Poor Kiwis getting better pension deal

A new survey of state pensions in affluent nations shows that it may be better to be poor in retirement in New Zealand than in Germany.

The Pensions at a Glance survey, just released by the Organisation for Economic Co-operation and Development (OECD), says that only New Zealand and Ireland outperform the United States in redistributing income to their poorest retirees, because they have simple flat-rate state pensions.

These types of pension schemes are simple, cheap and good at preventing poverty, but the lack of any link to earnings risks future pensioners voting for politicians who promise higher benefits.

New Zealand and Ireland have the lowest "net replacement rate" of less than 40 per cent: the replacement rate indicates the extent to which a pension preserves the previous personal standard of living of a worker.

Other workers on average earnings in OECD countries can expect their post-tax pension to be worth just under 70 per cent of their previous earnings after tax.

In Ireland, workers on half the average earnings can expect a retirement income after tax of 63 per cent of their previous earnings.

However, those workers earning twice the average wage can expect to retire on only 22 per cent of their former earnings.

In New Zealand, workers retiring on the average wage could expect to receive 38 per cent of those earnings. The average New Zealand worker received $39,912, in 2002.

The OECD says the US and British systems are similar in their effects, redistributing heavily towards the poor, but because neither is a flat-rate, they are not simple.

At the other end of the scale are many European nations that relate state pensions closely to earnings, which give good benefits to workers on average earnings and above.

In some countries, such as Germany and Italy, poorer employees fare badly: the OECD estimates that German employees on half the average wage can expect to receive 62 per cent of their after-tax incomes as a state pension, but those on 1.5 times the average wage - three times the money paid to the poorer workers - will receive 79 per cent.

Only four countries in the OECD, Australia, Ireland, Mexico and New Zealand, do not have an earnings-related second-tier to their pension scheme.

But when pensions are measured as a weighted average of the pension entitlement as a percentage of the average wage, it is much more comfortable to retire in Luxembourg, where the pension is almost exactly the same as the average earnings.

The analysis noted the impact of life expectancy on total pension payouts was quite large.

Countries with low life expectancy - Hungary, Poland, Mexico, the Slovak Republic and Turkey - could afford to pay men a pension 10 per cent higher with OECD average mortality rates.

Because the report took into account life expectancy, retirement ages, and forecast pension benefits, it would enable them to directly compare the pension promises being made to workers today, how much they would actually cost when those people retired, and whether governments would be able to afford them.

The report also noted that increases in life expectancy were raising the cost of pensions, prompting many OECD Governments to raise the statutory age of retirement or in some cases abolish a fixed retirement age.

- NZPA