A third of all government spending goes to Welfare, which includes NZ Superannuation. Well over half of total government spending goes on Welfare and Health. With an aging population these two expenditures are set to increase significantly.
In the 2019 fiscal year, we spent 9.7% of New Zealand’s GDP on Welfare; 5.9% on Health and 4.8% on Education.
This table shows the steady rise in expenditure on Social Security and Welfare: ($’s billion)
| 1997… | 2010… | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 |
| $12.5 | $20.8 | $21.9 | $22.4 | $23 | $23.5 | $24 | $25.3 | $26 | $28.85 |
A total of 630,000 people received payments from the Welfare system in the year ended June 2019. (This number will likely increase significantly if there is a post-Covid economic contraction).
Just on 346,000 families receive a Working for Families tax credit
On top of those numbers, 767,000 people currently receive NZ Superannuation, up 26,000 from the previous year. The number is projected to increase to 1.3million in 2039.
At a guess, approximately 1.5million out of 5 million people in New Zealand (i.e. 30%) of the population receive NZ Super or Welfare. That percentage will rise as the population ages.
In 2019 the amounts spent on the different benefits were ($million):
| NZ Superannuation | $14,562 |
| Family tax credit | $2,131 |
| Jobseeker support and emergency benefit | $1,854 |
| Accommodation assistance | $1,640 |
| Supported living payment | $1,556 |
| Sole parent support | $1,115 |
| Kiwisaver subsidies | $951 |
| (10 further lines omitted) | |
| Total | $28,190 |
So as at 30 June 2019, roughly half of Social Security and Welfare spending went on NZ Super and the other half on benefits and assistance to the needy.
There is notionally $1.6 billion owing to Inland Revenue by parents in default on their Child Support obligations. However most of this is penalties, which IRD does not expect to recover, and the net sum of overdue contributions the IRD looks to recover from parents as at June 2019 was just $83million.
In 2018 the Government appointed a ‘Welfare Expert Advisory Group’ to look into Welfare (but not NZ Super). The Group reported in May 2019. It found:
- The current welfare system no longer meets the needs of those it was designed to support.
- The benefit and tax credit systems are unmanageably complex.
- The level of financial support is now so low that too many New Zealanders are living in desperate situations. Urgent and fundamental change is needed.
- The experience of using the system is unsatisfactory . . . damaging for too many of the highest need and poorest people . . . the system diminishes trust, causes anger and resentment. . .
- Current levels of support fail to cover even basic costs for many people . . poverty and benefit receipt are strongly associated.
- Maori make up 36% of all working age people receiving a benefit.
- The cost for the Government to improve the benefit system as recommended by the Advisory Group, was estimated to be around $5.2billion per annum (which would be an increase of approximately 40% on current welfare benefits.)
NZ is spending a massive amount on both NZ Super and Welfare. The Welfare expenditures are certain to rise after Covid, if the economy turns down. The expenditures are certain to rise as the population ages. And the system doesn’t currently deliver very many satisfactory outcomes.
WHAT ARE OTHER COUNTRIES DOING?
SINGAPORE: American journalist John Goodman has described Singapore’s system thus:
‘(Singapore)..has built an alternative to the European style welfare state. Think of all the reasons why people turn to government in other developed countries: retirement income, housing, education, medical care, etc. In Singapore people are required to save to take care of themselves. Today employees under 50 years must set aside 20% of their wages, and employers must contribute another 16%. These funds go into accounts where they grow. . .until specific need arises. For example, one of the uses for these savings is housing. About 90% of Singapore households are home owners- the highest rate of home ownership in the world.
In healthcare, 7% of the 36% required savings rate is for healthcare and is deposited in a separate Medisave account for each employee. . . When a Medisave account balance reaches $34,100..any excess funds. . ..may be used for non-health care purposes.’
‘The Singapore state created a new social policy system that had asset building as its central structure.. During the past 25 years, Singapore. . . has taken important steps toward lifelong asset building, beginning very early in life. . . EduSave, the Baby Bonus, Child Development Accounts, and related asset building incentives. . . ensuring that one generation won’t bankrupt future generations by selfishly living beyond its means. It’s a welfare state that works and is available to any political leader with the courage to tell his people the truth about the limits of government’s power to pass out goodies’
The author of the article would summarise the philosophy of Singapore as follows:
- Each generation should pay its own way
- Each family should pay its own way
- Each individual should pay his own way.
