Tax cut threat to universal super: expert

Change means wealthy retirees pay much less towards pensions

A retirement-policy expert says New Zealand's universal old-age pension is threatened by the flatter tax scale unveiled in this week's Budget.

Dr Susan St John, co-director of Auckland University's Retirement Policy and Research Centre, says the universal flat-rate pension from age 65 was adopted when wealthy retirees effectively paid back almost two-thirds of their pensions through a top tax rate of 60 per cent.

But the cut in the top tax rate to 33 per cent from October would effectively raise the cost of future pensions because wealthy retirees would now pay back only one-third of their super.

"If the top tax rate comes down, it calls into question whether we can continue to pay a universal pension, and that has serious consequences for universal provision of all kinds including health and education," Dr St John told a Child Poverty Action Group post-Budget breakfast in Auckland.

She said the current policy had virtually eliminated poverty in old age. A 2008 study found that only 4 per cent of people aged 65 and over were in hardship, and 60 per cent had "good" or "very good" living standards, compared with figures for younger people on benefits of 47 per cent in hardship and only 5 per cent with good or very good living standards.

New Zealand's ageing population meant the net cost of superannuation on current settings would almost double from 3.5 per cent of the national income at present to 6.6 per cent by 2050.

Dr St John said the National, Labour and Alliance parties reached an "accord" in 1993 that the cost would be contained by the principle that "the net amount provided from public funds for a retired person should reduce as that person's total income increases".

At the time, that was achieved by a 25 per cent surtax on superannuitants above a threshold income, but the surtax was unpopular. A National-NZ First coalition scrapped the surtax and effectively scuttled the accord in 1998, but a year later Labour won power and clawed back some of the cost of pensions from wealthy retirees by raising the top general tax rate from 33 per cent to 39 per cent.

Dr St John said the drop back down to 33 per cent represented "a very significant shift from progressive taxation" and moved New Zealand further away from Australia, where the first A$16,000 ($19,700) is exempt from income tax and the top rate is 45 per cent.

Dr St John said she was not advocating adopting an Australian-style means test for the old age pension, nor did she want the rate of super cut.

A recent study by Age Concern and Grey Power found a couple would need $538 a week to maintain a minimal living standard in Auckland even if they owned their house without a mortgage.

The Budget raised the net couple rate of super from $489 to $511 a week.