A Presentation for the Singapore Central Provident Fund Dr Brian McCulloch Strategy Unit 30 August 2006 The Treasury
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NZ has a multi-pillared retirement income framework. simple and efficient fits World Bank prescription has political consensus has room to evolve World Bank Pillars 0. Basic social pension 1. Public pension plan 2. Mandated personal 3. Voluntary personal 4. Informal support, social programs, other individual financial and nonfinancial assets New Zealand New Zealand Superannuation Private Schemes, SSRSS, KiwiSaver Health care, disability support, long-term residential care, financial assets, home ownership, student loans The Treasury -- 3
New Zealand Superannuation provides a basic public pension. Universal benefit Paid to all residents over age 65 A married couple receives 65% of the national average wage (32.5% each) Indexed annually No income test or means test Not related to past earnings history Not a contributory scheme Fortnightly payments (as at 1 April 2006) Single, living alone Single, living with others Married or civil union couple (when both partners qualify) Married or civil union couple (when only 1 partner qualifies) Before tax $640 $589 $486 each $462 After tax $528 $488 $406 each $387 [Fortnight = 2 weeks] [NZD1.00 SGD1.00] The Treasury -- 4
Population level and structure will change significantly over the next few decades 6 5 4 Total population Projection 85 and over 65-84 Millions 3 2 15-64 1 0 0-14 1940 1960 1980 2000 2020 2040 2060 2080 2100 A larger proportion of elderly, especially older elderly. Some unexpected longevity people underestimating how long they live. People available for work for longer and/or longer in retirement/semiretirement. There will be changing demands on Crown finances. The Treasury -- 5
Most countries will experience ageing populations over the next few decades. 35% 30% Percentage 65 and Older 25% 20% 15% 10% New Zealand 5% Singapore 0% 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 The Treasury -- 6
The cost of New Zealand Superannuation is set to rise significantly. 10 Projection 8 % of GDP 6 4 2 0 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 The Treasury -- 7
New Zealand Superannuation Fund Policy Background Seek a stronger Crown Balance Sheet to cushion the impact on Crown finances and Public Debt is already at relatively low levels, so build up a fund of Crown-owned financial assets. Also a diversification benefit of broadening the Crown financial portfolio across capital markets. But need good governance arrangements to avoid repeating the international record of poor financial performance of public funds. The Treasury -- 8
Capital contributions to the Fund smooth over time the Budget effect of the increase in NZS. 9% Percentage of Nominal GDP 8% 7% 6% 5% 4% 3% 2% 1% Net NZS Expenditure Capital Contribution Plus Net NZS Expenditure 0% 2005 2015 2025 2035 2045 2055 2065 2075 2085 2095 Year ended 30 June The Treasury -- 9
NZ has a multi-pillared retirement income framework simple and efficient fits World Bank prescription has political consensus has room to evolve World Bank Pillars 0. Basic social pension 1. Public pension plan 2. Mandated personal 3. Voluntary personal 4. Informal support, social programs, other individual financial and nonfinancial assets New Zealand New Zealand Superannuation Private Schemes, SSRSS, KiwiSaver Health care, disability support, long-term residential care, financial assets, home ownership, student loans The Treasury -- 10
According to flow measures, household savings are low relative to other countries, and chronically negative $b 12 10 8 6 4 2 0-2 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005-4 -6-8 -10 United Kingdom United States Australia New Zealand The Treasury -- 11
but stock measures suggest that wealth has increased, even after allowing for house price increases. 600 500 400 $ billion 300 200 Removal of house prices 100 0 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005-100 Net Worth Adjusted Net Worth excluding house price effects The Treasury -- 12
Average household wealth levels are within the range of those of other countries $ (000) 350 300 250 200 150 100 50 0 Canada Finland Italy Sweden US NZ (couples) NZ (individuals) Australia The Treasury -- 13
but retirement wealth varies significantly across the population. 2,800,000 2,400,000 2,000,000 1,600,000 1,200,000 800,000 400,000 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Wealth Ventile Housing Wealth Financial Wealth Pension Wealth NZ Superannuation Total Net Wealth of Couples aged 56-64 by wealth ventiles (2001 Household Savings Survey) The Treasury -- 14
What are the policy implications? 8-10 5-7 Upper income deciles: More than adequate wealth to sustain retirement consumption as a rule - not a focus of policy. Middle income deciles: Average levels of wealth Ok but wide variation. Scope for higher saving. KiwiSaver is likely to self-select to this group. 1-4 Lower income deciles: New Zealand Superannuation will meet their main retirement income needs. Limited scope for any significant change in saving rates. The Treasury -- 15
What is KiwiSaver? A voluntary work-based savings scheme. Announced in Budget 2005 as part of an ongoing package of initiatives to increase individual savings and support New Zealanders in retirement. KiwiSaver s purpose is to encourage a longterm savings habit and asset accumulation to improve financial well-being, particularly for retirement. The Treasury -- 16
What are the underlying drivers of KiwiSaver? Creating a long term saving habit Encourages saving by making it easy Immediate benefit to join Simple to join, rules of thumb Safe, secure with effective oversight Avoiding constant temptation to spend Deduction from pay through Inland Revenue Lock in until age 65 Home or retirement saving accommodated The Treasury -- 17
What are the key features of KiwiSaver? Work-based savings scheme Voluntary participation (opt out) Defined contribution Private sector providers Payroll deductions through Inland Revenue Government up-front contribution and fee subsidy Locked-in until eligible for NZS (age 65) Access for first-home ownership To be implemented in 2007 25% of workforce assumed to be enrolled by 2012 The Treasury -- 18
