65 and counting

By PHILIP MACALISTER

Superannuation is often labelled the great political football, the issue that constantly gets booted around the political and financial playing field.

Yet at last week's annual Super Funds Summit conference in Wellington, there was a surprising level of agreement on a couple of points: New Zealand's retirement income policies are about right, and the weight of evidence is that maybe, just maybe, as a group we are saving enough money.

Of course those conclusions don't tally with what we read and hear about superannuation from politicians and other interested parties.

Nor does it mean that we can all sit back and do nothing. What it is saying is that the framework for saving is about right; now you, the individual saver, just have to get on and do it.

The situation was nicely summed up by Business Roundtable executive director Roger Kerr: "Given what people earn in their working years and the present shape of NZ Superannuation, most people are making rational decisions about saving. Treasury work has established that it would not be logical to expect them to save more.

"People in the 45 to 55 age bracket are saving at levels that would enable them to maintain their consumption in retirement.

Lower-income people who consume at the NZS [NZ Superannuation] level would be worse off if they saved more."

Despite that view, there will still be plenty more debate and hot air on the topic - particularly over what the experts like to refer to as "tier one".

Superannuation is often described as being like a three-legged stool. The first leg, or tier one, is the state pension, NZ Super, the universal entitlement paid by the Government out of your taxes to all eligible people aged 65 and over.

The second leg is workplace savings, or schemes where money is deducted from your pay packet before you get it, and invested in a savings scheme.

The third leg is private savings - the stuff financial planners, investment advisers and fund managers encourage you to do. Now there is talk of a fourth leg - working after you reach retirement age.

While the political debate has subsided, you are going to hear lots more about the first and fourth legs of the super chair, which is no lazy-boy recliner.

The big debate is going to be over the age at which you should be entitled to receive your state super. Today it's 65, but some groups such as the National Party are interested in a select-your-retirement-age approach.

In other words, instead of automatically getting the pension at 65 you would be able to choose to start receiving it at a later date.

The reward would be a bigger weekly payment than you would get if your super began at 65.

Although the party has no firm policy on this issue - in fact, its caucus is sharply divided on a number of superannuation questions - it is an idea that finance spokesman John Key confirms is under discussion.

Labour MP David Cunliffe told the conference he was opposed to the select-an-age concept.

The other part of this debate is setting different ages of eligibility for young and old.

Most political parties have vowed to keep NZ Super at its present levels, guarantee that it won't change for those in retirement or approaching retirement (that's anyone over the age of 50) and that it won't include any form of asset or means testing.

After that, who knows what will happen.

National leader Don Brash has made it reasonably clear - and this was reinforced at the conference by Key - that those under 50 should reasonably expect that the age of entitlement will be pushed out as they approach retirement, as a way of helping curb the cost of super.

New Zealand Superannuation is the Government's largest single item of expenditure each year, and the ageing population means that cost is going to keep on rising.

The trouble with this approach is that anyone under 50 who pays tax is paying for older people's pensions, but being given no assurance that the pension will be there for them when they reach retirement age - whatever that may be.

This debate has the potential to pit two large voting blocs against each other. While there aren't many signs that the battle has begun, one of the triggers could be the fact that, under the present arrangements, everyone will be paid a state-funded pension, no matter how rich or poor they are.

There are plenty of over 65-year-olds who are wealthy and still earning a good income, but who nevertheless receive their taxpayer-funded pension, including a handful of MPs who all earn well above the average wage.

If Brash and the National Party win the next election you have the prospect of a Prime Minister earning a big salary, plus getting a pension. That state of affairs could be enough to ignite the debate over who should be eligible for super.

The superannuation conference also highlighted a major weakness in New Zealand's savings market. All the attention these days is on wealth creation and making lots of money in preparation for retirement.

But there is scant focus on helping people manage their money once they stop work. The buzz word here is "decumulation", otherwise known as spending your accumulated savings.

Overseas this is a big area of the savings market, involving products such as annuities and home equity release schemes.

It's an area that has received some attention in New Zealand. The Retirement Commission will soon launch a section on its Sorted website (www.sorted.org.nz) aimed at helping retired people manage their money and, as highlighted in this column recently, we've seen the advent of home equity release schemes, which help people convert some of the capital invested in their house into cash.

University of Auckland senior lecturer Susan St John says this phase of people's financial lives has been ignored in New Zealand. But it is particularly important as we face longer in retirement than previous generations, and it is likely to become more important as the baby-boomers approach their retirement (first arrivals due in six years). On average, middle-income baby-boomers can expect to live significantly longer than their parents and during this time must eke out their modest savings to augment NZ Super.

St John says one issue is that the market for annuities - which can provide a steady stream of income in retirement - has all but disappeared. Nine life offices offered annuities in 1993, but that number fell to four by 2002.

In the latest survey by superannuation and savings consultants Aon, the only companies providing annuities were AMP and Fidelity Life. What's more, she says, there is considerable variation in the annuity payable for the same purchase price.

For example, a 65-year-old man putting a $10,000 lump sum into an annuity would receive $594 a year from AMP, but $643 more from Fidelity. Over the 16.5 years that 65-year-old man can statistically expect to keep living, that difference adds up to $10,609.

She says there needs to be suitable annuity products to supplement NZ Superannuation in a realistic way.

This is important, as any extra saving people have made is exposed to the risks of inflation, poor and volatile investment returns and mismanagement.

They may be tempted to invest super-conservatively, even though the period of retirement could be 30 years or more.

Retirees run the risk that they outlive their capital, or have a needlessly restricted retirement and die with assets intact.

* Philip Macalister is the editor of online personal finance website Good Returns and chaired last week's Super Summit.

* Philip Macalister