KiwiSaver and the ageing population - University of...

KiwiSaver and the ageing population:

What are the next steps?

Susan St JohnRPRCBusiness School The University of Auckland

A presentation from the Retirement Policy & Research Centre 2

KiwiSaver is here to stay

But how stable and sensible are our policies looking out to 2050?

Are there unintended consequences, especially distributional?

How can we move forward using a principles-based approach?

A presentation from the Retirement Policy & Research Centre

Context: 2010-2030-2050

Fiscal pressuresMore old and more ‘old’ oldNZS more generousLong-term care financing problems

Distributional pressuresKiwiSaver and social equity Implications for future of NZS


Age dependency ratio doubles

Treasury 2006


Context: Coming ready or not: More old and more ‘old’ old

Stats NZ 2007Stats


Healthier young group 65-74 numbers double by 2030

2006 276,000

2031 559,000

2051 548,000


Over 85 numbers grow by factor of 6Over 90 by a factor of 8.5

050,000

100,000150,000200,000250,000300,000350,000400,000

2006

2011

2016

2021

2026

2031

2036

2041

2046

2051

2056

2061

85+

90+


How low does mortality go 85+?

Stats NZ 2007


Increased health costs

Ageing New Zealand and Health and Disability ServicesDemand Projections and Workforce Implications, 2001–2021

NZIER and MoH

Discussion DocumentDecember 2004MOH


Costs per capita escalate with age

Age group Expenditure per capita ($ per annum)

As % of expenditure at 40–44 ($1050)

40–44 1,050 100 60–64 2,300 219 65–69 3,150 300 70–74 4,300 410 75–79 6,150 586 80–84 8,400 800 85+ 13,600 1,295


Health resource implications

Acute and sub-acute hospitalisations

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

0-4

5-9

10-1

4

15-1

9

20-2

4

25-2

9

30-3

4

35-3

9

40-4

4

45-4

9

50-5

4

55-5

9

60-6

4

65-6

9

70-7

4

75-7

9

80-8

4

85-8

9

90+

2001 2011 2021


Expensive chronic disease

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,0000-

4

5-9

10-1

4

15-1

9

20-2

4

25-2

9

30-3

4

35-3

9

40-4

4

45-4

9

50-5

4

55-5

9

60-6

4

65-6

9

70-7

4

75-7

9

80-8

4

85-8

9

90+

2001 2011 2021

..

E.g. Diabetes

Source: NZIER MoH 2004


Long-term care 2001-2021- demand doubles.. 2051????

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

50-6

4

65-6

9

70-7

4

75-7

9

80-8

4

85-8

9

90+

200120112021

NZIER MoH 2004


Fiscal pressures emerge from:

Demographic shifts

Policy changesLong term care New Zealand SuperannuationTax treatment of investment


The asset test liberalised The asset test liberalised

Years Single person

Married couple with one in care

Married couple,

both in care

Pre July 2005

$15,000 $45,000 +house $30,000

July 2008 $180,000 $75,000 + house etc

or$180,000 total

$180,000


Top-upsubsidy

Statepension

Subsidy

OtherIncome

Statepension only

High income

Statepension

Statepension

Otherincome

Subsidy

Some otherincome

The cap reduces private contributionThe cap reduces private contribution

DHBContractprice forrest homes


More for the More for the over 65sover 65s

2007 2012

$6.8 Billion $9.2 Billion

1. More over 652. Net average wage rises3. Expect fiscal pressure to come from other

social welfare expenditure PIE investments1. Allow tax on investment income at 19.5 or 30%2. May allow most gross super to be effectively

taxed at only 12.5%

New Zealand Superannuation


Role of retirement income policies?

To facilitate a division of the economic cake

Should retirement incomes policies also make the cake grow?

May be too big an ask


We might expect policies should:

Prevent old age povertyAllow participation and belongingFacilitate income smoothingBe fair as between

• Workers and retired • Men and women

Not add to growing wealth and income disparity Be as simple and transparent as possible


Have policies prevented poverty ?

MSD 2007


NZ Super a success storyLiving standards by age - 2004 (MSD 2006)


Are policies fair?

Pre KiwiSaverNZS : Flat rate same for everyoneNo paid or work-based contributions needed

Good for womenTaxableSame age for men and womenNo hidden tax incentives that tend to be:

• Pro rich• Pro male• Costly

NZS equaliser of incomes


The simplest and most cost effective retirement scheme in the world?

Public provisionNew Zealand Superannuation

• New Zealand Superannuation FundPrivate provision

Voluntary unsubsidised• Saving for retirement taxed

like saving in a bank


For twenty years OECD waxed lyrical

The level playing field

“After the radical reforms undertaken in the 1980s, the NZ tax system has long been regarded as one of the most efficient within the OECD.”

OECD 2007


What have reviews said?

Hard won consensus Brash Committee 1988Task Force 1992Accord 1993Periodic Report Group 1997Super Taskforce 2000McLeod Review 2001Periodic Report Group 2003Retirement Commission Review 2007


As late as 2002, Labour said:

“The government is not considering upfront tax incentives. These are likely to have to be very large - with fiscal costs running to many hundreds of millions of dollars a year - before they have any desirable effect on overall savings. Their abolition in the mid-1980s represented sensible tax policy on both equity and efficiency grounds.”

December Economic and Fiscal Update 2002


Enter KiwiSaver - 2005 Budget

Portable Extends workplace saving options$1,000 “sweetener”

Lump sumProgressiveLimited

Cabinet papers 2006Don’t go there with anything else!

