The “political football” is being tossed around again.
You will have seen the brochure about retirement savings in your mail box recently. The Government has designed a scheme to “smooth the road” through the bumpy years. These are the years when post war baby boomers will make up a proportionately larger part of the population than now and the cost of paying out NZ Super will be a much larger slice of GDP at that time. By 2051, people over 65 will account for 25.5 per cent of the population, up from 11.7 per cent in 1996.
These structural changes in the population are occurring on a global basis. It’s a phenomenon of our modern age that we are all living longer. Just a hundred years ago, on average, it was unusual to even reach 65 yrs. Now, most of us reach that milestone and can expect to live for another 20 odd years beyond it. To quote The Economist, “there’s mass survival to a ripe old age”.
New Zealand’s situation is typical of most western countries. We have a “pay as you earn” income tax scheme here and it’s the same with NZ Super. Some of the money deducted as tax today literally gets paid out in NZ Super tomorrow. There’s no “nest egg” provision in between where funds are put aside, earning income, that could be used to boost taxpayer contributions. That’s fine until the point in time when there’s a mismatch in the equation – too many dollars needing to go out and too few coming in.
What’s being proposed now is a change from the pay as you go approach to pre-funding – establishing a nest egg. The New Zealand Superannuation Fund will be a “general” nest egg for everyone with no connection between the amount contributed by any particular tax payer and the benefit he or she might derive from it in future. So, what is likely to happen as a result of this? The “Smoothng the Road” brochure states that:
“The New Zealand Superannuation Fund is not a reason to stop or reduce any personal retirement savings you’re already making or planning” but it is clear that people’s behaviour will change. Information from the Pre-funding Superannuation Team of
the New Zealand Treasury states:
“If pre-funding contributed to providing a more certain and stable environment for people to make their savings decisions, it could be argued that it would lead to an increase in private saving. However, there is much stronger evidence that pre-funding would lead people to think that retirement income provision was secure and that they did not need to save for retirement themselves so much.
Similarly, the Team comments about Government behaviour:“?pre-funding may provide greater fiscal discipline on government?(or) it may mean that retirement income policies may be seen as ‘solved’ and the increase in government costs or decreases in revenue would then have to be managed by adjusting other
policy areas”.
And we wonder which Minister is going to volunteer a cut to their budget to keep the contributions going!
The National Party, ACT and the Greens think the pre-funding scheme should be scrapped. As it was, the legislation was passed with only a narrow margin in the House.
So here we are again, superannuation, that weather-worn, old political football, is being tossed about again. It’s seemingly impossible for any consensus on the subject and whilst the endless debate rages, time slips by.
Contrast this with the situation in Australia where compulsory super started in 1993 at 3% salary deductions and is now at 8-9%. A real “head of steam” is being built in Australia with most working people having a significant stake in their local and many off-shore markets. By 2010 it is estimated that funds under management for superannuation purposes will have grown to AUD$1,500 billion with about 20% of that allocated to Australian equities.
More than ever, we need to get to grips with superannuation. Financial independence in retirement is not a complicated issue but knowing what to do about it as an individual does depend on stability in the wider political and economic context. If you don’t know the rules, it’s hard to play the game.
If you have over NZ$350,000 to invest and want truly impartial advice, contact us to find out how we can put your money to work to fund your important goals.
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