- Only after passing through these three filters should anyone turn to the government for help.
Goodman concluded: ‘If the United States (I would add New Zealand) had adopted a similar approach to public policy, there would be no deficit problem in this country’.
How is Government welfare at the end of this chain of compulsory saving organised? Goodman again:
‘The first thing to know about Singapore (government’s) welfare system is that qualifying for welfare is notoriously difficult by the standards of most of the developed Western world…..The state ..acts not as a guarantor of means, but merely as a guardian of final recourse. ..Welfare is channelled through state guided self-help community groups that are structured along racial lines. Government involvement in these groups goes only as far as a general regulatory oversight. Unlike typical welfare states… funding for these groups is (not derived from the government, but from)… a mixture of government schemes that draw a token sum of one or two dollars from each citizen’s government savings account ..as well as encouraging charity from the general community.
Most importantly, the discretionary processes involved with allocating welfare to low income members are left to the community group leaders. This privatised form of welfare where key decision making is carried out at a decentralise level has proved to be a far more economically efficient form of welfare…’
Put another way, these Singapore community groups feel much more that ”they are spending their own money’… in giving out funds to members of their ethnic community who have failed to save for themselves. The significant disconnect we have in New Zealand, with government employees handing out others’ (i.e. taxpayer’s) money, means neither the decision makers handing out the benefits nor the beneficiaries receiving those benefits, really feel any direct stake in the process. Singapore has managed to achieve a welfare system which is a bit like a person seeking assistance from their own family. They get the once-over before the family opens its cheque book.
In New Zealand we have a welfare system where applicants, free from family and peer oversight, put in for as much as they can get from government welfare. New Zealand has a disconnect between collecting the funds (from taxpayers), allocating the money (through a department of Social Welfare) and beneficiaries receiving the money. Beneficiaries seem under insufficient incentives in our welfare process, to adjust their lives and take more responsibility for themselves and their future.
It is difficult to compare government figures from different countries because the expenditure categories are all drawn on different bases. In New Zealand for the year ended June 2019, we spent 33% of Core Crown expenses on Social Security and Welfare, 21% on Health and 16% on Education. Singapore, for the same period, budgeted to spend 16% of Government spending on Health, 15.9% on Education, 3.9% on ‘Social and Family Development’, 2.7% on ‘Culture, Community and Youth’ and 1.7% on ‘Manpower’ . Whether these three last items are all welfare (they appear under the major heading ”Social Development’) is unclear. But if they are, then Singapore (including other items) spends 13.6% of its government expenditure on Welfare, while New Zealand spends 33%.
IRELAND
In choosing another country comparison I avoided countries with a federal system where welfare spending tends to be divided between the federal government and states making overall comparison of figures complicated. I also avoided a second Asian country because their social spending will likely be low, and a continental European country because their welfare spending is exceedingly high. So I settled on Ireland. It turned out to be an interesting comparison.
In 2017, Government spending in Ireland was 26.4% of GDP. Ireland spent 9.5% of its GDP on social welfare (NZ 9.7%). Ireland had one of the lowest percentages of GDP spent on welfare among EU states. Whether the 9.5% includes benefits employees have paid for via their Social Insurance is unclear but appears likely (in which case the net cost of welfare for the Irish Government would be less than 9.5% of GDP).
It appears in Ireland, all employees pay Social Insurance contributions from their income – an arrangement not dissimilar to Singapore. Generally you then qualify for benefits based on the level of contribution you have made to your social insurance. If an employee does not have enough in their social insurance account to qualify for any particular benefit they can be awarded a means-tested equivalent payment. Then there are universal payments, an example being a child benefit.
So it appears the welfare system in Ireland depends in part on people saving from their income to pay for the benefits they seek. Any benefit above the amount you have qualified for with your savings, is means tested. It appears to be a system more focussed on need and less on universal entitlement than we have in New Zealand. It is closer to the Singapore model but clearly still very different.
