KEY POINTS:
The KiwiSaver scheme is so generous that it could give average wage-earners higher incomes in retirement than they earn through their working lives, according to expert calculations.
But the expert who has done the figures, Michael Littlewood, says the numbers make the scheme unsustainable in its present form and could force a future Government to means-test the basic pension, NZ Superannuation.
"We have set off down the Australian compulsory saving path so an income- and asset-tested NZ Super pension seems a logical conclusion," he says.
The Australian basic age pension is clawed back at 40c for every $1 earned above just 6.5 per cent of the average wage.
Mr Littlewood, co-director of the Retirement Policy and Research Centre at Auckland University, is also a consultant with Aventine, an Auckland company which manages the SuperLife KiwiSaver scheme.
He said a 25-year-old man who paid 4 per cent of the average wage into a KiwiSaver scheme for 40 years, earning net real returns of 2.5 per cent a year and with prices rising 1 per cent less than wages each year, would end up at age 65 with a lump sum of $320,300 in today's money.
He could use that to buy an annuity - a financial product paying him the same sum every year until he died - of $22,000 a year after tax.
He would also qualify for NZ super, currently $14,407 a year after tax for a single person living alone, giving him a total net income in retirement of $36,407 a year.
That's 5 per cent higher than the net $34,525 which he earned while working on the average wage.
The number of people aged 65-plus is expected to rise from 18 for every 100 of working age today to 43 elderly for every 100 of working age by 2051. Mr Littlewood said such a generous scheme would become unaffordable.
"We know NZ super is going to double from 4 per cent to 8 per cent of gross domestic product," he said. "If that were the only call on our future economy from the aged, putting healthcare aside, arguably that is a bearable increase in the cost of the aged. KiwiSaver will significantly increase the tax-funded costs of retirement." He says the post-Budget version of KiwiSaver "probably does not have a long-term future. It is flawed in so many ways that it cannot survive."
"Tomorrow's government could say, reasonably, that we have already helped our saver to pay for that KiwiSaver annuity," he says.
"The future government might therefore be entitled to recognise that help in the retirement income we pay through NZ super. That's what happens now in Australia."
National Party finance spokesman Bill English raised similar doubts two weeks ago about whether the combination of KiwiSaver, NZ super and the "Cullen Fund", which sets $2 billion a year aside for future super payments, meant New Zealand was now putting too much money into retirement. "We are looking at a more balanced approach that focuses on growth prospects for our economy in the next five to 10 years, not solely on savings," he said.
But Finance Minister Michael Cullen rebutted Mr Littlewood's argument and said average wage-earners were most unlikely to end up in retirement with 105 per cent of what they earned in work. "That assumes 40 years of unbroken contributions with no broken employment, no mortgage diversion, no contribution holidays, starting from the age of 25. Change any of those assumptions and you immediately fall below 100 per cent."
He said putting money aside now for future retirement, through both KiwiSaver and the Cullen Fund, would ease the financial pressure on future governments when the number of elderly people increased and so reduce any threat to NZ Super.
"We don't reach the peak of the baby boom retirement issue, which is then a constant peak and not some sort of wave that comes and goes again, for another 25 to 30 years.
"So we should be using these good times to set ourselves up with a better long-term framework than we have had."
