By Andrew Coleman*
What do New Zealanders want from their retirement income policies? Lots of different things! As you will have noticed, retirement policies have many different features, and most people want something different. There is no single policy that will make everybody happy, so some sort of compromise is essential.
The secret of a good compromise is to give most people something they like, and to make sure that few people hate the final outcome. These compromises will have popular support and not too much opposition. This makes it important to understand the diversity of opinion. We should look for policies that improve things for a lot of people, without making them a lot worse for too many others.
In 2014 and 2022 I was one of four researchers from the University of Otago and the Treasury who surveyed more than 2000 randomly selected people to better understand the diversity of preferences over seven different aspects of retirement income policies. (The others were Joey Au, Jelita Noviarini and Trudy Sullivan.) (References [1] [2]) (See more here and here).
The surveys used an award-winning Dunedin-based software called 1000Minds that helps people make choices by understanding their preferences.
By measuring the way each individual ranks seven aspects of retirement income policies, it is possible to estimate the diversity of New Zealanders’ preferences as well as find out what they want on average.
People were asked questions about seven aspects of tax and retirement income policy. The survey was designed to find out whether people want to change the amount of the pension, when people get it, who pays for it, and whether there should be a compulsory savings scheme. To make the survey manageable for respondents, each aspect had two options.
⦁ The age at which people first get a pension: either 67 or 65.
⦁ The amount of the pension: either $360 per week or $390 per week in 2014, or $460 and $490 per week in 2022. (This was increased to reflect the increase in the actual pension).
⦁ Whether there is a means test: either a $60 per week reduction in the pension for people with $200,000 non-housing assets, or no means test and everyone gets the same amount.
⦁ Whether current taxes increase by 2 percentage points or stay the same.
⦁ Whether taxes on the next generation increase by 5 percentage points or increase by 3 percentage points.
⦁ Whether there should be a compulsory saving scheme that requires everyone to save 5% of their income in a special account, or whether people should be able to save when and how they like.
⦁ How important it is to have savings equal to 2 years of their average income when they retire, rather than 3 years.
Other than the size of the pension, the surveys were identical in 2014 and 2022.
The survey technology gets people to compare pairs of options two at a time. For example, a survey respondent could be asked whether they prefer a policy that gives them a pension of $360 per week at age 65, or a pension of $390 per week at age 67. Once they have answered this they are asked to make another comparison: for example, whether they prefer to keep the age that people get the pension at 65 and have taxes increase by two percentage points ($20 per week on a salary of $50,000 per year), or have the pension age raised to 67 and have taxes stay the same. After 10 – 15 of such comparisons, the software has enough information to work out how the respondent ranks the seven aspects of retirement income policy from least important to most important.
So what did we find? First, a lot of people are strongly opposed to means-testing. In 2014, 40% of respondents indicated that the most important feature of a retirement scheme was that it is not means-tested. This figure fell to 32% in 2022, but in both years it was by far the most important aspect of retirement income policy for the largest number of people.
Secondly, very few people thought that saving flexibility was important. If New Zealand were to introduce a compulsory saving scheme which forced people to put aside 5% of their income, only a small number would be strongly opposed.
Thirdly, people were really concerned to avoid big tax increases on future generations. In both years a majority of people thought it was more important to reduce the size of taxes on the next generation than to reduce the size of current tax increases.
To be precise, in 2014, 65% of respondents of all ages and all income levels indicated they would be willing to increase taxes by 2 percentage points immediately if taxes on the next generation would only increase by 3 percentage points instead of 5 percentage points.
In contrast, only 30% of respondents preferred keeping current taxes the same but allowing future taxes to increase by 5 percentage points. This is a stunning result. Moreover, it is actually possible to do this: the returns from the New Zealand Superannuation Fund are sufficiently high that if taxes were raised by 2 percentage points now and invested they could reduce the size of taxes the next generation pays by 2 percentage points. (This is one of the transition issues that was discussed when we looked at save-as-you-go pensions in article 5). In 2022 the fraction supporting current rather than future tax increases had reduced to 53%, but this is still a majority.
The fourth main result concerns the pension age. In 2014 this was the most contentious aspect of pension policy: about a third of survey respondents thought it was very important to keep the pension age at 65 rather than 67, another third thought keeping the age at 65 was unimportant and indicated would be happy to increase it to 67, and the remaining third were indifferent. In 2022 the fraction of people who thought it was important to keep the age at 65 had increased, and the fraction who thought it was unimportant to keep the age at 65 decreased, but the population was still strongly divided.
The survey results also indicate that New Zealanders have very diverse preferences over retirement policy. On a diversity index scale of 0 to 100, where “0” means that everybody has different opinions and “100” means that everyone thinks the same way, the survey results scored an 8. People really do want different things. This helps explain the passion with which superannuation policy was debated in the 1970s, 1980s, and 1990s.
A natural question is whether there are big differences in the preferences of men and women, or different age groups, or people with different income levels, education attainment, or ethnicity. The answer is “No”, although there are small differences. This is because each demographic group has very diverse preferences. The range of views among old men and young women or any other group are nearly the same. That said, there is a greater preference for high pensions among old people than young people, and high-income people are more opposed to high taxes and means-testing than low-income people. But the differences are not great – people differ much more by how they think than how they look. If you took a snapshot of all the people who wanted high taxes, high pensions, and a pension age of 65, and those who wanted lower taxes, lower pensions, and a pension age of 67, both snapshots would like a snapshot of all New Zealand and they would be nearly indistinguishable from each other.
You can organise the data into groups of people who have similar preferences. There are basically five groups of people, and by construction these groups do have different preferences. The big differences between groups concern the desired pension age, means-testing, and whether or not there should be a compulsory saving scheme. The three most popular groups were happy to have a compulsory saving scheme but disagreed to some extent over means testing and the pension age. There was a distinctive but small group that wants the minimum government intervention in superannuation (no compulsion, a small pension at a high age, and low taxes). There was also another small group that wants the maximum redistribution to low-income people (a high pension that is available at age 65, with high taxes, means testing, and no compulsion).
The survey results can be used to investigate how people are likely to rank policies that have different combinations of the policy attributes. In 2014 the authors considered three policies. The first was to keep the pension age at 65 and allow taxes to increase as population ageing occurs. The second was to increase the pension age to 67, which allows taxes to be increased more gradually.
The third option was to increase taxes immediately and invest the proceeds, while keeping the pension age at 65. While taxes on the current generation go up under this option, tax increases on future generations will not be so large. Of these three, keeping the age at 65 and raising taxes immediately to reduce taxes on the next generation was ranked the best policy by just over half and the worst policy by the smallest number (about 1/6). In contrast, raising the age to 67 was considered the best policy by the smallest number (about 1/6) and the worst policy by the largest number of people (just over a half).
Keeping our current policy in place was the best policy for about a quarter of respondents, and the worse policy for another quarter.
These results have a clear implication: according to these respondents, keeping the age at 65 and prefunding New Zealand Superannuation would be much more popular and less unpopular than either raising the age of pension to 67 or keeping the age at 65 without prefunding. These results, of course, are only based on surveys, and may not to translate to actual voting behaviour if people were given the vote. Nonetheless, they provide very little support for the idea that New Zealanders think raising the pension age is a silver bullet to solve the problems associated with the current pension scheme.
Overall, these surveys provide a better understanding of the trade-offs New Zealanders’ are willing to make over several aspects of retirement policy. One of the big lessons is that there is a lot of diversity. This should give us all pause for thought. No matter how strongly you personally support a particular retirement policy, or me for that matter, your preferences will not be universally shared. It is a much more difficult proposition to find a set of policies that suit a lot of people reasonably well than it is to find policies that a few people like a lot but which are disliked by many. Another lesson is that people are really quite concerned about the forecast increase in taxes on the next generations, and “more of the same” is not that popular. The third lesson is that some possible changes seem a lot better than others, and garner quite a lot of support.
With this in mind, over the next two weeks I shall conclude this series by suggesting a way forward. Over the last 10 weeks we have discussed how our current retirement income and tax policies cause many problems for younger people, in part because they are different from the systems used in other countries. But change is possible, in ways that reduce many of the problems of our current system while preserving or improving many of the features that people like.
*This series and an accompanying paper are based on work I started in 2020 with Jeanne-Marie Bonnet while we were both at the University of Otago. I am very grateful for her assistance and insights. All errors remain my own.
(This article is part 11 in the series. You can find all other articles in the series to date here).
**Andrew Coleman is a visiting professor at the Asia School of Business. This article is his personal view of retirement policy in New Zealand, based on academic study.
Coleman is on extended leave from the Reserve Bank of New Zealand, while working overseas. The views expressed in this article do not represent the RBNZ and are unrelated to work conducted at the Bank, which has no responsibility for retirement policy in New Zealand.
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