Why is KiwiSaver based on savings through the workplace? Allows deductions for contributions to be made at source. Avoids temptation to spend. Obtains benefits from economies of scale in administration in conjunction with income tax collection. Reaches a high proportion of the population who are able to save. The Treasury -- 19
Who participates in KiwiSaver? New employees are enrolled automatically. The need to actively opt out uses human inertia to encourage participation. Existing employees and non-employed can sign up, either through their employer or directly with a provider. Applies to all New Zealand citizens and permanent residents below the age of eligibility for New Zealand Superannuation (65). The Treasury -- 20
Why isn t participation compulsory? Some people might be better off not contributing to KiwiSaver. Those who would be better to be repaying debt. Those who have other goals than passive saving for retirement (for example, building a business). Those on low incomes for whom New Zealand Superannuation may be adequate in retirement. Contribution holidays can be taken to temporarily suspend making contributions. Up to 5 years after a minimum membership of 12 months. The Treasury -- 21
What decisions to savers have to make? When joining: Can choose which scheme (and investment profile) to join [or be allocated to a default provider]. Can choose a contribution rate: 4% [the default] or 8%. While saving: Can transfer between schemes. Can take a contribution holiday. Can make a first home purchase withdrawal. The Treasury -- 22
How much are the contributions to KiwiSaver? Employees contribute 4% (the default) or 8% of their gross salary or wages through payroll deductions. Employers can also make contributions. These count toward the 4% or 8%. Tax exempt up to a cap. Employees can make additional contributions direct to providers. The Treasury -- 23
What can KiwiSaver balances be withdrawn for? At age 65, the full balance can be withdrawn. One-off withdrawal for first home purchase. Under certain circumstances for financial hardship or serious illness. The Treasury -- 24
Will KiwiSavers money be protected? KiwiSaver schemes will be run by trust deeds (like existing registered superannuation schemes). Schemes must meet the requirements of the KiwiSaver Act and be approved by the Government Actuary. Regulated as for other superannuation products. No government guarantee of scheme balances. The Treasury -- 25
What support does the Government provide to KiwiSaver? Financial A kick-start contribution of $1,000 to new accounts. An annual contribution toward members fees. Targeted assistance to individuals buying a first home. Tax exemption for employer contributions up to a cap. Administrative Contributions are collected and aggregated through the PAYE tax collection system. The Government appoints default providers and negotiates their fees. BUT the financial returns of schemes are not government guaranteed. The Treasury -- 26
How will KiwiSaver affect employers? KiwiSaver has been designed to minimize compliance costs by using the existing PAYE tax collection processes. Employers will be required to: Provide information packs (prepared by IRD) to all employees. Notify IRD of new employees details Deduct contributions from payroll and remit to IRD. Employers can: Nominate a provider for their employees for when employees do not choose their own. Make voluntary employer contributions Apply for exemption from automatic enrolment if their existing pension scheme meets certain requirements. Apply to convert their existing pension scheme to a KiwiSaver scheme. Employers are not liable as a scheme advisor or promoter. (Unless they go further and provide specific advice.) The Treasury -- 27
What is the role of the Inland Revenue Department in KiwiSaver? Inland Revenue is the central administrator: Providing information about KiwiSaver to employers for distribution to employees Administering the opt-out process Receiving contributions from employers and others and on-paying these to providers (with interest) Administering the contribution holiday Paying up-front $1000 contribution to each new KiwiSaver account Allocation of default schemes to employees The Treasury -- 28
What are the requirements on KiwiSaver providers? Requirements for all KiwiSaver providers: Comply with the securities legislation and the Superannuation Schemes Act Comply with the KiwiSaver Act Register with the Government Actuary Entry requirements for registration Ongoing Monitoring by Government Actuary and Trustee Requirements for KiwiSaver default Providers: Open and Competitive tender to appoint Default Providers Further Requirements for Default Providers The Treasury -- 29
KiwiSaver Enrolment Process Send default investment statement Saver Information pack Employee details Employer Information packs Employee details Central Administrator (IRD) Allocate to fund Fund Providers Active opt-out (weeks 2 to 8) The Treasury -- 30
KiwiSaver Contribution Process Saver Employer Contributions by employer Contributions deducted from wages Annual contribution advice Central Administrator (IRD) Kickstart and fee contributions Transfer to fund Investment return advice Fund Providers Government Contributions directly to provider (optional) The Treasury -- 31
What is the progress of implementation of KiwiSaver? Select Committee has considered the draft legislation and reported back to Parliament last week. Currently going through the final legislative processes before becoming law. Implementation was intended to be by 1 April 2007, but now likely to be 1 July 2007. A competitive tender process to select default providers has been initiated but will not be completed until the legislation is passed. The Treasury -- 32
Further information on KiwiSaver Inland Revenue Department (Central Administrator) www.ird.govt.nz/kiwisaver/ The Treasury (Overall Policy) www.treasury.govt.nz/kiwisaver/ Ministry of Economic Development (Provider Selection and Regulation) www.med.govt.nz/kiwisaver/ The Treasury -- 33
Dr Brian McCulloch Director New Zealand Treasury brian.mcculloch@treasury.govt.nz The Treasury -- 34