Why NZ Superannuation will be unaffordable

The Herald reports:

New Zealand superannuation is unaffordable and could even be called “a pyramid scheme”, according to a senior tax lecturer at the University of Auckland Business School, Mark Keating.

Either the amount paid in superannuation will have to fall or taxes will have to be significantly increased to cover the rising costs, says Keating – adding that a universal pension is socially desirable but it is generally accepted sharply increasing costs will make it unaffordable. 

“It should be a warning that New Zealand is now the only country still paying a universal superannuation, regardless of the asset wealth or income of the recipient,” he says. “All other countries have changed their system because it is simply unaffordable.”

Yep we have the most generous superannuation scheme in the world – universal, linked to average wage and no income or asset testing. Raising the eligibility age helps but only a bit.

Currently, an average New Zealander will work for approximately 45 years on an average annual salary of $50,000, and will pay approximately $8000 per year in income tax. They will then retire at age 65 and receive superannuation while they live until almost 90.

 

“The problem is that average person can expect to receive more back in superannuation than they paid in income tax during their entire working life,” says Keating.

When doing the maths, using current tax rates and superannuation rates, an individual will pay approximately $360,000 in income tax on wages over their working life, but will receive approximately $500,000 in superannuation. 

We need as many people as possible to save for their own retirement, and superannuation should just top up those who are short.

That means the Government has to fund all non-superannuation services and benefits from other sources of taxation (mainly GST, corporate tax and user-charges). 

A universal superannuation system is sustainable in only two circumstances: either there are significantly more workers than retired people or many taxpayers die either before reaching retirement age, or shortly after, says Keating.

The ratio of workers to retired people is dropping.