What are the next steps?

KiwiSaver and the ageing population: What are the next steps? Susan St John RPRC Business School The University of Auckland

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 principlesbased approach? A presentation from the Retirement Policy & Research Centre 2

Context: 2010-2030-2050 Fiscal pressures More old and more old old NZS more generous Long-term care financing problems Distributional pressures KiwiSaver and social equity Implications for future of NZS A presentation from the Retirement Policy & Research Centre

Age dependency ratio doubles Treasury 2006 A presentation from the Retirement Policy & Research Centre 4

Context: Coming ready or not: More old and more old old Stats Stats NZ 2007 A presentation from the Retirement Policy & Research Centre 5

Healthier young group 65-74 numbers double by 2030 2006 276,000 2031 559,000 2051 548,000 A presentation from the Retirement Policy & Research Centre 6

Over 85 numbers grow by factor of 6 Over 90 by a factor of 8.5 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 A presentation from the Retirement Policy & Research Centre 2006 2011 2016 2021 2026 2031 2036 2041 2046 2051 2056 2061 85+ 90+

How low does mortality go 85+? Stats NZ 2007 A presentation from the Retirement Policy & Research Centre 8

Increased health costs Ageing New Zealand and Health and Disability Services Demand Projections and Workforce Implications, 2001 2021 NZIER and MoH Discussion Document December 2004 MOH A presentation from the Retirement Policy & Research Centre

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 A presentation from the Retirement Policy & Research Centre

Health resource implications Acute and sub-acute hospitalisations 16,000 14,000 12,000 2001 2011 2021 10,000 8,000 6,000 4,000 2,000 0 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90+ A presentation from the Retirement Policy & Research Centre

Expensive chronic disease E.g. Diabetes 20,000 18,000 16,000 2001 2011 2021 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 0-4 5-9 10-14 15-19 20-24 25-29.. 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90+ Source: NZIER MoH 2004 A presentation from the Retirement Policy & Research Centre

Long-term care 2001-2021- demand doubles.. 2051???? 35,000 30,000 25,000 20,000 15,000 2001 2011 2021 10,000 5,000 0 50-64 65-69 70-74 75-79 80-84 85-89 90+ NZIER MoH 2004 A presentation from the Retirement Policy & Research Centre

Fiscal pressures emerge from: Demographic shifts Policy changes Long term care New Zealand Superannuation Tax treatment of investment A presentation from the Retirement Policy & Research Centre

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 $180,000 or $180,000 total A presentation from the Retirement Policy & Research Centre 15

The cap reduces private contribution Subsidy Subsidy Top-up subsidy DHB Contract price for rest homes Other income Other Income State pension State pension State pension State pension only Some other income High income A presentation from the Retirement Policy & Research Centre 16

More for the over 65s New Zealand Superannuation 2007 2012 $6.8 Billion $9.2 Billion 1. More over 65 2. Net average wage rises 3. Expect fiscal pressure to come from other social welfare expenditure PIE investments 1. Allow tax on investment income at 19.5 or 30% 2. May allow most gross super to be effectively taxed at only 12.5% A presentation from the Retirement Policy & Research Centre

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 A presentation from the Retirement Policy & Research Centre 18

We might expect policies should: Prevent old age poverty Allow participation and belonging Facilitate income smoothing Be fair as between Workers and retired Men and women Not add to growing wealth and income disparity Be as simple and transparent as possible A presentation from the Retirement Policy & Research Centre 19

Have policies prevented poverty? MSD 2007 A presentation from the Retirement Policy & Research Centre 20

NZ Super a success story Living standards by age - 2004 (MSD 2006) A presentation from the Retirement Policy & Research Centre 21

Are policies fair? Pre KiwiSaver NZS : Flat rate same for everyone No paid or work-based contributions needed Good for women Taxable Same age for men and women No hidden tax incentives that tend to be: Pro rich Pro male Costly NZS equaliser of incomes A presentation from the Retirement Policy & Research Centre 22

The simplest and most cost effective retirement scheme in the world? Public provision New Zealand Superannuation New Zealand Superannuation Fund Private provision Voluntary unsubsidised Saving for retirement taxed like saving in a bank A presentation from the Retirement Policy & Research Centre 23

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 A presentation from the Retirement Policy & Research Centre 24

