Early Superannuation has viable alternatives

Peter Dunne

Peter Dunne

Wellington, April 7, 2022

The call by Te Pāti Maori Co-Leader Rawiri Waititi to pay Māori a pension from the age of 57 should not be dismissed out of hand.

He is right to draw attention to the fact that on average Māori die earlier, and therefore have less time to enjoy a quality retirement. In terms of equity, he also has a point, given that the New Zealand Superannuation Scheme is a taxpayer-funded, “pay as you go” scheme, meaning that Māori who do not live as long in retirement are effectively short-changed on the taxpayer contribution they have made over their working years.

A similar argument can also be made in respect of other groups, like manual workers for example, who on average do not enjoy the same post-65 life span as others. However, the problem with setting a blanket age limit – like Waititi’s suggestion of 57 for Māori, or 65 for the general population for that matter – is that not everyone’s circumstances are the same. So, what would be a decided benefit for some, would have little impact on others and would therefore not be a particularly helpful or well-targeted intervention.

But that does not detract from the relevance of Waititi’s call or mean it should just be swept under the carpet as too difficult to address. Fortunately, there is another way of resolving the problem he has raised.

Variable Superannuation payments

Some years ago, I suggested the concept of variable New Zealand Superannuation arrangements or FlexiSuper as it became known. It was designed to address fairly the issues Waititi is concerned about today, by giving people choices over when they took up New Zealand Superannuation.

Under FlexiSuper, a person would have the option of choosing to receive New Zealand Superannuation from the age of 60 at a lower than the normal rate. In practical terms, that would mean about 66% for life of the rate payable to those who chose to wait until 65 to take up their entitlement. For those with a likely shorter life span, this would mean they would be able to choose to collect a reasonable pension from the age of 60 for whatever years are left to them, whereas currently they are entitled to nothing until and unless they reach 65. Under FlexiSuper, someone choosing not to uplift New Zealand Superannuation until the age of 70 or above would receive a higher rate.

Somewhat Cost-Neutral

FlexiSuper could therefore be close to cost-neutral – those opting for 60 would be effectively offset by those deferring until age 70 – which would peg current superannuation expenditure at roughly current levels. This would make New Zealand Superannuation not only financially sustainable into the future but would also mean that there would be no need to lift the standard age of entitlement beyond 65.

FlexiSuper would not be means-tested, nor affect any private pension arrangements or eligibility for KiwiSaver pay-outs at the age of 65 for those who were members of that scheme. Its great advantage is that it gives people the opportunity to plan their retirement lifestyles according to their needs and circumstances, without the arbitrary intervention of the state.

Consistent with confidence and supply agreement provisions, the National-led government released a discussion paper on FlexiSuper in 2013 and invited public submissions. These showed strong support for and understanding of the idea, and separate polling at the same time showed that FlexiSuper was nearly twice as popular with the public as other options like raising the age of entitlement or bringing back means or asset-testing.

Unfortunately, National declined to go any further. It was worried about the impact a choice-based scheme might have on universality, especially for those who chose the 60 option but lived on well after the age of 65. In any case, National was more interested in reducing the overall cost of New Zealand Superannuation than notions of flexibility or equity.

Its answer to the affordability question was to propose a gradual upwards shift over the twenty years to 2037 in the eligibility age to 67. But that did nothing to address the plight of the under 65s seeking to leave the workforce early.

Of the other parties, only Te Pāti Māori showed any interest in the idea at that time, for pretty much the same reasons as Waititi is advancing today.

Rising Maori population

But the issue is not going to go away. Demographic projections suggest the proportion of Māori and Pasifika will rise steadily to almost 30% of the population by 2038. Because the mortality gap with Pakeha looks likely to remain about the same as now, the problem Waititi is drawing attention to will be escalated – more Māori and Pasifika coming to the end of their working lives but still dying earlier than Pakeha.

At the same time, as the population reaches six million or more by 2040, the sustainability of the present New Zealand Superannuation Scheme will be severely tested.

Lifespans are expected to be increasing steadily (the gap with Māori and Pasifika notwithstanding) meaning a higher proportion of New Zealanders than ever before will be eligible for New Zealand Superannuation.

Labour now seems to be joining National in acknowledging that this may mean an upwards adjustment of the age of entitlement at some future point to maintain universal superannuation. While gradually raising the age of entitlement seems standard practice among OECD countries, it is still an overly heavy reliance on a single tool that will do little to address some of the wider social and demographic issues now emerging. Those in their 30s and 40s now are unlikely to appreciate being told that while they will continue to “pay as you go,” their future entitlements are likely to be arbitrarily capped by the state.

In planning their futures, people want to have some control over the circumstances they are likely to face. This applies whether they be Māori whom Waititi is properly concerned about, Pasifika, those approaching retirement, or those early in or near the middle of their working careers. FlexiSuper could be a step towards giving all of them greater flexibility and options in planning for their retirement. It therefore deserves fresh consideration.

Rawiri Waititi’s call provides a timely opportunity to rekindle that discussion.

Peter Dunne was a Minister of the Crown under the Labour and National-led governments from December 1999 to September 2017. He lives in Wellington.

 

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