The slippery slide begins as advice ignored


2007 … KiwiSaver is being enhanced

4% or 8%

$20 per week

$20 per week per employee

4% (phased in)

Cullen, May 2007


KiwiSaver subsidies for some …… instead of tax cuts for all

$1000 sweetener - one-offFees subsidy $40 p.a. Matching tax credit of $20 a week for member contributions to KiwiSaverMatching employer contributions made compulsory (for members) rising to 4% by 2011Tax credit up to $20 paid to employersMatching employer contributions to 4% tax-freePIE tax rate 19.5% or 30%First home buyer subsidy $3-5,000


2007 Review of Retirement Income policy

Raised questions about principle, process and fairness


2007 Review

“KiwiSaver’s generous incentives will compound the gap in retirement income between those who have saved and those who have not, threatening the equity and fairness of current retirement income policy”

Review of Retirement Income Policy, p 4


Recommendations

That Inland Revenue fulfils and extends its plans beyond 2013 to evaluate KiwiSaver on the outcomes from the policy, in particular, …what its distributional impact has been.

That these outcomes are examined by analysing the spread of take-up and the value of incentives received by different households: by income level, gender, ethnicity, age, whether disabled, and employment status. p11


Demographics of KiwiSaver enrolments –to 31 July 2008

Age range

Numbers enrolled

% of total

enrolled

numbers enrolled as % of

total in age range

0-17 90,722 13% 8.8%

18-24 120,934 16% 31.4%

25-34 117,653 16% 22.67%

35-44 130,333 17% 21.18%

45-54 134,839 18% 24.69%

55+ 141,430 19% 34.24%

No information

14,920 2%

758,860 100%

IRD 2008


Equity problems

Two tier retirement

Young retired with and without KiwiSaverOld poorer retired vs younger with KiwiSaver

Size of tax subsidy on retirement varies by:• Age of joining• Income• Gender• Ethnicity• Employment status• Net real returns


Analysis to date

John Gibson et al. (2008)

- examine the question of the distributional impact of KiwiSaver using data from their nationwide survey.

Maori, Pacific Islanders, women, low income and the less educated receive a smaller share of incentives than their population size would dictate.

“The ESCT exemption is perhaps the most overlooked element of the KiwiSaver incentives.”


RPRC - Hypothetical projections: 2% net realreturn 0.5 AWE, AWE, 2AWE, 3AWE - from age 40

NPV KiwiSaver tax subsidies

$0$20,000$40,000$60,000$80,000

$100,000$120,000$140,000$160,000

0 0.5AWE AWE 2AWE 3AWE

$N

PV


Ethnicity, gender:

Maori and Pacific IslandLower incomes

WomenFar lower incomes on averageMedian $20,085 vs $33,000 male (HES 2007)Lower workforce participation at all agesLess income from paid employment

Australian experience shows the wayAverage super payout 2006 $130,000 for men, and $45,000 for women

ASFA


How should we view the costs of KiwiSaver subsidies?

“Treasury has estimated that the cost of KiwiSaver incentives will exceed $2 billion a year by 2016, but has not estimated how the cost may grow beyond then.” 2007 Retirement Review

But the true economic cost is the extra consumption that KS subsidies facilitate, ie from 2012


KiwiSaver Tax- funded lump-sum payouts

NPV of New Zealand Superannuation = $170,000 - the same for all (assuming

average mortality)

NPV KiwiSaver tax –funded subsidiesin 20 years may vary from

$0 - $150,000+


Inequity made worse by:

Employment-related subsidiesESCTPIE rates

Meanwhile, those not in KiwiSaver:No tax breaksPay higher taxesGet lower wage rises


Is the solution to make KiwiSaver compulsory?

“If compulsion was to be introduced we would have to think about income testing New Zealand Super. That was just an awful phase in New Zealand's history."Michael Cullen (NZH, Nov 9th, 2007)

“KiwiSaver is likely to become compulsory if the sign-up rate so far is anything to go by.” Peter Dunne (NZH Oct 27th 2007)


Is the solution to means-test New Zealand Superannuation?

… fiscal strains .. are likely to appear in the long term as the New Zealand population ages. If trends do not change, these strains could mean that programmes like NZS may have to become less generous in the future (New Zealand Treasury, 2007).


Is the solution to revisit KiwiSaver?

43

NZS is worth preservingKiwiSaver interventions have raised cost of the oldTotal cost may not be sustainableThe size and shape of KiwiSaver needs revisiting


Need to ask the question: Why?

Why tie subsidies to employment?No advantage to employerRemuneration negotiation problemsDouble dipping problems

Why give children KiwiSaver accounts?They need access to their savingsDifferent take-up perpetrates inequities

Why give the largest tax-funded lump-sums on retirement to better off? To the smart?Why tax investment income less than earned income?

44


What is the purpose of the ESCT exemption?

NPV KS tax-funded subsidies

$0$20,000$40,000$60,000$80,000

$100,000$120,000$140,000$160,000

0 0.5AWE AWE 2AWE 3AWE

$NP

V

NPV KS subsidies

NPV ESCT

45


Return to principle

KiwiSaver to help facilitate retirement saving in as neutral an environment as possible:Let young people save as they can, when they can, with access to their savingsAny subsidies given without regard to employment status

Remove KiwiSaver from employment • ESCT• Employer contribution• Employer tax credit

Tax all income at MTR of investors46


Possible visions of the future

At age 40 every NZ citizen is given a KiwiSaver account with a KickStartEncourage regular contributions with modest subsidy from state not employer Enable some critical thinking around decumulation with possible state subsidies to achieve social objectivesReturn employment-based superannuation to employers

47

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