What have reviews said? Hard won consensus Brash Committee 1988 Task Force 1992 Accord 1993 Periodic Report Group 1997 Super Taskforce 2000 McLeod Review 2001 Periodic Report Group 2003 Retirement Commission Review 2007 A presentation from the Retirement Policy & Research Centre 25

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 A presentation from the Retirement Policy & Research Centre 26

Enter KiwiSaver - 2005 Budget Portable Extends workplace saving options $1,000 sweetener Lump sum Progressive Limited Cabinet papers 2006 Don t go there with anything else! The slippery slide begins as advice ignored A presentation from the Retirement Policy & Research Centre 27

2007 KiwiSaver is being enhanced $20 per week $20 per week per employee 4% or 8% 4% (phased in) Cullen, May 2007 A presentation from the Retirement Policy & Research Centre 28

KiwiSaver subsidies for some instead of tax cuts for all $1000 sweetener - one-off Fees subsidy $40 p.a. Matching tax credit of $20 a week for member contributions to KiwiSaver Matching employer contributions made compulsory (for members) rising to 4% by 2011 Tax credit up to $20 paid to employers Matching employer contributions to 4% taxfree PIE tax rate 19.5% or 30% First home buyer subsidy $3-5,000 A presentation from the Retirement Policy & Research Centre 29

2007 Review of Retirement Income policy Raised questions about principle, process and fairness A presentation from the Retirement Policy & Research Centre 30

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 A presentation from the Retirement Policy & Research Centre 31

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 A presentation from the Retirement Policy & Research Centre 32

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 inform ation 14,920 2% 758,860 100% IRD 2008 A presentation from the Retirement Policy & Research Centre

Equity problems Two tier retirement Young retired with and without KiwiSaver Old 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 A presentation from the Retirement Policy & Research Centre 34

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. A presentation from the Retirement Policy & Research Centre

RPRC - Hypothetical projections: 2% net real return 0.5 AWE, AWE, 2AWE, 3AWE - from age 40 NPV KiwiSaver tax subsidies $NPV $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 0 0.5AWE AWE 2AWE 3AWE A presentation from the Retirement Policy & Research Centre

Ethnicity, gender: Maori and Pacific Island Lower incomes Women Far lower incomes on average Median $20,085 vs $33,000 male (HES 2007) Lower workforce participation at all ages Less income from paid employment Australian experience shows the way Average super payout 2006 $130,000 for men, and $45,000 for women ASFA A presentation from the Retirement Policy & Research Centre

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 A presentation from the Retirement Policy & Research Centre

KiwiSaver Tax- funded lump-sum payouts NPV of New Zealand Superannuation = $170,000 - the same for all (assuming average mortality) NPV KiwiSaver tax funded subsidies in 20 years may vary from $0 - $150,000+ A presentation from the Retirement Policy & Research Centre

Inequity made worse by: Employment-related subsidies ESCT PIE rates Meanwhile, those not in KiwiSaver: No tax breaks Pay higher taxes Get lower wage rises A presentation from the Retirement Policy & Research Centre

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 9 th, 2007) KiwiSaver is likely to become compulsory if the sign-up rate so far is anything to go by. Peter Dunne (NZH Oct 27 th 2007) A presentation from the Retirement Policy & Research Centre 41

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). A presentation from the Retirement Policy & Research Centre 42

Is the solution to revisit KiwiSaver? NZS is worth preserving KiwiSaver interventions have raised cost of the old Total cost may not be sustainable The size and shape of KiwiSaver needs revisiting A presentation from the Retirement Policy & Research Centre 43

Need to ask the question: Why? Why tie subsidies to employment? No advantage to employer Remuneration negotiation problems Double dipping problems Why give children KiwiSaver accounts? They need access to their savings Different 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? A presentation from the Retirement Policy & Research Centre 44

What is the purpose of the ESCT exemption? NPV KS tax-funded subsidies $NPV $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 NPV KS subsidies NPV ESCT 0 0.5AWE AWE 2AWE 3AWE A presentation from the Retirement Policy & Research Centre 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 savings Any subsidies given without regard to employment status Remove KiwiSaver from employment ESCT Employer contribution Employer tax credit Tax all income at MTR of investors A presentation from the Retirement Policy & Research Centre 46

Possible visions of the future At age 40 every NZ citizen is given a KiwiSaver account with a KickStart Encourage regular contributions with modest subsidy from state not employer Enable some critical thinking around decumulation with possible state subsidies to achieve social objectives Return employment-based superannuation to employers A presentation from the Retirement Policy & Research Centre 47