New Zealand’s universal pension is in danger

New Zealand has a universal pension scheme that is the envy of the world. It is simple, affordable, and eliminates poverty in old age. When a qualified resident reaches the state pension age, he or she receives a basic, flat pension, regardless of income, wealth or employment history. This benefit, called ‘Superannuation’, is financed from general government revenue. Earmarked taxes are not levied to support it, but benefits are taxable as regular income, so net benefits are lower for pensioners who have income from work or from savings.

Residents of New Zealand are free to supplement their ‘Super’ with voluntary retirement savings, but in the past government never offered any cash or tax incentives for doing so. In 2007 the government for the first time introduced incentives with an opt-out (so voluntary) savings scheme, known as KiwiSaver. At the time I feared that KiwiSaver might be transformed into a mandatory savings scheme, for the purpose of ending the universality of Superannuation. My fear is now stronger, as some New Zealanders, most often managers of KiwiSaver funds, are urging government to mandate contributions by workers.

University of Auckland economist Susan St John is struggling to protect universal pensions. I urge others in New Zealand to join her, in order to preserve the universality of their ‘Super’. Here is a portion of her recent blog.

[T]here is something disingenuous about a director of a KiwiSaver fund arguing for a compulsory KiwiSaver at a much higher rate of contribution than today, with tax-funded subsidies. ….

[Means-testing the universal pension] would hugely disincentivise saving. ….

The justification [Shamubeel] Eaqub uses is that means testing would enable the pension to be more generous and this would help old age poverty. Using that argument, we ought to have benefits such as for sickness at a level that prevents poverty by now. Sadly as history shows, welfare only for the poor becomes poor welfare, unsupported by the smug higher income group who can save for themselves, stigmatising, complex to access and thoroughly miserable.

He argues that tax cuts should be channelled into compulsory KiwiSaver taking no account of the vast number of struggling working poor on low wages who may need those tax cuts to survive.

Better off people can simply save less in other funds if they are forced to contribute more, while the poor just get poorer. On retirement, low income workers may get little advantage from their forced saving [because their Superannuation will be reduced] ….

NZ’s taxation of retirement saving is based on the sound economic principle of treating all income from saving the same. OECD countries like the UK and Ireland are struggling with their traditional mode of Superannuation tax breaks as they benefit the rich much more than low income savers and create distortions in the flow of capital. These countries are in thrall to powerful financial sector lobbies and their reformists look enviously at what we have done in New Zealand.

Susan St John, “Universal Super – No steps forward. Two steps back?”, The Daily Blog, 16 June 2018.

Universal Super – No steps forward. Two steps back?

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