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.
33 Comments
This is very sound thinking. Why do we only ever talk about higher eligibility age as the way to rein in NZS costs?. A smart, progressive tax would claw back 100s of miilions in unnecessary payments to the well-heeled elderly. We accept an extremely targetted delivery system for working for families , yet no targetting at all when it comes to our increasingly costly NZS .
Agree.
"Why do we only ever talk about higher eligibility age as the way to rein in NZS costs?"
Because this is an agenda of the "right" who dont want to fund it. meanwhile it seems the "left" are unable to come up with their own narrative, though this looks like a good start.
Correct, and the incentive to save is what our learned comentator above has put forward, tax those who forgo consumtion today. No reward for saving, only reward is for those that borrow and spend.
We need to incentivise saving and thrift and not spending and largesse.
We need to reverse the current incentives and the only way to do that is to limit the financial sectors control over the real sector, the financial sector is supposed to be an enabler of the real sector, not a controller.
Thanks John. How to incentivise savers? The mechanism (withholding) is there now to tax people who earn interest. It could be changed easily to collect a tax on interest paid. !! And no tax on interest collected.
That would certainly incentivise in quite different, and good, ways from the present.
Mind you our fellow commentators, the PIs, will be dumbfounded with rage at that change in their landscape. But it could create benefits in that controversial area as well.
The problem is that in theory spending/borrowing to increase production or make a good and make a profit is good, but spending for consumption is not, yet that is what makes our economy tick. By this I mean it seems saving isnt that good an idea in an economy. On top of that just what some ppl think is a fair return on their money isnt realistic usually.
I agree on your financial sector and real sector comment, 100%. They are like parasites really they the banks need to be hog tied (regulated).
Do we really need to try and increase savings? Last I checked the world was actually flooded with savings, trying to be good capital and find investment opportunities but failing. Global interest rates are low, low, low because nobody wants to spend today, and thus create investment opportunities!
You mean a discussion about Boomers giving up their Entitlements? ....Not going to happen until the young voters get their act together and vote + plus hit the streets in protest. Alas they are busy checking facebooks and working 50 hour weeks paying off SL and saving for their first home, given up on starting a family. Good work National.
http://www.nzherald.co.nz/lifestyle/news/article.cfm?c_id=6&objectid=11…
I'm glad the RPRC isn't pushing here for raising the age of eligibility. That only discriminates against those in economically lower levels who tend not to live as long into their retirement years.
Is there an intention to transform Super towards a welfare benefit for the aged poor? Using fixed brackets would sugest future bracket creep could reduce entitlements.
I don't like any system that humiliates elderly people and makes them jump through hoops to apply for what they are entitled to. I hope future systems won't do this.
Any fixed age of eligibility means that short-lived people won't get as much Super as long-lived people do. You could reduce the age to 40 and that would still be the case. There's nothing the Government can realistically do to superannuation policy to address that.
No, as far as they have announced the Government has no intention of transforming Super in any way. On the contrary, the Prime Minister has repeatedly said he does not intend any changes. The suggestion here is the thought of an independent think tank.
No Im sure the following is correct JK
On 31 August 2010, South Canterbury Finance asked its trustee to place it in receivership after negotiations over a recapitalisation deal failed.[14] The Government immediately paid out investors $NZ1.6 billion under the Government's Retail Deposit Guarantee Scheme. Alan Hubbard was reported blaming the Government and the other South Canterbury Finance directors for the receivership: as the directors had sidelined him and the Government had placed him in statutory management.[2][10]
Any change to the superannuation structure would cost more than it saves. As a sovereign country New Zealand has the power to create money to solve any of its internal problems. It is a political decision if it chooses not to. And it is a political decision to now call the baby boomers "a problem that must be addressed".
"create" just means printing. Printing does not solve the problem it just creates inflation in goods.
No, the BBs as a demographic are a problem. The current OAP burden is around 12.7%? rising to something like 26% for BBs, so basically a doubling of the burden, just why you cannot see that is an issue I do not know.
Then there is the BBs who have been big exploiters, users and spenders making the world's economy bubble will be switching to OAP mode where they do far less, shrinking the economy and hence its ability to pay for that doubling they create.
Where do you get those figures from?
