A future without a pension?
June 18 9:00 AM
AUTHOR: Robin Gunston
The recent Financial Services Council report on retirement and savings spelt out doom and gloom for those now beginning Primary School! I somehow dont think it is something that is in their curriculum at present- nor do we think it should be!
However we should not assume that NZ has always had a pension system since democratic Government was introduced. As always looking far forward we should look back and see what has transpired as our society has changed.
The following is an extract from Retirement Income in New Zealand: The historical context, written by David Preston for the Office of the Retirement Commissioner.
Until 1898 New Zealand had no public pensions. The 19th century British colonists did not bring the Poor Law into New Zealand, and the relatively small number of elderly pakeha were expected to provide for themselves or be supported by their families. Older Maori were supported in the traditional way by their whanau or extended family.
New Zealand was seen as a land of opportunity and the government focus was on getting individuals and families to be self-supporting through developing land, setting up businesses, or obtaining waged and salaried work. New Zealand was to be a land without poverty, and thus a land that did not need public income support for the elderly or others.
In 1898 an Old Age Pension was introduced, for which those aged 65-plus could apply subject to a rigorous means test that covered both income and assets. The pension was set at a maximum of £18 a year (about a third of a working man's wage) and twice this for a couple.
Other provisions included evidence of good character (designed to exclude criminals, drunkards and wife-deserters) and the requirement to apply in a public court session.Overall, slightly more than one-third of the population aged 65-plus qualified for the pension.
Early 20th century initiatives
With the highly targeted Old Age Pension in place, New Zealand governments looked for ways to encourage people to provide for their retirement privately rather than expanding the scope of the tax-funded pension.
In 1910, the National Provident Fund was set up, providing large government subsidies for those who joined as contributors to its superannuation scheme. However, despite virtually pound-for-pound subsidies in its early years, the fund attracted only a minority of earners.(Shades of KiwiSaver!!)
The 1938 Act and the pensions debate
In the aftermath of World War I, government attention largely focused on the need to fund adequate war pensions for disabled returned servicemen. For a time, war pensions were more costly than the Old Age Pension. However, the debate on alternatives to the Old Age Pension continued.
Officials in the Pensions Department promoted a compulsory national or social insurance scheme during the 1920s. In 1927 a National Insurance Bill was drawn up but did not proceed. Others mooted the case for a universal pension or at least higher Old Age Pensions. British experts visiting in 1936 advocated a compulsory national insurance scheme and for a period the Labour Minister of Finance, Walter Nash, championed the idea and had officials develop a proposed scheme.
However, as in 1882 and 1927, the national insurance proposal did not go ahead. More dramatically, the Social Security Act 1938 installed a two-tier public pension system that was also to last for nearly four decades.
The 1970s - renewed debate
By the 1970s public pension policy had moved back to the top of the political agenda. Three major changes took place:
1. In 1972 the Royal Commission on Social Security recommended higher real pension levels, with parallel proposals for increased rates for other benefits. Pensioners received a boost in the real rates of Age Benefit and Universal Superannuation - by 1976 the Age Benefit for a couple had risen to over 72 percent of net ordinary time wages. However, these changes represented increased generosity within the existing system; the basic two-tier pension structure itself did not change.
2. In 1975 the third Labour Government set up a compulsory contributory superannuation scheme. Combined contribution rates for employees and employers were to be phased up to 8 percent of earnings, funding individual contributions-related pensions at retirement. The contributory scheme was short-lived and repealed by the newly elected National Government in 1976.
3. In place of the contributory pension, the Government announced a revised National Superannuation scheme for a taxable universal pension at age 60, effective from 1977. The new scheme meant the pension for a couple was set at 80 percent of the average wage by 1978, and for a single person at 60 percent of the married pension. Only 10 years of residence in New Zealand were required to qualify, and there were no income or asset tests. There was no requirement to be actually retired to claim the pension.
And now look where we are......
So what would it be like if NZ Super gets to being nationally unaffordable?
1. Some people would not bat an eyelid- maybe 20-30% of the population who have enough self provision for their future
2. Some would need to work on at at least some level for the remainder of their natural life
3. Some, maybe 30-40% would need to be supported by the State fully for the rest of their natural life from a point of entitlement that is actuarily and economically feasible.
That is no different from 1938 or perhaps even before then... so back to the future perhaps?
UnitedFuture's flexi super model goes some way to moving to an entirely different form of superannuation but a more robust debate needs to ensue to take into account an otherwise gloomy future, before it is too late!