't blame them - there was a religious 'the lord has provided' hangover at the time, which seems to have morphed seamlessly within one generation, into the economic growth-mantra belief seem here.

You can build, house/shelter yourself and yours, for sod-all. I'm starting to think about inter-generational cooperation - the old (with the land) teaming up with the young (with energy and enthusiasm). Gotta be the way to go.

by Colin Riden | 25th Jun 12, 9:00pm 1340614842

I'm starting to think about inter-generational cooperation

Me too, but for several years. More though to do with different intellectual skill sets.

by Ralph | 25th Jun 12, 8:07pm 1340611652

The biggest asset most boomers will leave is real estate of some kind.

But once they are gone the demand for housing will be much reduced for quite some time. If supply and deman mean anything real estate as an investment is going to have a terrible time over the next 30 years. So that house you may be leaving may not be the nest egg you think it is.

by Ralph | 25th Jun 12, 8:11pm 1340611897

"Two brothers graduate in 2011. One takes a job in Australia at the average wage. The other decides to stay put in New Zealand, also working for the average wage.

Which one ends up with a bigger nest egg for retirement?"

Hold on.

What is the cost of living in each country?

There is an assumption that all other things will be equal and no allowance for any adverse events of any kind over a 40 year working career. Over 40 years the chances of all things being equal are zero.

by Al R | 25th Jun 12, 9:42pm 1340617320

Hold on.

What is the cost of living in each country?

While you may have something about cost of living you forgot about this important part

"the Kiwi who takes flight theoretically ends up with two and a half times the retirement income owing to the differences in the retirement savings schemes and systems."

Australias' system is vastly different to NZs'...

by Ralph | 25th Jun 12, 9:45pm 1340617501

Yes the theory is always good. It's the practice where these things fall over.