October 1, 2013 4:30pm by David Farrar

Flexi-Super – change for changing times?

It can be tough to talk about the future; sometimes it seems like there are so many unknowns. Just think about how much the world has changed since the introduction of New Zealand Superannuation (NZS) in 1977 creating a universal – and not means-tested – scheme that paid 80 per cent of the average wage to married people over 60.

During the ensuing years, adjustments have been made to the scheme which in itself was the latest incarnation of much older systems. This shows we can be ﬂexible when we need to be – and right now, with a population which is living and working longer,we need to talk about superannuation.

It’s time for an honest and frank discussion about how NZS might need to change to reﬂect these changing circumstances and lifestyles because the current arrangement of eligibility for NZS at 65 may not suit everybody’s needs.

Earlier this year, United Future leader Peter Dunne released a Government Discussion Paper on aFlexi-Super plan and New Zealanders have just a few more weeks left until the Friday, 11 October deadline to comment on the proposal.

Flexi-Super gives New Zealanders the option of choosing to take a reduced rate of NZS from the age of 60 or an increased rate if they delay taking up superannuation until they reach 70.

“The basic motivation for this policy is giving people more choice because New Zealanders want choice about how they live their lives,”Mr Dunne says.“At the moment, they have no option but to carry on working until they’re 65 or leave and make do.”

Under Mr Dunne’s Flexi-Super plan, the standard age of eligibility for the state pension remains at 65 and payments stay at two-thirds of the average after-tax weekly wage for those who take their super then. But the earlier someone decides to ﬁrst take NZS, the lower the payment will be each year relative to the rate they would have received had they decided to ﬁrst collect NZS at 65; alternatively, taking NZS after age 65 means receiving a higher relative rate.

These rates will be adjusted for inﬂation and wage increases,so the mechanism for adjusting rates of NZS does not change. It will remain possible to continue working and receive NZS-and that could offer greater ﬂexibility to those in physically demanding jobs.

The paper points out that there are advantages and disadvantages in allowing such ﬂexibility.

Advantages include making the system fairer for workers in tough, physical jobs and those, such as Maori and Pasiﬁka, who have a lower life expectancy. It also avoids the possible stigma associated with seeking beneﬁts among those who, for a variety of reasons, can no longer work. It may also enable some people to pay down debt or build up assets.

Giving people the option to wait till they are 70 before drawing down NZS will encourage older workers to stay in the labour force for longer, helping to retain much-needed skills, experience and institutional knowledge.

There is a risk that Flexi-Super may reduce incentives for the 60- 64 year olds to work and if NZS is taken too early, it could create hardship for many who retire early. It is vital for us all to understand that the reduced rate we accept in return for being paid earlier would be the rate received for life.

The State might end up having to supplement the incomes of people who retire early, then ﬁnd themselves unable to make ends meet because of an unforeseen change in circumstances.

A layered system could also seriously complicate what is at present an easily understood and administered system. Government actuaries will face a Herculean task to ﬁgure out a sliding scale that takes all the required factors into account and delivers a system that iscost-neutral, as is proposed.

“This is part of a wider conversation about ﬁnancial literacy that we all have to have and I encourage all New Zealanders to think about these issues and discuss them in the course of daily life,” MrDunne says.

According to a Fairfax Media-Ipsos poll in February, 49 per cent of people want to choose when they receive their state pension, with reduced or enhanced rates depending on the age they start drawing payments.

So we need to consider carefully Flexi-Super and the Government wants to hear your views. The Discussion Paper can be viewed at www.unitedfuture.org.nz and also on the Minister of Finance’s website.

The deadline for submissions is October 11, 2013. Submissions can be made by email to ﬂexi-super@treasury.govt.nz or posted to Flexible Superannuation, The Treasury, PO Box 3724, Wellington 6140, New Zealand. Following this consultation, the Government will consider whether to further explore the Flexi-Super proposal. More detailed policy work and more consultation will take place before any decisions are made.