SOME GENERAL OBSERVATIONS
Governments around the world spend trillions on welfare each year and yet, have they ever really analysed and understood what is needed to help people? I suspect not. Here are a few general observation on welfare (I will come to NZ Super later):
First, New Zealand governments and well-meaning NZers seem driven by guilt in their approach to need. If a child has been beaten by its parents, it means society has failed that child. A man is living rough on the streets because bad housing policy has resulted in him having nowhere else to live. New Zealand’s Welfare Taskforce took the same approach when it wrote in its recent report, ‘. . . the failures of the welfare system disproportionately affect Maori’. Might a more balanced and analytical approach to welfare, free from this overlay of guilt, produce better welfare outcomes? Yes, a modern civilised society has a duty to help its less well-off members; but it doesn’t have to do so from a perspective of guilt. Saying the system has failed a beneficiary, conveniently exonerates the beneficiary from any responsibility at all, for the predicament they presently find themselves in.
People also have a responsibility to look after themselves, not to throw total responsibility for this onto the State. Both Singapore and Ireland, by requiring people to save for their own needs, help puts responsibility on people themselves – a more balanced approach and philosophy which NZ’s guilt perspective obscures. We should be looking to follow Singapore and Ireland, and get people saving for their own needs and own welfare, as soon as possible. Then like Ireland, means-test any extra benefits. Support that people have partly saved for, will be viewed very differently and valued more.
In my assessment we definitely need to change attitudes among beneficiaries if we are serious about really improving New Zealand’s welfare outcomes. Welfare has to be a partnership between Government and beneficiaries. It will only produce good outcomes if a strong part of the policy emphasises that beneficiaries also have to help themselves. Better social services (not handing out money) are needed to help beneficiaries to help themselves. But having the Government just throw more money at people, without a corresponding buy in from the person to help further their own position, is highly unlikely to deliver significant social improvements in my opinion.
Among people receiving a benefit in New Zealand, 53% have a health condition or disability, or care for a person with a health condition or disability. So yes, our welfare system does pick up people who really do need help – and possibly does not support some of these people sufficiently. But conversely, 47% of beneficiaries don’t face health or physical constraints on their ability to live normal lives.
DO THEY SIMPLY NEED MORE MONEY?
New Zealand welfare policymakers seem simplistically to assume that welfare needs can and will always be met and corrected if only we as a society throw enough money at them. The Welfare Taskforce said New Zealand needed to spend another $5.2 billion each year to do the job. Even if New Zealand had another $5.2 billion (which it assuredly does not, after the profligate 2020/21 budget) and even if we spent it all on Welfare, would that see all the country’s welfare needs satisfied? All homeless off the street? All children brought up in loving and caring households, well above the poverty line? Highly unlikely. Why? Because welfare needs are far more complex than just lack of money.
Why does a person drop out of normal life and need welfare? There seems to be a watershed. If you are struggling but can still see it possible to save enough for a house, or you might still get a reasonable job, or might still be able to get your weight down, then you keep struggling. But if the mountain gets too high, at a certain point you give up. You stop struggling, you cross the watershed and become welfare dependant.
How can we get that person back to being a functioning member of society? They need a change of mindset above everything else. How do they make that change? Answer: the most likely way is for them to have a few successes so they start to have some faith in themselves again, which is very hard to achieve and will often require social workers to be alongside the person, on and off, for years. Paying money to a person who has stopped struggling helps them with food and shelter but it is highly unlikely to help them bounce back off welfare to become a functioning member of society again. Indeed by funding them, and enabling them to struggle less, it may help lock them into dependency from that point forward.
WELFARE BEGETS WELFARE
A child of a functioning family, loved by their parents, is highly unlikely to end up welfare dependant. A child of a welfare dependant household may well have parents who lack motivation in all aspects of their lives, including practising birth control, and making an effort for their children. A number of those welfare parents will be drug dependant. That child grows up in a dysfunctional household, often with many siblings. About 30% of benefits go to single parents with children. The children get few parental examples of what is important for success in life (education, hard work, saving etc.). Violence (including violence to children) may well be present in the household. They all too often grow up in a provincial town where there is very little work and schools can be of an indifferent standard. Those children, unsurprisingly, have a high probability of ending up welfare dependant themselves.
