Is It Time To Review New Zealand Superannuation?

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moneyNZ Super sits at the heart of most people’s retirement plans. Around 40% of retired Kiwis live solely on NZ Super and another 20% live on NZ Super with up to $100 per week extra. That means that 60% of retired people in New Zealand are effectively dependent on NZ Super.

Of course, many of the remaining 40% of retirees would also be in deep trouble without NZ Super – they often use NZ Super to cover their basic living costs and, while they have some other income from their investments, investment returns alone would probably not be enough to cover everything to any reasonable living standard.

All of this shows how critical NZ Super is for retirement. It may not furnish a lavish lifestyle but the vast majority would be sunk without it.

Many people I talk to are not confident that NZ Super will remain in its current form. Most commonly people think that the age of entitlement (currently 65 years) will be increased (perhaps to age 67 years). To me that seems very likely.

Others (and I am firmly in this camp) think that there should be a thorough review of NZ Super. After all, we have had NZ Super since 1977 (i.e. nearly 40 years) and in that time, there has been political tinkering but no wide-ranging formal review. It seems to me that now would be a good time to review NZ Super with a view to long-term planning and to give some certainty to people planning retirement.

 

Some Doubt Superannuation Will Be Affordable

There is, of course, a debate regarding whether or not NZ Super will remain affordable as baby boomers retire in increasing numbers. A huge group of aging people like the baby boom generation will throw strains on Government finances not just for NZ Super but, at the same time, for increasing health care as well.

While some say that our economy will be able to afford these costs others have doubt and fear that the cost will lead to big cuts to or even the abolition of NZ Super before they can access it.

New Zealand Superannuation Unlikely To Be Scrapped

Although I think we are overdue a review on NZ Super, I do not believe the scheme is ever likely to be scrapped in its entirety.  Many experts agree that NZ Super is a very cheap and efficient way of delivering income to retirees. It seems unlikely that a scheme like this and which is so often admired would be killed off. You can expect changes over time, but not abolition.

Interestingly, although NZ Super makes up a large part of most people’s retirement, studies have shown that few people under the age of 60 years know much about it. People are vague on the amount that NZ Super pays and even the age eligibility.

So, a few basic facts about NZ Super:

  • NZ Super is paid to all Kiwis from age 65 – it is paid universally even if you are still working. However, there are eligibility requirements especially regarding New Zealand residency: you must have lived in New Zealand for at least 10 years since age 20 with at least five of those years since you turned 50.
  • NZ Super is taxed as income and so payments vary according to what other income you have (e.g. investment returns or work). Payments also vary according to your living circumstances (i.e. whether you are living alone and whether your partner is also eligible for NZ Super). By way of example, the after tax amount received by a couple where both are eligible is $30,780 p.a. Someone who lives alone would receive $20,007 p.a. Both amounts assume the M tax rate.
  • NZ Super is set at approximately 40% of the average wage for a single person and 66% for a couple. NZ Super is reviewed annually and rises with wages. This means that you can expect your payment to keep up with living costs.
  • If you travel overseas for more than 26 weeks, you may no longer be eligible for NZ Super. This will depend on which countries you travel to and you should see the WINZ web site for details.
  • Some people who receive pensions from overseas see their NZ Super reduce by the amount of the overseas pension. Call WINZ to see if this applies to you.
  • You do not receive NZ Super automatically on turning 65 years – you must apply. Application can be made within three months of turning 65 either on-line or by going into a WINZ office.
  • Work and Income (WINZ) administer NZ Super and more information can be found at www.workandincome.govt.nz

Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee. He is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at www.martinhawes.com. This article is of a general nature and is not personalised financial advice.

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Martin is a GrownUp’s columnist, to learn more about Martin click here.