Retirees facing lean future

Retirement Commissioner Diana Crossan says affordability of New Zealand Superannuation will be a key issue for her report to the Government next year on retirement income policy. Photo / Supplied

Kiwis will have to work longer and be paid less in retirement, Treasury has warned the Government in a sobering report about the fiscal state of the nation.

Soaring Crown debt and an ageing population mean the country cannot afford to maintain current New Zealand Superannuation (NZS) entitlement.

Treasury proposes increasing the age of eligibility to 67 from 2017 as well as indexing the entitlement to 1 per cent above inflation instead of the average wage - an effective payment drop.

Both Prime Minister John Key and Opposition finance spokesman David Cunliffe are promising to keep superannuation as it is, but Mark Brighouse, managing director of Brook Asset Management, says the current Government won't be the one that makes the decision.

"Reassurances are not a helpful message for New Zealanders in their 40s who have time to address their situation if they are given the facts."

Public debt will blow out to 223 per cent of gross domestic product (GDP) by 2050. By that time, the number of people over 65 will have grown 2 times, while those 85 and over will grow five-fold.

The shift to an ageing population will accelerate as the first baby boomers begin to retire and receive superannuation from 2011 - and then live more than another two decades on average.

That magnifies the major fiscal challenge facing Government: spending that is a lot higher than revenue.

The unprecedented demographic trends mean the ratio of people aged 65 and older relative to the working-age population aged 15 to 64 climbs from 19 per cent in 2009 to 42 per cent in 2050.

There will be relatively fewer people to drive the economy and more people requiring government services and support. Part of the solution to both issues will be for people to continue working later in life.

Even so, many New Zealanders are unlikely to have the financial resources to provide the lifestyle they expect in retirement, Brighouse says, and Treasury's report shows they can't depend on the government.

A 2007 report by the Ministry of Social Development suggested older people generally have adequate incomes that provide them with a reasonable standard of living.

But Brighouse says that's because people born soon after the Depression who lived through the war years are frugal and self-sufficient, but boomers are used to different lifestyles. For them to drop to the superannuation income is a big adjustment.

Retirees need a nest egg equivalent to 20 times the difference between their estimated annual spending and their income from pensions or superannuation, he says.

Accumulating such substantial retirement assets requires setting aside about 10 per cent of their income every year of their working lives to enjoy the same lifestyle in retirement.

"It's a pity that KiwiSaver contributions are too low to achieve this and not all the workforce is enrolled," Brighouse says.

Retirement Commissioner Diana Crossan says affordability of New Zealand Superannuation will be a key issue for her report to the Government next year on retirement income policy.

She questions where the money to maintain the scheme unchanged into the future will come from.

"What I don't want is for government in the future to announce a sudden change. What I want is for us to do it now so New Zealanders know what it is. It's unfair for people to have something come too quickly upon them."

NZ universal super unique in OECD

New zealand's public pension system is unique in the OECD, particularly in its universality.

Income or asset testing is a feature of public pensions in most OECD countries such as Australia, Canada and Britain.

Many countries are lifting the qualification age beyond 65 years: Australia and Germany to 67; Britain to 68; and Denmark to 67.

Norway, Iceland and the US also have, or plan to have, pension ages above 65.

The Australian Government this year announced plans to raise the age for receiving the pension from 65 to 67 between 2017 and 2023, giving future superannuitants at least eight years to adjust saving and working patterns.

Denmark is the only country so far to pass law indexing the eligibility age to increases in life expectancy. This change takes effect with a long delay.

Inflation indexation from 2017 would cut the cost of superannuation to 5 per cent of GDP in 2050.

The payment would be about 23 per cent of the average wage, down from around 40 per cent now and about the same as universal pensions in OECD countries such as the US, Denmark and Germany (some are means-tested).

Budget buster

A quarter of government spending is currently spent on the 12 per cent of the population aged over 65.

Spending on New Zealand Superannuation is $7.7 billion this year.

Generally, a couple receive 66 per cent of the net national average wage currently $14,229 each pre-tax.

There are 522,000 people receiving superannuation now.

This will hit 1.3 million in 2050, almost doubling the cost from 4.3 per cent of GDP in 2009 to 8 per cent in 2050.