Patrick Nolan says with the 'golden assumption' breaking down quickly now, policymakers will need to turn their attention to why it is so hard for many more people to retire without poverty. A social investment approach is one answer

By Patrick Nolan^

Social investment is one of this government’s big ideas. 

This is not about simply reducing spending but is about reform. At the core of it is a belief that, as Nicola Willis has said, “we can, and we must do better” with our funding and delivery of social services. 

This has two key features. 

The first is taking a person-centred approach rather than looking at individual government policies or programmes in isolation. 

As the Productivity Commission noted in 2017, government programmes tend to be organised in silos (what the Treasury calls Votes) for accountability reasons. 

But this can mean people may have to discuss their needs several times with a range of different agencies when they are looking for support. 

Social investment aims to make it easier for people to get what they need by better joining things up. 

The second feature is to identify interventions that have the best long-term payoffs and to direct resources towards them. 

This, in turn, places a premium on the smart use of data and analytics. It also makes it important to draw on local knowledge and allow scope for innovation. 

To date much of the focus with social investment has been on improving outcomes for youth given the potential long-term payoffs. 

But at Te Ara Ahunga Ora / Retirement Commission we think social investment could also apply to needs associated with an ageing population. 

This is an important topic. Research undertaken for us for Sorted Money Month showed only around one in four New Zealanders have a good idea of what income they’ll need when they retire. 

Addressing this requires new thinking. It is not just a question of doing what has been done before. The needs of the community continue to change. 

Take housing. It used to be that nearly everyone would reach retirement age owning their own home. This meant housing costs were not a big issue in retirement and people had equity they could draw down in later life.  

But, as the Retirement Commission has shown, this “golden assumption” has broken down. And figures will likely keep going in this direction with home ownership rates projected to continue to decline. 

This raises questions for government transfers like the Accommodation Supplement. There are wider implications too, including for the private rental market (the ability to age in place) and the ability of people to self-fund retirement village living and aged care. 

The good news is that with KiwiSaver approaching the end of its teenage years more people are reaching retirement with private savings they can draw down. Yet as KiwiSaver is an earnings-based system it has gaps. The less you earn the harder it is to build up a pension pot. 

This ability to build up and make the most of pension pots also depends on financial capability, which is not just issue for policy makers in Wellington, but involves schools, banks, financial advisors, community groups, parents, and others. 

And work is changing too. A quarter of all people over 65 are now in employment. Of people aged 65-69 close to half are working. This is up from around 15% at the start of this century. Many say they need to continue working as their nest egg isn’t enough. 

For 40% of people over 65 their only source of income is government transfers like NZ Super and the Winter Energy Payment. A further 20% have only a little more. For years this has been enough to largely eliminate pensioner poverty.

But the effectiveness of this spending is falling, particularly for pensioners with housing costs. Women are especially affected by this.  

There is of course also a cost to taxpayers. While programmes like NZ Super aren’t expensive by international standards - spending as a share of GDP is at the low end of the OECD - they do cost a lot of money.  

Indeed, the government spends more on NZ Super than on education. The increase in spending on NZ Super in the last Budget alone was equivalent to around two thirds of all business spending on research and development in New Zealand. And we know that health costs are rising too. 

The implications go beyond the fiscal numbers. Consider how many more people are living with dementia and what this means for our aged care system.  

And there’s loneliness. About 1 in 10 people over the age of 65 are lonely all or most of the time and this increases to around a half of people over 80. Many older people in need don’t have family or friends to support them. 

What’s clear from this is that thinking is needed on what the next generation of retirement income policies for New Zealand could look like. This won’t necessarily be easy, and the temptation may be to put this off. 

But the result of this will be to limit our future options. It will mean that when change comes, which it will, we will be less ready. And change will be piecemeal and reactive - not the best that we can do. 

We owe it to our future selves and to our children to have these conversations. The first question must be – how do we best support our older citizens?

Patrick Nolan is director of policy research at the Retirement Commission / Te Ara Ahunga Ora