Three "tier" retirement income

One of the first actions of this government was to boost the level of New Zealand Superannuation - restoring the floor for NZ Superannuation from 60% to 65% of the average, ordinary time weekly wage.

The 65% came from the 1993 multi-party Accord which decided that a 65% wage floor was the minimum necessary to ensure all retired New Zealanders may continue to enjoy a reasonable level of participation in and belonging to the community.

Since restoring the value of the pension, the government has introduced the New Zealand Superannuation Bill. I see this as one of the Coalition Government's most significant initiatives. The Bill is designed to provide for the long life of a realistic, universal, flat rate, non-means tested NZ Super entitlement.

What can you expect from the state in your old age?
Security in retirement is the least that citizens should expect from their government in a civilised, developed country. It is also the most they should expect. It is not the function of the government to maintain in retirement, the incomes that people earned during their working life. That is up to the individual.

How do NZ retirement savings stack up?
Compared to other developed countries, New Zealand offers little in the way of incentives to encourage people to save for their retirement.

Saving through a structured, retirement focussed vehicle like a superannuation scheme or pension fund is taxed in exactly the same way as money in a savings account at your local bank. Indeed, people who earn less than $38,000 are taxed a higher rate for their superannuation savings than they were taxed for their income.

So it is not surprising that many people tend to save in ways that gives them ready access to their money or more options for using it: i.e.: term deposits rather than pension plans.

New Zealanders also tend to look for options where their returns are not taxed - like buying second houses where there is no capital gains tax.

This all means that as a country our savings rates are low and also that the form those savings take is not very efficient from the point of view of the wider economy.

The three "tiers"
The standard international terminology is to see retirement income being based on three "tiers":

1. universal, government funded pensions
2. income derived from employment based superannuation schemes
3. personal savings

1st Tier Government funded pensions
The Labour Alliance Government has a very clear and non negotiable policy on 1st tier retirement income:

• A government funded, universal, flat rate, non-means tested NZ superannuation entitlement.

2nd Tier Employment based super schemes
Whether we like it or not, the days of employment based superannuation schemes are disappearing.

There are a number of reasons for this:

• nowadays people change jobs much more frequently than in the past. The concept of a 'job for life' is foreign to the younger generation. It gets too expensive to switch pension plans, or to maintain a large number of small schemes each built up with a different employer.
• As union membership and the coverage of large collective contracts have reduced, there are fewer opportunities to negotiate pension schemes as part of an employment package.
• there is growing acceptance, by both employers and employees, of the concept of a "total remuneration package", so workers choose how to spend or invest their own money.
• the focus on cost cutting has seen employers axe the pension subsidy as an avoidable extra
• there is no tax advantages for a worker to save with an employer based super scheme, indeed some workers find that their savings are taxed at a higher rate than the same money received as a wage.

3rd Tier Personal Savings
In New Zealand there is virtually no distinction between the 2nd and 3rd tiers of provision for retirement income.

The government can't force people to save for their retirement but it can encourage them to do so by aligning the tax system with appropriate incentives to save. But,

• incentives must not be so fiscally expensive that encouraging private savings crowds out other public benefit spending programmes (including health services to the elderly);

• incentives must actually add to the level and rate of savings, not just a re-jig of current savings in order to get new tax advantages.

Taxing Jargon Existing tax arrangements for superannuation schemes are referred to as TTE - Taxed, Taxed, Exempt T - contributions to super funds are out of TAXED income T - the earnings of super funds are TAXED E - when pensions are paid out they are EXEMPT from tax. We are thinking about setting up a new, parallel system that people could opt into if they wanted - TEt - Taxed, Exempt, (partially) taxed T - contributions to super funds are out of TAXED income E - earnings from the fund are EXEMPT from tax t - at the end of the life of the scheme, the elements of pensions that represent the withdrawal of the already taxed capital contribution would be EXEMPT but the portion representing the tax exempt earnings of the fund would be TAXED (hence the little "t") Q. What's the difference between TTE and TEt? A. In a nutshell, under TTE, tax is collected early. Under TEt, some tax is collected now but some is deferred until the pension is paid out. Q. What if I already have a super scheme? A. Most people with reasonably mature TTE super schemes are close to getting the tax exempt pension so they would clearly not want to change. Also, existing, tax exempt pensions being received by those already retired will not be affected in any way whatsoever.

Our elderly have the right to live with dignity and respect. But we need to act now to secure our future. The debate on 2nd and 3rd tier retirement provisions is only just getting underway in New Zealand and I welcome your contributions to this important issue.