The Retirement Commissioner is talking tough on people who come to New Zealand to retire.
Diane Maxwell is calling for the Government to increase the length of time you need to have lived in NZ as a resident to receive NZ Superannuation, from 10 to 25 years.
“We’re an incredibly diverse country. That’s fantastic… However, we need to be able to afford it,” she told interest.co.nz in a Double Shot Interview.
“The length of residence needs to be appropriate in the context of increasing international mobility and reform of overseas pensions.”
Maxwell proposes years be counted cumulatively from age 20, and continue beyond the age of eligibility for Super, so someone may qualify when they’re aged 70 for example.
She says 25 years’ residence represents just over half of one’s working life and would still allow people to have lived overseas for extended periods of time.
New Zealand, along with Australia, has the lowest residence requirement in the OECD, where the average threshold is 26 years.
Asked whether 25 years is long enough in light of New Zealand receiving a record net 70,000 immigrants (including returning New Zealanders) a year, Maxwell says: “Maybe in the future there’ll be a time for that.”
The new rule would only apply to new immigrants, so the transition would take 15 years to be fully implemented.
Maxwell’s suggestion is part of the second and final set of recommendations the Commission for Financial Capability’s (CFFC) has made in its three-yearly review of retirement income policies. The first set was presented to the Government last week and called for the minimum KiwiSaver contribution rate to be increased among other things.
Jobs support to accompany age of eligibility increase
The CFFC is also calling for the age of eligibility for Super to be increased from 65 to 67.
Maxwell suggests there be a 10-year notice period until 2027, after which the eligibility age increases by three months every year, to reach 67 by 2034.
With 24% of those over 65 currently in paid employment, the CFFC says the increase reflects the fact people are living longer.
Internationally, 67 is also the new norm.
Maxwell says a number of people have been telling her, ‘I want to work, I want to be useful, I’ve got a lot of give… but I need a bit of upskilling, I need some retraining. I can’t pay for that. Help me.’
For others, she acknowledges retiring at 65 is too late.
Therefore she believes the money saved by increasing the age of eligibility should be invested in people in their 50s and 60s, through targeted employment and re-training programmes for example.
These could help a manual labourer move into less physically demanding managerial or teaching roles for example.
Prime Minsiter Bill English has been non-commital when asked about raising the age of eligibility. Labour and NZ First oppose the idea, while ACT supports it.
Age rise will see Super costs drop 10% in 2034
Treasury estimates increasing the age of eligibility to 67 would reduce Super costs by $3.5 billion or 10% in 2034. The savings are expected to continuing growing each year thereafter.
Taxpayers currently spend $11 billion (net) on Super a year, which equates to 5% of GDP. This cost is expected to more than triple to $36 billion in 20 years’ time, and hit 7% of GDP by 2045.
Asked whether the situation is really that bad, given other countries in the OECD already spend 7% of GDP on their pension schemes, Maxwell says: “Rather than look at cost of GDP, look at the actual cost of Super.”
“The single biggest increase in cost to the Government last year was NZ Super. It went up by $700 million, followed by health, which went up by $600 million. If you combine health with Super costs, you really have got some significant increases.
“We know these costs are going to grow because they’re fixed costs.”
Maxwell acknowledges Treasury forecasts Super, in its current form, will be a key contributor to net debt blowing out from 25% to 206% of GDP by 2060.
Yet she warns any projections relative to GDP rely on a number of assumptions around growth and productivity, which is expected to drop as our population ages.
Migrants and working age people shouldn’t receive Super through their partners
In addition to reforming Super with our aging and increasingly international population, the CFFC would like it to be modernised socially.
It’s calling for the non-qualifying partners (NQP) rate to be removed. This would mean a super annuitant with a spouse, who doesn't qualify for Super, would no longer be able to receive a higher ‘couples’ rate.
There are currently nearly 13,000 non-qualifying partners included in their partners’ Super, costing taxpayers $200 million a year.
The majority of NQPs are within five years of the age of eligibility. There are also 846 who don’t qualify because they haven’t lived in NZ as residents for 10 years.
“Eligibility for NZ Super should be based on an individual meeting the eligibility criteria and this option does not meet that principle. New Zealand is the only remaining country in the world that has a non-qualifying partners pension rate,” the CFFC says.
It would like the NQP rate phased out over five years.
“It will affect people,” Maxwell admits.
“But it’s a very old-fashioned view. It’s based on the idea that we’re all living in tidy couples and that we retire together as couples, and it’s sort of based on the assumption that a wife is not working and therefore she needs to get super when her husband does…
“Things have changed so much. [Do] we think someone in their 40s should be getting Super because their partner is a super annuitant - I don’t think so.”
Clarity needed around what happens if you get Super but have an overseas pension
The CFFC wants the direct deductions policy for overseas state pensions to be reformed.
“Increasingly, countries are transferring responsibility for pensions from the state towards individuals, with a range of private savings schemes supplementing state safety net pensions,” it says.
“It is becoming more difficult to clearly define what overseas pensions are comparable to New Zealand Superannuation and should qualify to be deducted.”
Specifically, Maxwell says: “We’ve got to ensure we’re not offsetting ones where people have voluntarily contributed.”
With 11.8% of Super recipients receiving an overseas pension, the issue needs to be addressed. The number of people in this category has increased by 30,000 since 2010 to 83,982.
Crown Super Fund contributions should resume
Finally, the CFFC is urging the Government to resume its contributions to the NZ Super Fund, having suspended them in 2009.
The Fund is expected to be drawn on to help pay for Super from around 2032/33. It’s expected to contribute towards paying for 4.5% of Super costs in 2040.
The Fund anticipates Government contributions will resume in 2020/21.
“The idea was that they would contribute when net debt got down to 20% of GDP. It’s not there yet. Do we have to wait for that?” Maxwell questions.
“The thing is growing, but we need it to grow faster.”
Maxwell would be happy if contributions resumed at the rate of 1-2% of GDP.
She believes we can afford it, as there have been some “aggressive projections” around what our budget surplus might look like in the mid-term.
While Crown contributions are suspended, the CFFC says the Fund shouldn’t be taxed. It’s paid $6.6 billion of tax since 2009.
“The effect is a net outflow from superannuation investment for the future to other purposes today,” it says.
Interest.co.nz has done a series of stories and video interviews with Maxwell, as the CFFC has worked through its review. You can see these here.