What Australia can learn from the NZ retirement system

The lack of means testing in New Zealand means Kiwis have more incentive to work and save

By Ross Guest and Kirsten MacDonald, Griffith University

The Conversation Magazine   21 June 2017

The Australian and New Zealand retirement systems both feature public pensions and private superannuation.

But there are things to learn from the differences between the two systems.

While Australians may end up with more savings in retirement, New Zealand’s system is simpler and offers more freedom.

In Australia, contributions to the superannuation system are both compulsory and higher, and you cannot make withdrawals or stop contributing except in exceptional circumstances.

The Australian pension is also better targeted at those with greater need.

In New Zealand, saving for retirement is not compulsory, so those on low incomes are not forced to make contributions.

The aged pension is available to all New Zealanders, so people don’t need to game the system to maximise their pension.

The New Zealand superannuation system is also more straightforward when it comes to taxation and administration.

Finally, the New Zealand retirement system offers more freedom.

Its super system allows people to opt out, to stop making contributions for a certain time, and to withdraw funds for housing.

Incentives to work and save

While New Zealand’s pension, New Zealand Super, is less equitable than the Australian age pension, it probably provides more incentives to work and save throughout a working life.

This is in large part because, unlike in Australia, New Zealand Super is not means-tested.

It does not take into account a pensioner’s income and assets when deciding whether and how much they are entitled to.

The absence of means testing in the pension system provides more incentive for New Zealanders to save and work.

This is because means testing acts in a similar fashion to a tax — once your income or wealth rises above a threshold level, your pension is gradually reduced.

The lack of means testing means New Zealand Super is available to all New Zealanders over 65, subject to residency requirements.

Hence even rich New Zealanders are entitled to the pension, which is arguably less fair than the Australian system.

More choice in superannuation

The New Zealand superannuation system, KiwiSaver, puts more control over retirement saving in the hands of the investor than the Australian system.

This allows New Zealanders to vary the amount they save over their lifetime as their needs change.

KiwiSaver is an opt-out model. This means employees are automatically enrolled when they are first employed, but they can choose to opt out.

If you do not opt out, you and your employer each contribute 3 percent of your income to KiwiSaver.

But individuals can choose to contribute at higher rates of 4 percent or 8 percent and make voluntary lump-sum contributions.

KiwiSaver also allows members to suspend their contributions for between three months and five years after one year of membership.

Funds can also be withdrawn to buy an owner-occupied house, provided certain requirements are met.

The need to opt out and default contributions tend to nudge employees towards saving for retirement, thereby providing a balance between unfettered choice and the more rigid Australian system of compulsory 9.5 percent super contribution.

No ‘lost super’ and better taxation

KiwiSaver funds are linked to individual tax numbers and employer contributions are made through the pay-as-you-earn tax platform.

Switching between schemes or providers doesn’t bear the same risk of “lost super” as found in Australia [as your Australian super can disappear into consolidated revenue].

Also unlike in Australia, KiwiSaver contributions and returns are taxed the same as other savings.

This means there is no reason to limit tax-paid contributions, to claw back taxes after an investor dies, or to prescribe a minimum contribution.

This is arguably a more straightforward and fair system.

Simplicity and flexibility

There is no simple answer to which system is better.

Even though the Australian system may lead to more in retirement, and is better targeted to those in need, there is a lot to learn from the design of the New Zealand retirement system.

The New Zealand system is a lot simpler than Australia’s.

Because of the way superannuation is taxed and the lack of means testing for pensions, New Zealanders have less reason than Australians to try to game the retirement system.

The ConversationThe lack of means testing also means New Zealanders have more incentive to work and save throughout their working lives.

And the freedom to vary their superannuation contributions, and even suspend or withdraw their contributions to pay for a house, gives New Zealanders more flexibility to react to financial events throughout their lives.

Ross Guest is a professor of economics and a National Senior Teaching Fellow at Griffith University and Kirsten MacDonald is a lecturer in the Griffith Business School at Griffith University

Original article here

A Reader’s Comment from New Zealand:

I had a foot in BOTH camps regarding Super and pension. The Australian system was draconian and highly bureaucratic. It also required that non citizen’s total worth (i.e. Kiwi Spouses’  of Australians living in NZ were required to list and formally register with accompanying paperwork  and valuations of EVERYTHING that they even owned. This was totally onerous and almost impossible to garner. Even wedding rings required valuations from at least 3 valuers as did cars, paintings, furniture, shares,bank accounts (even bank accounts of non-Australian citizens accounts with non-Australian banks) , a total list and costs of EVERY overseas trip a non-Australian spouse took over the total period of the marriage. You name it the Aussie bureaucrats required proof and valuations for EVERYTHING even though the spouse was not even an Australian citizen. Totally bureaucratically outrageous and used to make the application for pension of an overseas Australian citizen impossible to complete truthfully.

Most just lie about their total net worth, to a figure that puts them over the maximum that the Commonwealth of Australia would give a pension, and claim a Kiwi Pension which is a complete breeze. Two pages filled in and a 5 minute interview and voila. You have a Kiwi pension. Compare that to the Aussies with seven different forms to complete totalling 76 pages of bureaucratic bullshit not including hundreds of valuations and banking documents going back decades, that required a level of proof of assets, shares, antiques, art, cars, sporting gear, etc, etc, etc,… You name it and the Aussies require formal valuations  that is made almost impossible to comply with. Requiring non-Australian spouses not even living in Australia, to toe the Australian bureaucratic line lest the Australia bureaucrats use the coercion of non compliance of non-citizens reflecting badly on their Australian spouse. This is ‘Big Brother’ on steroids let loose on expat Aussies living abroad.

The simplicity and good humour of Kiwi bureaucrats is like chalk and cheese to the Australian bureaucratic Gestapo demanding compliance not only from expat Aussies but also from non-Australian citizens living in their home nations. The naked threats to these non-citizens that any non compliance will result in sanctions on their Australian spouses of pure international threats to third parties and the use of extortion against non-Australian citizens from the Australian bureaucracy.

The Australian bureaucracy ‘sees off’ most expat Australian citizens with there bureaucratic bully boy tactics, which is exactly the result that the Australian bureaucracy is looking for. It saves them money even though many Australians living overseas paid taxes for decades to the Australian Taxation Department. Oh and by the bye, beware of regular changes to the Australian legislation covering citizenship of Australians living abroad. Do NOT allow you Aussie passport to expire by one day whilst residing in a foreign country or you will find yourself potentially ‘stateless’. This happened to me as I was required to apply for a Kiwi passport for work reasons whilst holding an Australian Passport ( which expired for 7 days and when I attempted to get a reissue my recently expired Aussie passport was seized and I was asked whether I had another passport. I said that I was required to travel on a Kiwi passport and the official at the Aussie embassy took my passport from me and sneered … “lots of luck Kiwi”. This to an Officer of the Australian Defence Forces with overseas service. I eventually had to go through the idiotic bureaucratic BS of applying for the Issuing of Australian citizenship through naturalisation . Even though I had been born in Sydney at Randwick on a ‘race day’ !

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