Our ageing population needs to make sure they are prepared for many eventualities in a volatile world, writes Shamubeel Eaqub.
We have an ageing population, and the time to make gradual policy changes is quickly running out. This has implications for us as a country, but also in how we might prepare individually.
It is unlikely that retirement policies will change quickly but looking at the polarised politics unfolding around the world, it would be prudent to prepare, or at least have a “Plan B”. That means a deliberate and considered look at how much you might want to save for your retirement, how you invest that, what kind of retirement you want, and how to fund it with – or without – NZ Super.
A raft of reports from government agencies (Treasury, IRD and MSD) have come to the conclusion (like similar reports of years passed) that our current set-up of taxes, borrowing and spending will not work with the older-skewed population we know is coming.
More than a decade ago, Sir Michael Cullen (the architect of KiwiSaver) warned that we should not leave harder choices to future generations, simply because we are unwilling to make difficult decisions today. Yet, the politics have proved too hard to handle, and successive governments have avoided doing anything – decrying: “Not on my watch!”
Who pays?
The politics are understandable: voters want and use public services, but do not like paying the taxes that fund them. The fiscal math is also understandable: Those aged between 30 and 64 are net contributors to the fiscal coffers. That is, they pay more into government coffers than the public services they personally consume. Those outside of this age range (ie kids and retirees), are a net cost. This is more pronounced for the older contingent, who receive a high proportion of public services and welfare: health, superannuation, aged care, housing subsidies for example.
We have a pay-as-you-go retirement income system, meaning our taxes pay for the current generation of retirees. The taxes we pay are not saved up for our own retirement in the future. That means the retirement of current workers will not be funded from the taxes they’re paying now. So, heading towards an ageing population, who will pay? In 1950, there were eight working-age people for every retiree. Today, that number has dropped to four, and in 50 years’ time it will be two. The maths simply doesn’t math.
As this demographic reality bites, it’s impossible to predict the choices that’ll have to be made in the future. Will NZ Super, which is unsustainable from a future budgetary perspective, remain in its current form? Will health become further rationed, already being the number-one concern for older Kiwis? Will we spend less on education or transport? Will we tax and borrow more? Whatever happens, changes must be made, and there will of course be winners and losers.
Retirement policy choices
There are some retirement policy choices currently on the table. NZ Super could be changed. The most common recommendations are around increasing the age of eligibility and making it means-tested alongside a compulsory retirement savings scheme, like in Australia. Increasing the age of eligibility for NZ Super to 67 would moderate some costs, so makes sense. When pensions were introduced, the age of eligibility was higher than the average life expectancy. Increasing longevity since then has made the policy more expensive. But increasing the age would not address increasing health, aged care, housing and other welfare costs for retirees.
We could enhance KiwiSaver by making it compulsory, automatically enrolling all workers from 18, and gradually increasing total contributions towards 12 per cent. A simpler single contribution rate would be better than the current employer plus employee, because the contribution is seen as overall compensation of workers regardless.
If KiwiSaver was compulsory, in time we could make NZ Super means-tested like in Australia, where around 40 per cent independently fund their retirement. Easing hardship withdrawals for lower-income workers would moderate the impact of lower income during working life.
These options are most likely to be adopted at some stage in our future. We just don’t know when the politics will shift. Will it happen gradually and with enough time for future generations to prepare? Or will it happen abruptly,
when workers realise all their taxes from work are being gobbled up by NZ Super and health?
Uncertain future
Uncertainty makes things hard to predict. Planning, however, doesn’t require prediction. For individuals, the question is: within your resources, how much do you want to save, what will you invest it in, and how will you manage your retirement?
Because even if my scenarios don’t play out in your lifetime, having done your own planning, you’ll have the benefit of a more comfortable retirement, just with a little less disposable income through your working life. It’s a balancing act. For some people, the choice will be to do nothing.
But it’s good to understand your choices with clarity. Personally, I believe politics and policy changes are inevitable over the next 20-30 years, because the fiscal situation will become completely unsustainable and a new bolder generation of politicians will make necessary changes.
This is not financial advice of course, but here’s our set-up. We target saving at least 10 per cent of household income for retirement. We contribute just enough to maximise entitlements for KiwiSaver. I do not put in extra, because KiwiSaver locks up money until 65, which I prefer to keep accessible. I do this across a range of investments including a low-cost global equities fund, some low-risk and liquid income assets, venture capital, direct business investments and property.
We also make regular contributions to our kids’ investment funds so that they are building assets from birth, rather than missing out on the benefit of compounding – this gives them options when they reach adulthood. If there’s subsidised high-quality education when they reach the right age, great. If not, there’s some money available for that. Or a car, or assistance towards a house deposit. The key is, having choices.
For every individual and family, the options available and the choices you make will be unique. But the broad story is one where many things will change over the coming decades. We will get older as a country. Our current set-up of taxes and spending will morph – retirement income and KiwiSaver set-up will be prime candidates for change. While politics is not yet making the gradual changes to help, prudent individuals and families will make gradual preparations now.
Shamubeel Eaqub is chief economist and head of policy at Simplicity.
The information provided and personal opinions expressed in this article are intended for general guidance only and not personalised to you. These materials do not take into account your particular financial situation or goals and are not financial advice or a recommendation.
