The Retirement Policy and Research Centre suggests that an income test using the tax system could deliver national super savings without causing material hardship

Content supplied by the Retirement Policy and Research Centre

In a world of constrained choices for government spending, the affordability of New Zealand Superannuation is often questioned.

Does the retired population get more from the state overall than they need?

Would some of the cost of the age pension be better directed to help solve issues of deprivation in the younger population? 

These questions will become more acute as the population ages and the pensionable population increases dramatically from 14% today to 26%, or one in four by mid century. 

“If the answer to those questions is yes, then we could reduce the cost of NZS in one or more of 3 main ways: increasing the age of eligibility, reducing the level of payment or introducing some kind of means test.” says co-director of the RPRC Susan St John. 

“In the discussion of the future shape of the state pension, the age of eligibility is usually given the most attention but there are disadvantages to relying on this lever, and there is no political interest in raising the age in the foreseeable future” says St John.

In a recent RPRC working paper Improving the affordability of New Zealand Superannuation, St John argues that a sensitively designed income test using the tax system is capable of delivering meaningful saving without causing material hardship.

The innovation in the paper is to change the existing NZS into a basic income called the ‘New Zealand Superannuation Grant,’ set at the after tax married rate of NZS.

The paper argues that since there is no good rationale for different rates of NZS based on marital status, the single sharing rate should be frozen and the married rate allowed to catch up over time so that eventually there is a single rate for the New Zealand Superannuation Grant.

Under the New Zealand Superannuation Grant, at age 65, everyone would get a basic unconditional income, set in today’s terms at the married person rate of $14,677 or $282 a week. This tax-free payment is the same for everyone, but in electing to take it, superannuitants would be automatically placed on an alternative tax scale for all other income.

Currently, the tax scale provides a form of an income test or clawback so that the highest income earners retain only about 76% of that retained by a low income earner. “The recommendation is to increase that clawback using the tax system” says St John. 

“We have to be mindful of the hornets’ nest any suggested income test could be. The old surcharge, operating for 13 years until 1998, was far too complex. The innovation in this paper is the simplicity of the suggested plan, and its alignment with the ‘basic income’ idea that is gaining traction around the world” says St John.

The paper illustrates a simple superannuitants’ tax scale of 17.5% on the first $15,000 and 39% on all income over that.  Any superannuitant with gross other income up to $15,000 would be no worse-off under the new tax scale.  Above $15,000, the new tax scale provides a gentle clawback while not increasing the marginal rate of tax beyond 39%. Many other people, students repaying loans, working families getting Working for Families, beneficiaries working part-time, ex-partners with child support, for example, can currently face far higher rates.

The highest income earner whose NZS is currently taxed at 33%, retains $3,550 less than that retained by a low income earner.  Today, high-income married superannuitants gain a net $11,120 from NZS. Under the proposed tax system, when other income reaches $147,000 they effectively lose that $11,120 in extra tax.  Those on earned incomes above the cut out point of $147,000 could chose not to apply for the New Zealand Superannuation Grant, or they could recover any overpaid tax at the end of the year. 

Costings suggest that the combination of a gradual alignment of married and single sharing rates and a two tiered tax system as described above could produce immediate savings of around 10% of the net cost of NZS. This in turn could release around $1 billion to address the pressures felt by the working age and young population.

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The Retirement Policy and Research Centre is within the Business School at the University of Auckland.