New Zealand

On December 7, 2010, New Zealand’s Retirement Commission (NZRC) released the 2010 Review of Retirement Income Policy, a 3-year evaluation of New Zealand’s retirement income system and other related areas (such as savings, the effect of the global financial crisis on household income, and the economic well-being of the population aged 65 or older). The report evaluates the retirement income system’s two main components: (i) the flat-rate, universal public pension funded by general revenues known as Superannuation (“NZS”), and (ii)  the voluntary, government-subsidized retirement savings plans known as KiwiSaver.

According to the NZRC, the sustainability of the NZS is threatened by a rapidly aging population. The ratio of workers to retirees is expected to fall from 4.5:1 to 2.2:1 by 2036. Without any changes to the NZS, the cost is projected to rise from about 4.5% of gross domestic product to 6.5% by 2035. In order to ensure the long-term viability of the NZS, the commission recommended the following:

  • A gradual increase in the normal retirement age from 65 to 67 for both men and women, by 2 months each year from 2020 to 2033.
  • The introduction of a transitional, means-tested benefit for those aged 65 to 66 who may not be able to support themselves until age 67.
  • The indexation of the NZS benefits using the average of the change in consumer prices and earnings, rather than the change in annual wages alone.

The report also identifies increasing government subsidies to KiwiSaver accounts as a major concern. Currently, such subsidies amount to 40% of the money deposited in KiwiSaver accounts. In future years, the subsidies are projected to account for approximately 0.5% of the gross domestic product. In an effort to solve this problem, the NZRC recommended the following:

  • Default fund investment settings should remain conservative, regardless of the member’s life stage.
  • The government should adopt a standardized method of calculating provider fees and measuring fund performance to allow consumers an easy comparison of KiwiSaver providers and funds.
  • The government should closely monitor withdrawal patterns under KiwiSaver. From July 2012, members aged 65 or older can make lump-sum withdrawals from their accounts. The market for "decumulation" products is very limited, and KiwiSaver has no specific requirements for how to use these funds.

Click here to access the full report.

Later, on February 1, 2011 the Savings Working Group (SWG)[1] released Saving New Zealand: Reducing Vulnerabilities and Barriers to Growth and Prosperity. The report analyzes savings policy in New Zealand and its effect on economic growth and investment performance. According to the report, national savings are inadequate relative to the country's investment needs, leading to overdependence on foreign borrowing (currently, net foreign liabilities are 85% of gross domestic product). As a result, the economy is exposed to shifts in international financial markets, which may cause financial shocks and economic disruption. To reduce this vulnerability, the SWG recommends that the government adopt policies to increase savings in the country-through KiwiSaver, superannuation, and other types of savings vehicles.

Key recommendations related to KiwiSaver follow:

  • Membership in KiwiSaver should remain voluntary.
  • To increase membership, auto-enrollment should be extended to include the self-employed and employees aged 16 or older who are not yet members of KiwiSaver.
  • The default employee contribution rate should be increased to 4% of earnings, but with the possibility to opt down to 2%. Under current rules, employees contribute 2%  (the current default), 4%, or 8% of earnings; employers contribute at least 2% to an employee's account.
  • To reduce costs, fees, and expenses, a new low-cost default scheme should be created that invests only in index-based shares and bonds and offers only a limited number of basic combinations for those investments. An additional "ultra-low-risk" fund should also be set up, which invests only in short-term government securities.
  • KiwiSaver (and superannuation) providers should be required to produce regular reports that specify all fees and charges, as well as the net investment returns to the member (after deducting all costs).
  • The government should consider encouraging the development of a market for annuities or similar instruments and requiring members to convert a portion of their savings into an annuity or other appropriate instrument at retirement. Currently, the annuities market is very limited.
  • The government's one-time payment of NZ$1,000 (approximately US$750) to every KiwiSaver account should be spread out over a number of years. This would distribute the potential large cost to the government of a sudden influx of new members over a period of years, while providing an incentive to members to continue contributing to their accounts after the first year.

Click here to access the full report.


Article with courtesy of Social Security Online

Sources:"New Zealand," International Update, September 2010, US Social Security Administration; Saving New Zealand: Reducing Vulnerabilities and Barriers to Growth and Prosperity, Savings Working Group, February 1, 2011; "2010 Review of Retirement Income Policy," New Zealand Retirement Commission, December 7, 2010; "Raise Super Age to 65, Report Recommends," New Zealand Herald, December 8, 2010; "NZ Super Policy Needs Total Rethink," Scoop News, December 9,2010.



[1]The SWG was established by the government in August 2010. It is composed of private- and public-sector experts.

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