Money: Super myths debunked

Superannuation is one of the biggest issues facing the country and it will become highly topical in the next few months as the Government attempts to change the way the state pension is funded.

The idea being promoted by Finance Minister Michael Cullen is that instead of paying the cost of New Zealand Superannuation out of each year's taxes, the Government should instead start to set aside some money now to help pay for part of the future costs of the pension.

Dr Cullen says his plans are reasonably advanced, and a paper on the proposal will be put before the cabinet quite soon.

This proposal is likely to be a defining moment for all New Zealanders for two reasons.

First, superannuation affects everyone, as they are either paying for it, or being paid it. Secondly, there is a growing feeling that this issue can't continue to be kicked around endlessly as in the past.

Politicians know that there is an urgent need to make some decision to cement certainty into the issue. On that basis it seems the status quo of voluntarily saving for retirement isn't sustainable.

Lots of economic arguments will be trotted out during the debate to support the range of ideological cases.

This week we explore some of the "myths" around superannuation so you can better understand the issues.

Myth 1: We face a crisis.

Not true. At present NZ Super costs the Government about 4 per cent of gross domestic product. That cost stays the same and at times is predicted to fall over the next 10 years as the age of eligibility creeps up and those born in the low birth years of the Second World War retire.

"In 10 years' time, [the cost of NZ Super] is virtually the same as it is today," Finance Minister Michael Cullen says.

It's after this period, when the baby boomers start to retire, that the cost of NZ Super doubles to 8 per cent of GDP and reaches 9 per cent by the middle of the century.

While New Zealand does not face an immediate crisis, there is a problem looming, and it needs to be addressed sooner rather than later.

Myth 2: We all need to save for our retirement.


The message constantly drummed into New Zealanders' heads is that they need to start saving for their retirement right now. Financial planner Murray Weatherston says that's not necessarily true.

"It's rational for a large number of New Zealanders not to save for their retirement," Mr Weatherston says.

He says that is especially true if the Government continues to pay New Zealand Superannuation at the rate of 65 per cent of the average weekly wage.

At 65 per cent, pensioners are getting an annual income after tax of about $16,000 and that's reasonably generous, considering most of the recipients own their own home debt-free and have no major expenses.

In many cases, a pensioner living solely off NZ Super is better off than someone on the average salary (about $39,000 gross) who has major expenses such as a mortgage and their children's education.

Surprisingly, it's a view that Retirement Commissioner Colin Blair is reasonably comfortable with.

"I don't disagree with it too strongly," he told a superannuation conference in Wellington.

He says some people are actually encouraged to save too much.

"Basic day-to-day requirements can be covered by NZ Superannuation," he says.

The big issue is that no one can say with any certainty what level NZ Super will be paid at in future years. For this reason, there is a need for people to save for their retirement, rather than to rely on payouts from future governments.

Myth 3: The best way to pay for NZ Super is to increase economic growth.


Many people suggest that the answer to the cost of New Zealand Superannuation is to have a higher level of economic growth. That makes the country richer, and therefore the Government can afford the cost of super at its present levels.

According to NZ Institute of Economic Research director Alex Sundakov that argument doesn't quite stack up.

He says the type of superannuation scheme the Government introduces will have an impact on economic growth as it will determine the quality of savings.

However, as economic growth booms so do wage levels. If the wage levels go up, so does the cost of NZ Super, as it is tied to the annual average weekly wage.

Myth 4: Increased immigration is one answer to helping pay for NZ Super.


The contention runs that as things get tight New Zealand should encourage more people to come to live here, thus increasing the Government's revenue streams.

The problems here are that New Zealand's track record in immigration is shockingly inconsistent.

Secondly, research suggests that the benefits of increased immigration take a long time to flow through to the economy and immigration actually accelerates population ageing.

To make an impact, the level of immigration would need to be significant. Consider this: New Zealand's population is around 4 million people. Importing a further 20,000 people a year would add only half of 1 per cent to the population. To make an impact these people would have to be fabulously wealthy and young.

Myth 5: There will be no NZ Super left for the baby boomers when they start retiring.


No one knows the answer to this question. The previous Government worked on conditioning people to this point of view as part of its effort to encourage them to save.

The present Government's approach is quite different. Both the Labour Party and its coalition partner the Alliance support NZ Super being a universal entitlement. That is, every eligible retiree gets the same-sized pension from the Government no matter how rich or poor he or she is.

But there is no continuing comfort in this position because Dr Cullen won't be running the economy for the next 40 years.

Myth 6: There is no golden bullet to the Super issue.


That's correct, but New Zealand is actually in an enviable position, according to University of Waikato Professor of Demography Ian Pool.

Our population is ageing later than most other developed countries so we have more lead-in time to prepare our economy for the growth in superannuation costs.

The other important demographic distinction, which New Zealand shares with the United States, is that we have what's known as the "baby-blip" generation, that is, a baby-boom in the 1990s

Professor Pool says the baby-blippers will enter the labour force about the time the boomers will reach old-age. If they are well educated, in good jobs paying their taxes and stay in New Zealand, then the country is well-placed to handle the future superannuation costs.

Myth 7: Prefunding NZ Super will be good for the local economy

Building up a multibillion-dollar pool to pay for future state pension costs may be good for the New Zealand economy. How good it is all depends on how the money is invested.

At a purely theoretical level there is a compelling argument to invest all the money into overseas shares to minimise risk and improve returns.

Actuary Michael Chamberlain says that because the fund has no need to make payouts until 2030, it doesn't need to invest in cash or bonds.

He also dismisses property as an asset class, despite its growth characteristics, because of liquidity issues.

By default 100 per cent of the fund should be in shares, he says.

Because the fund wants to minimise its risk to an under-performing New Zealand economy, then all the share allocation should go overseas.

What does all this mean?

There is no one simple answer to the superannuation issue and an economically pure approach to the problem won't work.

Dr Cullen's proposed New Zealand Superannuation Fund isn't a complete answer to providing an adequate retirement income. However, it will provide a basic standard of living and some much-needed certainty.

The message is still the same: if you want a lifestyle in retirement that is better than what is offered by the state pension, you had better get saving.


* Philip Macalister is the editor of online money management magazine Good Returns. Good Returns provides news on managed funds, mortgages, insurance, superannuation and financial planning.