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The following OECD assessment and recommendations summarise Chapter 2 of the Economic survey of New Zealand, published on 23 April 2007.
The basic design of public pensions is sound
The government has already taken important steps to reform the public pension system. These have included raising the age of entitlement to a pension to 65 years and establishing the New Zealand Superannuation Fund to partially pre-fund future pension liabilities. Overall, the main features of New Zealand Superannuation are well crafted and have successfully erased poverty among the elderly by providing a flat-rate pension to everyone who has satisfied the residential eligibility criteria. As benefits are not income-tested and there is no requirement to retire, the system has also avoided the pitfall of favouring early withdrawal from the labour market. However, since it provides everyone with a basic level of retirement income, it may discourage private saving. Indeed, for some low-income earners, their expected replacement income from NZ Superannuation would allow them to maintain their consumption patterns in retirement, without needing other income sources. The move to a partial pre-funding approach is projected to alleviate around only a third of the additional budgetary requirements arising from future increases in pension costs.
A number of adjustments could slow down the increase in superannuation spending and aid long-run fiscal sustainability
Policy changes will be required to ensure fiscal sustainability over the very long run and, if taken early, small changes in a number of policy areas could be sufficient. This is particularly true for spending on health and public pensions. The fiscal cost of NZ Superannuation could be pared back over time without compromising its many positive features. One option would be to shift progressively the indexation of superannuation payments to an adjustment formula that raises real benefit rates at a slower pace than real wages. However, this would result in lower retirement income for those pensioners who had not compensated for the future loss in NZ Superannuation payments by increasing their private savings. In this context, the authorities would need to monitor the situation closely and ensure that elderly poverty does not re-emerge. An alternative measure would be to lift the age of pension eligibility. This change would help to reduce public pension outlays by providing benefits to a smaller share of the elderly population and would raise participation rates of older age groups. It would be appropriate to consider a mechanism that automatically adjusts pension expenditure for changes in life expectancy.
Appropriate incentives to save are embedded in KiwiSaver
New Zealand Superannuation is only one component of a whole set of retirement income arrangements. Ensuring that individuals face reasonably strong incentives to save and to develop an optimal asset mix would improve replacement income in retirement. But only a small proportion of the working-age population is enrolled in a formal private pension scheme, with households typically accumulating a disproportionate share of their capital in the form of housing rather than financial assets. Against this background, the government has introduced the KiwiSaver scheme. Starting in July 2007, it creates investment-based personal retirement accounts on a defined-contribution basis, using the tax system to collect contributions and pass them on to pension providers. One noteworthy feature of KiwiSaver is that, although it is voluntary, new employees are automatically enrolled, with the right to opt out during their first eight weeks. Existing workers can opt in, as can the self-employed and those not currently working. The scheme is a welcome development, which should contribute to raising private savings, although the provisions relating to housing may be counter-productive.
Pro-housing elements in KiwiSaver could weaken its effects on financial savings
Indeed, some of the benefits of KiwiSaver could be undermined because it explicitly allows households to use “mortgage diversion” of the employee share of contributions, permits a one-time capital withdrawal and provides financial advantages for first-home buyers. These pro-housing elements may reduce the extent to which the scheme encourages a switch in the allocation of households’ net wealth away from housing investment. There have also been some calls for KiwiSaver to be made compulsory. The main advantages of compulsion in the NZ context would be to effect a larger increase in private saving, force households to diversify their wealth portfolios, and help consumption smoothing for some. It could also reduce the fiscal cost of the programme and help deepen financial markets, although a significant voluntary uptake would have a similar effect on the latter. However, for low-income households, compulsion could see their consumption constrained during their working lives by more than they would have otherwise chosen so as to give them higher income in retirement. On the other hand, higher-income households are more likely to be able to rearrange their affairs to reduce their saving in other forms in order to maintain their desired level of consumption. Overall, it is premature to judge whether KiwiSaver should be converted into a compulsory scheme. That judgement should be put off until its take-up rate can be evaluated.
Competition between different types of private pensions should be fair
The advent of KiwiSaver is expected to affect other players in the pension market such as occupational or retail schemes. To avoid disadvantaging current employer-based arrangements, the government has announced that from July 2007, employer contributions to all registered superannuation plans that meet specified criteria will be tax-free up to a ceiling. This is intended to encourage employers to contribute to their employees’ savings for retirement and will provide incentives for people to save through this type of arrangement. But it could lead to substitution effects whereby tax-advantaged occupational schemes crowd out existing retail plans. It would be advisable to maintain a level playing field between all types of pension plans by extending an equivalent tax exemption to retail schemes that have the same savings lock-in requirements.
Public pension reserve funds
Per cent of GDP, 2005
1. As at June 2006.
Source: OECD, Global Pensions Statistics database.
Average minimum retirement benefit(1)
Per cent of average earnings
1. Parameters are based on 2002 values but include all legislated changes even when these take effect in the future.
Source: OECD (2005), Pensions at a Glance, OECD, Paris.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of New Zealand 2007 is available from:
For further information please contact the New Zealand Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Deborah Roseveare, Annabelle Mourougane and Shuji Kobayakawa under the supervision of Peter Jarrett.