What are the next steps? Susan St John RPRC Business School The - - PowerPoint PPT Presentation

KiwiSaver and the ageing population:

What are the next steps?

Susan St John RPRC Business School The University of Auckland

A presentation from the Retirement Policy & Research Centre

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KiwiSa ve r is he re to sta y

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

Conte xt: 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

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Ag e de pe nde nc y ra tio double s

Treasury 2006

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Conte xt: Coming re a dy or not: More old a nd more ‘old’ old

Stats NZ 2007

Stats

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He a lthie r young g roup 65- 74 numbe rs double by 2030

2006 276,000 2031 559,000 2051 548,000

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Ove r 85 numbe rs g row by fa c tor of 6 Ove r 90 by a fa c tor of 8.5

50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 2 6 2 1 1 2 1 6 2 2 1 2 2 6 2 3 1 2 3 6 2 4 1 2 4 6 2 5 1 2 5 6 2 6 1 85+ 90+

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How low doe s morta lity g o 85+?

Stats NZ 2007

A presentation from the Retirement Policy & Research Centre

Inc re a se d he a lth c osts

Ageing New Zealand and Health and Disability Services Demand Projections and Workforce Implications, 2001–2021 NZIER and MoH Discussion Document December 2004 MOH

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Costs pe r c a pita e sc a la te with a g e

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

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He a lth re sourc e implic a tions

Acute and sub-acute hospitalisations

2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 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+ 2001 2011 2021

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E xpe nsive c hronic dise a se

2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 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+ 2001 2011 2021

.. E.g. Diabetes

Source: NZIER MoH 2004

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• ng - te rm c a re 2001- 2021- de ma nd

double s.. 2051? ? ? ?

5,000 10,000 15,000 20,000 25,000 30,000 35,000 50-64 65-69 70-74 75-79 80-84 85-89 90+ 2001 2011 2021

NZIER MoH 2004

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F isc a l pre ssure s e me rg e from:

Demographic shifts Policy changes

Long term care New Zealand Superannuation Tax treatment of investment

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T he a sse t te st libe ra lise d T he a sse t te st libe ra lise d

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

• r

$180,000 total $180,000

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Top-up subsidy State pension Subsidy Other Income State pension only High income State pension State pension Other income Subsidy Some other income

T he c a p re duc e s priva te c ontribution T he c a p re duc e s priva te c ontribution

DHB Contract price for rest homes

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More for the More for the ove r 65s

• ve r 65s

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% New Zealand Superannuation

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Role of re tire me nt inc ome polic ie s? To facilitate a division of the economic cake Should retirement incomes policies also make the cake grow? May be too big an ask

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We mig ht e xpe c t polic ie s 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

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Ha ve polic ie s pre ve nte d pove rty ?

MSD 2007

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NZ Supe r a suc c e ss story

Living standards by age - 2004 (MSD 2006)

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Are polic ie s fa ir?

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

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T he simple st a nd most c ost e ffe c tive re tire me nt sc he me 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

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F

• r twe nty ye a rs OE

CD wa xe d lyric a l

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

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Wha t ha ve re vie ws sa id?

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

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As la te a s 2002, L a bour sa id:

“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

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E nte r KiwiSa ve r - 2005 Budg e t

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

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2007 … KiwiSa ve r is be ing e nha nc e d

4% or 8% $20 per week $20 per week per employee 4% (phased in)

Cullen, May 2007

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KiwiSa ve r subsidie s for some … … inste a d of ta x c uts for a ll

$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% tax- free PIE tax rate 19.5% or 30% First home buyer subsidy $3-5,000

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2007 Re vie w of Re tire me nt Inc ome polic y Raised questions about principle, process and fairness

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2007 Re vie w

“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

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Re c omme nda tions

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

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De mog ra phic s of KiwiSa ve r e nrolme nts – 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

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E quity proble ms

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

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Ana lysis to da te

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

• verlooked element of the KiwiSaver incentives.”

A presentation from the Retirement Policy & Research Centre

RPRC - Hypothe tic a l proje c tions: 2% ne t re a l re turn 0.5 AWE , AWE , 2AWE , 3AWE

• from a g e 40

NPV KiwiSaver tax subsidies

$0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000

0.5AWE AWE 2AWE 3AWE

$NPV

A presentation from the Retirement Policy & Research Centre

E thnic ity, g e nde r:

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

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How should we vie w the c osts of KiwiSa ve r subsidie s?

“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

KiwiSa ve r T a x- funde d lump- sum pa youts

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+

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Ine quity ma de worse by:

Employment-related subsidies ESCT PIE rates Meanwhile, those not in KiwiSaver: No tax breaks Pay higher taxes Get lower wage rises

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Is the solution to ma ke KiwiSa ve r c ompulsory?

“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)

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Is the solution to me a ns- te st Ne w Ze a la nd Supe ra nnua tion?

… 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

Is the so lutio n to r e visit KiwiSave r ?

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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

Ne e d to a sk the que stion: 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

• n retirement to better off? To the smart?

Why tax investment income less than earned income?

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A presentation from the Retirement Policy & Research Centre

Wha t is the purpose of the E SCT e xe mption?

NPV KS tax-funded subsidies

$0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000

0.5AWE AWE 2AWE 3AWE

$NPV

NPV KS subsidies

NPV ESCT

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A presentation from the Retirement Policy & Research Centre

Re turn to princ iple

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

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A presentation from the Retirement Policy & Research Centre

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

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