The best solution: much better birth control, to avoid children being born into such unfortunate circumstances in the first place. We have people advocating that unborn children have a right to life. Maybe we need a group advocating that children have the right to be born into a safe and loving household where they will be loved, fed, clothed, and not abused. It is a delicate subject, which society generally and politicians especially, shy away from. But better birth control at the outset is far better than a lifetime of welfare at the bottom of the cliff.
MAORI WELFARE
According to the Welfare Taskforce, Maori (16.5% of the population) make up 36% of all working age people receiving a benefit as the primary recipient. It is a depressing statistic. Pacific Islanders are also disproportionately represented in welfare numbers. And yet New Zealand has been slow to develop an approach similar to Singapore where dependants get to deal primarily with their own people in relation to welfare. Whanau Ora is a policy established around 2010 with the objective of putting Maori at the centre of their own social development, but progress has been slow. It is not clear how much Whanau Ora actually directly influences the way in which individual Maori interact with the Welfare system. Consideration should be given to setting up an exclusive Maori section in some Welfare offices as a trial. Allocate a bulk sum for a group of Maori clients (equal to the sum paid to those beneficiaries in the previous year) to Maori administrators acting in conjunction with Whanau Ora and leave it to them to make decisions how best to apply that welfare funding for their people. Perhaps there would be a better connect, and an overall better result. It would not surprise me to find Maori being tougher on their own than the European administrators they replaced.
MOVE TO WHERE THE JOBS ARE
Welfare is disproportionately prevalent in North Island provincial towns. Those towns lack employment opportunities. But we do not seem to be able to move working age people from these towns to where work can be found. So we end up with plenty of unemployed people living in areas with very limited economic opportunities while immigrant workers are picking horticultural crops and doing seasonal work in other parts of the county. Surely Work and Income NZ can be more successful in moving unemployed people to areas where jobs can be found. It would be a win for both the beneficiaries and for the exchequer.
Will spending a massive $3 billion through the Provincial Growth Fund help stimulate the provinces and create employment there? One would hope that a few of the projects funded will be a success but overall I doubt this is going to boost provincial employment significantly. Much of the funding seems to be channelled through local government which doesn’t always invest well.
The other thing one wonders about is whether Treaty Settlement monies could be invested in ways which generate more tangible benefits for struggling provincial towns, where Maori unemployment is high.
IN SUMMARY
There are undoubtedly people who genuinely need help and probably do not get enough help at present. There are people who have given up on life and need support with basic funding for food and shelter. Then there are people who can”t get work where they live but could get work elsewhere. They need help to move them to the places where they can get work. Then there are undoubtedly some malingerers who game the system to the extent they can. The extent of unpaid Child Support is a good example of people dodging their obligations if they can.
There is possibly not a one approach that suits all needs. Whether welfare officers are flexible enough to adjust their assistance to meet the varying circumstances coming before them, I really do not know. But judging by the ever increasing money being ploughed into welfare, with the Government’s own Welfare Taskforce saying the system is dysfunctional and the customers unhappy, one would have to wonder if the department is doing as good a job as it should. But they do not have an easy job in the first place.
Then there is political meddling. Like every other part of government, Welfare is too complex because politicians constantly bring in changes and alter policies. Worse, politicians in part see Welfare as a way to buy votes. The Working for Families tax credit provides significantly welfare for middle-income earners. It is primarily a voter bribe. If (as seems likely) many of these families are struggling then reduce the tax rates at lower levels of income and leave more money in their hands. Welfare should be just for people who need payments from the State because they cannot get by on their own.
Overall, welfare policy, like a number of other Government activities, seems headed to a dead end. Beneficiares are dissatisfied, more money (if the country could afford it) is highly unlikely to induce beneficiaries to return to productive lives, get the homeless off the streets or see more children growing up in positive environments. A whole new mindset and approach to welfare is needed in this country if we are to achieve better outcomes, and better return for the enormous Government expenditure.
Central to that new mindset is to put personal responsibility back into equation. The State cannot take total responsibility for people, they also need to help themselves. Successful welfare has to be a combination of government and beneficiary working together. The system must also recognise cultures and give more responsibility for people’s welfare back to their own people, such as Maori interacting with Maori much more through the Welfare system. And there are definite lessons we could learn from Singapore.
WHAT ABOUT AN IDENTITY CARD?
I am not sure this topic quite fits into this chapter but it is related to social welfare in a broader sense. For years, an identity card for New Zealanders has been opposed by civil libertarians and I understand their concerns. But the more the world becomes networked with IT, the more unknown global organisations gather personal information about us, (whether it’s the CIA in America or the Security Intelligence Service here, or Google, Amazon, social media sites, ‘cookies’ on the sites we visit or information stored in retail, telephone, utility, banking and other commercial operators), much information about us is no longer confidential. Cambridge Analytica, which mined Facebook to assist political parties target their election campaigns, is proof of that.
Government is now partly moving in this direction too. Computer systems, run independently by various Government departments in the past, have been interlinked. When you arrive in New Zealand a border official scans your passport and things such as money you owe IRD and unpaid fines, can flash up. If significant social change becomes possible post-Covid, isn’t it time for an Identity card for all citizens? Some countries already use them. Give every citizen a number, then use that number throughout the Government’s IT systems – for tax, welfare payments, passports, health and education records etc..
Eventually the system could count the costs of all government services each citizen receives during their lifetime and record the tax they pay over their lifetime. I suspect much surprising information would be revealed. With data showing which sections of society benefit financially from Government services and which sections of society actually pay the costs, social policy could be much better focussed.
Then consider immigration. Every immigrant would be given a card. The country could eventually see how much income they have earned, how much tax they have paid since arrival and how many government services they have consumed. We could determine precisely whether immigration delivers a positive or negative return for the country, and that is just an example of the sort of information which could be extracted.
I am sure the system would provide far more information on New Zealand’s society and economy than our five-yearly census does. Indeed, the census could be discontinued if an identity card was introduced. Everyone would then have an official identification, which is not so at the moment. Those without a passport or a New Zealand driving licence have no official identification.
There are plenty of downsides of identity cards. Security of information and carefully regulated access to information would be vitally important. But identity cards would enhance administration across many arms of government. They would make government more efficient, which is vital to improve productivity. They would provide a great deal of information which would allow far better economic and social policy.
Facebook is able to sell for large sums the information it gleans about you, just from you becoming a Facebook user. Supermarkets don’t give you a loyalty card because they want to pay you rebates. They give you a card so they can track your spending patterns and know more about you. If this is worthwhile for a supermarket, how much more useful could a card be for social decision making? Undoubtedly it would provide a very great deal of information we currently just guess or simply do not know.
With the breakdown of privacy in so many spheres of modern life and the opportunity provided by Covid for a rethink of all aspects of life, it is time to consider giving individual identity numbers and cards a try .
NOW SUPERANNUATION
In 1975 New Zealand unfortunately repealed a relatively recently introduced funded public superannuation scheme (ie a system in which citizens saved over their working lives, to pay for their pensions on retirement). At that time the population’s average life expectancy was 69 years for men, 75.5 years for women. From the time of the repeal of funded superannuation saving, a pension, (called ‘superannuation’ but paid entirely from current taxation), was provided to everybody from age 60. So on average back then, males received superannuation for 9 years, and females for 15.5 years.
By 2018, life expectancy had risen to 80.2 years for men and 83.6 years for women, and the qualifying age for NZ Super had been increased to 65 years. So today, on average males will receive super for 15.2 years; and females for 18.6 years. Put another way, the period for which the Government has committed to providing NZ Super has increased by 68.9% for the average male and 18.45% for the average female. Across both sexes, the average number of years New Zealanders receive the pension has increased by well over 40% since 1975, even although the starting age has been raised by five years in the interim.
In fact, these figures understate the position because they are average life expectancies. They include plenty of people who die before they reach 65 years. In 2019, Statistics NZ produced figures which show how long the average 65-year-old continues to live. Males on average can expect to live for another 19.6 years, females for another 21.7 years.
I almost begin to feel sorry for the Government when I see those figures. Assuming the average New Zealander has worked for 40 years when they retire at age 65, they can now expect a pension for 20 years, i.e. 50% of the time they spent working. There is only one consolation for the Government – the increase in life expectancy does appear to be slowing but it is still going up.
And since 2011, the post-war ”baby boomers’ have been reaching the pension age. Not only are people living longer, there is a significant bump in the numbers who have passed 65 years. Disproportionately more people are starting to receive the pension while fewer people are dying and ceasing to receive it. You can see this in the figures for the year ended June 2019: recipients of NZ Super increased 26,000 over the year, to 767,000, a 3.5% increase. By 2039, when the entire baby boomer generation will be over 65, the numbers receiving NZ Super are projected to be 1.3 million. And on average those extra people are going to receive their pensions for longer than ever before.
The former Retirement Commissioner, Dianne Maxwell, said NZ Super was costing $38 million a day in 2018, ‘But in 20 years time it will be $117 million a day. It is terrifying.” Well, not to our head-in-the-sand politicians who refuse to acknowledge there is a major catastrophe in store for the country’s economic future.
The only difference between having a Category 5 hurricane heading toward Auckland and the impending superannuation disaster, is that there is always hope that hurricanes can change course. Short of a Covid wiping out much of the retired population, nothing is going to put our impending superannuation disaster off track. And the financial havoc will be many times the cost of cleaning up after a major hurricane or earthquake. It amounts to many times the cost of fixing Christchurch after the earthquakes there. It is truly a major financial mess that we of the boomer generation are bequeathing our children and grandchildren. And to make it worse, we have now massively increased the government debt position in the 2020/21 budget.
WHAT DO WE NEED TO DO WITH SUPERANNUATION?
New Zealand’s biggest mistake was to ever let politicians run our superannuation. If citizens had been required to save for their retirement, as enacted in 1973, with politicians not involved, we would have totally avoided the situation the country is in today.
But having created the mess, and knowing the current scheme is untenable, successive governments have ducked the hard task of sorting it out for the future. Each year which passes without a solution means the financial hole gets deeper. People need time to alter their plans, their savings and their lives, to adjust to changes in superannuation. And savings need time to grow and reach meaningful amounts. The current low interest rates mandated by the Reserve Bank make the position much worse – you need increasing capital to earn the same income, as interest rates drop.
But it is not hard to see what has to happen to NZ Superannuation. The only difficulty is finding politicians with the backbone to implement the changes. First and most obviously, we need to raise the retirement age. People aged 65 basically live for another 20 years so every year you a raise the qualifying age cuts about 5% off the amount they will receive over their period of superannuation. (Although increasing life expectancy is reducing this saving). Realistically. the age has to be raised progressively to 70 years (which means a 25% saving overall). We need to begin raising the age as soon as possible. It needs to be brought in quickly- ideally over no more than 10 years.
Then we need to ration NZ Super to those who need it. Rather than means test it (messy) bring back a surtax. If your income is above a threshold (say, $25,000), then you pay a surtax on just your super, so that if your income is, say, $50,000 per annum, all the super is taken back with 100% tax. The rest of your income, including private superannuation, would be taxed at normal rates. The Government should then also introduce a means test based on capital held – so someone with low taxable income, but with capital above (say) $750,000 would begin to lose their super, which would be lost altogether at capital of say $1million. (If a capital based tax was introduced, this would make such a capital -based means test easier to administer, because the IRD would then have some figures on people’s worth). Perhaps these thresholds could be set so that a further 10% of the cost of super was saved for a total saving of 35%).
Next, work out actuarially what amount is needed in the NZ Super Fund to cover 15% of the cost of pensions through to the point when the baby boomer bubble has passed through the system. Then work out the level of Government contributions to the NZ Super Fund that need to be made each year to enable the fund to reach the necessary size. It is likely the Government’s current contributions will have to rise and taxing of the fund”s earnings will need to be waived. Then start to apply the fund at a time in the future that will achieve a further 15% saving on the currently projected costs. Total saving from the current position, if left unaltered- 50%.
