Source: Radio New Zealand
Who gets the best deal in retirement? Australians or New Zealanders? RNZ / REECE BAKER
Do New Zealanders or Australians get a better deal in retirement?
Commentators say it depends who you’re asking.
A number of people who contact RNZ with questions about their financial lives want to know about NZ Super if they’ve been in Australia or [https://www.rnz.co.nz/news/business/579686/we-re-in-australia-can-we-come-back-and-get-nz-super-ask-susan their entitlements to a pension in Australia if they’ve been living here.
But how do the two systems compare?
Superannuation savings
Australians probably get a better deal out of their superannuation savings than New Zealanders do from KiwiSaver.
From July last year, the contribution rate has been set at 12 percent – and this is contributed by the employer. Contributions are generally taxed at 15 percent but tax is charged on withdrawals when they are made from income before tax was paid on it such as contributions from an employer or salary sacrifice.
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In New Zealand, our current default rate of 6 percent is split between the employer and employee. It comes from taxed income and returns made by the fund are taxed. Withdrawals are not taxed.
Tim Jenkins, superannuation consulting leader at Mercer, said the contributions were a key difference. “In Australia, no one needs to pay a contribution… if you’re an employee, it’s 12 percent regardless of whether you pay or not.”
The compulsory nature of the scheme meant that anyone who was employed was developing savings for retirement, whereas in New Zealand people could opt out of the scheme, or stop contributing.
He said it was notable that New Zealand had next to no tax concession for savings.
“In Australia there are substantial tax concessions particularly for the higher end of town and that makes a big difference on incentives and what people choose to do.”
Jenkins said another difference was that Australian superannuation schemes had life insurance built in, whereas in New Zealand people have to arrange and pay for this cover separately
People can also access their superannuation in Australia when they are 60 if they have left work. In New Zealand, access is tied to the age of eligibility for NZ Super.
“That’s quite important because you have a number of people who cannot continue working to 65 because of the physical jobs, or whatever is going on, or they’re unemployed,” Jenkins said. “This helps with that transition to retirement phase.”
New Zealand’s pension costs about 5.1 percent of GDP, roughly twice what Australia’s costs. It is projected to rise to 8 percent by 2065, compared to a projected drop to 2 percent for Australia by 2060.
Pension
But it’s on the pension that New Zealand comes into its own.
In Australia, you need to be 67 to qualify. To receive the full pension amount, you can only earn up to $218 a fortnight as a single person, or $380 as a couple.
The cut-off point for a single person to receive anything is $2575.40 a fortnight, and for a couple it is $3934.
A single homeowner also cannot have assets more than $321,500 to receive a full pension.
In New Zealand, NZ Super is available to anyone over 65 who meets the residency requirement, with no income or means testing.
To generate the amount that a single person gets in NZ Super, you’d need to have about $600,000 saved, at a drawdown rate of 4 percent a year. At the moment, the average balance of Australians nearing retirement is about A$400,000.
Jenkins said Australian super was replacing the pension for middle Australia, whereas all residents and citizens in New Zealand could access it.
Simplicity chief economist Shamubeel Eaqub said, from an individual perspective, New Zealand had a really good system. “Everybody just gets free cash… Who would say no to free cash? The problem, of course, is that the overall pension system doesn’t make sense.
“It’s literally free money. Essentially working New Zealanders are subsidising the superannuation system. It’s working as we designed it to and it’s doing exactly what we thought it would. The question is, is it fair?”
The cost of the current system was projected to keep rising in an unsustainable way, he said.
“If you look at the Treasury long-term briefing, there’s a really nice chart of New Zealand versus Australia, comparing the total superannuation cost including the subsidies for their savings scheme.
“Ours goes up forever, and theirs gradually trends down over the next several decades. That’s the difference. We have it good for now but it’s not going to last.
“They have it good for those who need it but not so much for those who don’t. They have a system that encourages people to save out of their income … it’s really around collective versus individual. I think the lens really matters but also generational, so for people who are getting it now this current system in New Zealand is fantastic and it’s absolutely terrible for the young people of New Zealand.”
Pie Funds chief executive Ana-Marie Lockyer agreed there were clear differences.
“I would say Australia is more generous at the front end through compulsory employer contributions and tax breaks. New Zealand is more generous at the back end by guaranteeing a universal pension. They’re fundamentally different philosophies rather than one clearly being more generous overall, and different cohorts will benefit from one over the other.”
Australia’s pension is generally tax-free and more generous than New Zealand’s, which is also taxed as income.
Other differences
Jenkins said another difference was that Australia had given more thought to helping people spend their superannuation savings.
“We’re starting to get decumulation options and a focus on how to spend in retirement using your super as opposed to New Zealand, which is really a savings system at this stage… every system has its strengths and its weaknesses and it’s the combination of the KiwiSaver or super guarantee alongside the age pension that makes the difference. You’ve got to look at both together. And then think about not just accumulation but how does decumulation work?”
What if you live in one country and want to retire in another?
New Zealand has a reciprocal social security agreement with Australia and you can use residence in either country to meet the residency test for the pension in the other.
Ministry of Social Development general manager international, disability and generational policy Harry Fenton said if someone relied on time spent in Australia to meet the residency requirements, they would not be able to qualify for NZ Super until they reach the age of entitlement for Australian Age Pension, which is age 67.
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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand