Savings group proposes national 'tithing' to fund pensions
BUSINESSDESK: A major new report on the pension system proposes New Zealanders gradually lifting their savings to 10% of annual income, and allowing the age of entitlement for universal state pensions to move up as life expectancy increases.
The equivalent of the biblical system of tithing, where 10% of income is set aside for the church, the proposal from the Financial Services Council would allow people to start tapping their pension savings at the age of 65, and to buy insurance against premature death, loss of income through illness or disability and through investment failures close to retirement age.
With almost half the population forecast to be living to the age of 100 by the 2060s, the report says the focus for pension reform should be aimed squarely at New Zealanders who are under the age of 40 today.
The report is the first from the FSC after the amalgamation of two financial services lobby groups and represents most of the New Zealand investment, savings and banking sector, which have struggled for years with low private savings rates outside of residential property investment.
Under the proposal, New Zealanders would be "encouraged" - the report deliberately avoids a position on making retirement savings compulsory - to raise their superannuation savings rate to 10% of annual income, with individuals and their employers paying 5% each.
KiwiSaver contributions are moving to 6% of annual income, paid 50/50 by employers and employees.
The result would be to more than double retirement income for today's under 40 year olds by the time they reached retirement age, the council's chairwoman, former National Party Prime Minister Dame Jenny Shipley, said.
The report calculates that a man on a median lifetime income turning 65 in 2061, after saving for 40 years, would receive a NZ Super and KiwiSaver Plus income of $42,016 a year, an extra $281 a week in retirement above NZ Super. For women it would deliver $32,897, an extra $106 a week.
The FSC suggests this personal "KiwiSaver Plus" retirement plan, if used from the age of 65 irrespective of the entitlement age for the universal pension, would allow the purchase of a fixed term private pension equivalent to today's New Zealand Superannuation.
"It would fill any gap between 65 and a time in the future when the age at which people qualify for NZ Super is likely to be extended as longevity increases. As the saver’s own pension, the fixed-term pension could be taken to anywhere in the world," the report says.
Lump sum payouts would also be permitted.
The report earned early caution from Retirement Commissioner Diana Crossan, who told Fairfax Media that many New Zealanders would struggle to set aside 10% of their income because the country's wages are "so low".
The proposal says the government should top up KiwiSaver Plus accounts of people who had spent long periods out of the workforce, such as women raising families, and people who had earned "very low incomes" throughout their working lives.
The paper comes as the Labour and Green parties support a rise in the pension entitlement age to 67, while Prime Minister John Key is sticking to the current age of 65 to keep a political promise.
The report projects that 52% of women and 44% of men will be living to 100 years of age by 2061, and notes life expectancy beyond 65 has nearly doubled in the last century.
"This longevity increase would require a 28% increase in current tax rates if the age of eligibility for NZ Super remains the same," the FSC paper says.
"At the same time, New Zealanders feel they need about $300 more a week than NZ Super is currently paying in order to live comfortably in retirement."
“We urge all stakeholders and political leaders current and future to see this as both an opportunity and an obligation: we hope new partnerships can emerge where public policy, private enterprise and personal endeavour converge and conclusions can be drawn," said Shipley.
The report suggests the shift to contributions equivalent to 10% of income could happen gradually, at the rate of 0.5% annually.
"For people currently not contributing to KiwiSaver, the FSC suggests starting contributions from employers and employees at only 0.5% in the first year and increasing that amount each year."
Under such a proposal, the rate for people already contributing to KiwiSaver would not increase until the standard contribution rate was higher than their current rate of contribution.