Then people have to save more. Singapore forces its citizens to save 20% of their incomes (with their employer compulsorily adding a further 16%). In Australia the employer rate of compulsory contributions is currently 9%, rising to 12% by 2025 (with tax incentivised employee saving on top of that). And here in New Zealand, we are currently compelling employers to contribute 3% of gross income (from which incredibly tax is deducted, making the net employer contribution around 2.5%) with contributions from employees entirely voluntary above 3%, and not tax deductible. New Zealand currently spends far too much of its income and does not save enough for the future. The Government does not offer substantial tax concessions, to encourage superannuation saving, or to help the funds to grow, once they have received contributions. There is no alternative – all of this has to change substantially.
With a Covid induced economic slowdown likely, people are possibly going to be struggling to maintain their incomes over the next couple of years, let alone pay a higher sum in compulsory savings. So despite the fact that New Zealand is miles behind where it should be with compulsory saving, we may have to look at a slow start. First we need to make employee contributions compulsory. Then we need to raise the compulsory percentages for both employer and employee at say half a percent per annum for the first couple of years. Then we must move to 1% annual increases for both employers and employees, as soon as the economy improves a little. Ideally we should ultimately at least move to match Australian levels of contribution: so in total at least 15% of an employee’s income is being saved into Kiwisaver each year.
Then we need to manage people’s Kiwisaver accounts better. The fees charged by the Wealth and Superannuation sector of the economy are too high. I am sceptical that banks invest in the best interests of the customers whose funds they manage. The New Zealand Super Fund has had a very good investment record since it was established in 2007. Ideally it should be put in charge of investing all Kiwisaver balances (which would still be held in individual accounts – the Super Fund should just ensure that maximum investment earnings are generated at minimum or ideally at zero cost to investors).
Earnings of Kiwisaver funds should not be taxed. Given NZ is so far behind other countries, the Government should also allow contributions to Kiwsaver by both employer and employee to be tax deductible. All of these will represent a loss of revenue to the Government – a short term cost, for a long term savings gain, That is not something New Zealand politicians have generally been willing to do, take a long term view. Hopefully a post-Covid economic downturn may encourage them to change.
Then we need a well thought through system, so that when someone does retire, a good percentage (say 85%) of the balance in their Kiwisaver accounts, is turned into an annuity. It is no good paying out the whole balance in cash when people stop work – many people will not be able to manage these funds adequately to fund their retirement well. The Government needs to run, free of charge, a state-underwritten annuity scheme across all Kiwisaver accounts, which cuts in when people retire. It should be possible this way, to turn Kiwisaver balances into regular cash in hand for retirees at more attractive rates than they would get if this was left to the insurance and/or banking sector. New Zealanders will be retiring over the next 30+ years with savings which are low by world standards to fund their retirement. It is therefore important that those savings are used as cheaply and efficiently as possible, generating regular cash in hand for the retirees who saved them.
IN SUMMARY
New Zealand has allowed itself to get into a serious savings and retirement bind. All three interested parties – current retirees (who should receive less from the current scheme), future retirees (who need to have their qualifying age deferred and increase their savings rate significantly) and the Government (which needs to stop taxing super fund earnings, allow savings by employer and employee to be from tax free income and pay more into the NZ Super Fund each year) all need to make real sacrifices and changes, belatedly to improve the position. Unless current retirees and the Government shoulder their shares of this massive burden, a majority of the financial deadweight will fall on the current 10-35 year olds (who are already saddled with student debt and who are going to have to take on massive mortgages, if they want to try and get onto the overpriced New Zealand home ownership ladder. Following the 2020 budget, they will also inherit a country with large government debt).
What happens when a generation feels it is carrying an unfair share of the intergenerational burden, left behind by the baby-boomer generation? Answer: the brightest and the best leave New Zealand. At the time of Greece’s debt crisis, more than 50% of young Greeks with tertiary qualifications were leaving the country. That is the risk we run, if we do not sort out NZ Super and the inter-generational inequality it represents.
There are already approximately 500,000 Kiwis living in Australia. We need to sort out NZ Superannuation immediately to minimise the circumstances which may encourage our brightest and best to exit on a much larger scale in the future.
| << Chapter 9 | Chapter 11 >> |
Covid – Catalyst for Change 