I think it's very negative to see older people as nothing but a burden. Many of them can and do make substantial contributions, financially and in other ways (and many younger people don't). One of the many beauties of the current system of NZS is that it does not penalise people who continue to work and save, as any system based on means testing would inevitably do, and this shows up in New Zealand's remarkably high level of workforce participation among older people.
I think they were Govn stats, I dont recall where from stast NZ I think. If you look at the writer's numbers above they are of a similar order.
I dont see older people as nothing but a burden. The costs are the cost of the pension a burden which doubles as the number of OAPs doubles. That also means 13% (ish) less significant tax payers, a double whammy it seems. I dont see anything wrong with older people working, I think its good when they exercise the choice of wanting to. ie maybe you should consider that some are working because the pension is inadequate not because they want to.
I agree with you on means testing I dont like the idea, however we have limited money and collecting the pension and working while ohers may not be well l enough to work suggests a mis-allocation that should be discussed to me.
Why is the main focus on increasing taxes or decreasing entitlements, public sector waste should be first on the list and when this is eliminated or reduced to levels beyond which the cost of savings exceed the benefit. This policy would also institute the concept of what a person needs so before adoption I suggest a pilot excercise be carried ou for say 20 years so politicians/Local Govt Councilors/senior public officials etc have their needs assessed by the taxpayer and rewarded accordingly with perhpas an incentive of a bonus based on a percentage of the expenditures saved or benefits added by virtue of their efforts.
...oh joy. Using the taxation sytem. I can here the lawyers and accoutants cheering this on. More trusts, more cook island bank accounts, more gifting (no gift duty these days), more investing in inflated non income producing (cap gain type) property and so on as the populace keeps one step ahead of the army of (skilled0 beureacrats needed to chase all the hidden inceme and assets of these persons....Brilliant stuff...
next pse.....
(skilled) bureacrats is something of an oxymoron.
There is a simple, baked-in structural issue with democracy:
- It is designed to change things slowly and incrementally
- This insulates it from big, bold changes that can in another view be seen as tyranny, dictatorship or other such bugswords
- This renders it wide-open to arbitrage, gaming, exploitation on multiple levels where the core driver is that the perps and MO's can mutate faster than can the Authorities.
Such is the world in which we live...
14K is the approx after tax superannuation payment (for a year) for a person with a partner of some kind. A single person gets about 19K per annum. A single person sharing (including with former partner) gets about 17K per annum - enough difference to pay for the lawyer for a divorce (extra 6K per annum for the pair who share this way). All superannuation is subject to tax, so the numbers can vary depending on the tax bracket total income reaches.
oops my mistake. That 14K your basic unconditional income provided by super payments. Here – I’ve put a little more thought into how someone might get around this…
Here's a scenario: Bob and Maud are retirees and have some rentals or whatever in a trust which has a taxable income (after all deductions) of 150K per year. They want to live off $600 per week, and claim super as well. This is how they do it.
They simply allocate themselves $27,108 per year of trust beneficiary income. Because that's over the tax free 14K its taxed at 39% (under scenario 1 from the paper) which leaves $16,536 per annum in addition to $282 per week super adds up to $600 per week. The other $123K of Trust income is trustee income and taxed at 33%
But it gets better – Bob and Maud also have grandchildren Steve and Jenny who are married. Steve works but Jenny takes care of the kids and has a taxable income of zero. Jenny is a discretionary beneficiary of Bob and Mauds family trust and receives 14K of beneficiary income, so that portion gets taxed at 10.5%.
Overall Bob and Maud's trust doesn't pay much tax at all, and Bob and Maud get to keep the super.
...of course fat pat the policy supporters woudl say that we will put rules arond this (by way of example the new family scheme income rules used for student allowances would capture your scenario). However, the problem is that policing this requires manual analysis by (as I mentioned above) reasonably skilled beaurocrats. Data matching has it's limits, the ceativity to make 1 = 1 = whatever your want it to is limitless.
But a certain few have a retirement made in heaven, they cannot go wrong, win, lose or draw.
Even if they do not work in NZ. They win hands down.
The taxpayer will help fund their rich life, as they sing, "what shall we do with the drunken sailor' with their compadres and it is not the superanuated you should worry about...but I bet I can guess who will be there in droves..to sing along...as they played along, for the past few Cup matches.. What is few million, amongst friends...
Cronies, or otherwise.
http://gordoncampbell.scoop.co.nz/2015/02/19/gordon-campbell-on-the-ame…
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