First of all I want to take right up front!
I DO NOT wish our elderly to starve, freeze or not get medical care. I am writing this blog post as a way of being able to link to this whenever I hear the ridiculous response that pensions pay for themselves or that “I have paid tax all my life” when you question how much the pension should be.
This blog post is merely to showcase how the pension is not a right, how the impact of the pension is something to worry about and thirdly how only a very small percentage actually pay their way in terms of pensions. The current mind set is that pensions are something that we deserve to have through 45 years of solid work; it is our right. I hope to change your perspective on that right and to drive conversation in how we can (over a long period of time) look towards taking peoples dependence on the state away and replace it with self-independent values.
Lets talk Pension
In its inception (1898) it was designed to be a means tested state welfare for those that are unable to work, much like the unemployment benefit; this was also strictly limited to those that had been in NZ for 25 years. It was not designed to be a right but merely a benefit to a long service in NZ. This charitable donation made sense in a time when we needed to reward potential “investors” in NZ.
In 1938 this means test was lowered to 60 and a state pension began at 65 through the Social Security Act. This was referred to as one of the 10 benefits NZ offered it’s non workers. It can be thought of an insurance policy for people who had worked in NZ and were rewarded with a small benefit if you hadn’t prepared for your future.
The start to the end
In the late 70s Labour introduced a forced taxation (funny enough similar to Kiwisaver) to push others into saving for their retirement. Muldoon scrapped this by creating fear that we wouldn’t be able to afford this and basically BOUGHT votes from the soon to be retired by introducing a system that would be just as disastrous! Pegging the pension or superannuation by this time to 80% of the average wage for a single person.
Just to recap. NZ has a benefit system that ensured a catchment for all people that found themselves down on their luck or ended up retiring with not much in the coffers and then they replaced it only 40 years ago with a salary of 80% the average wage which looks like from the outside a way to buy votes from a rising demographic. Government after Government has focused on increasing either the younger population (immigration). the age of retirement or taxes to cover this.
In 2001 this Superannuation cost 8.8 billion and in 2017 we are looking at 12.8 Billion in a time when as a society we have children unable to get a good level of food and warm housing. I am not trying to make you choose… I am merely putting this into context. Total benefits are 25 billion and that means just in pensions alone…. We are looking at half going to an ever growing proportional population.
All this excludes war pensions
As you can read above, the pension was never originally designed to be a livable amount, it was designed as a benefit or an insurance policy to a few bad choices in life. In the late 70s in a time of much distress and global change, governments fought for votes and made YOU the voter think there is enough money through taxes to be able to afford some sort of long term pension scheme that you can live on.
I hope this show my first point which is that the pension is not a right. It is a benefit that is highly outside the original scope and costs a pretty penny.
I pay tax all my life
Firstly, we don’t pay tax all our life… but lets assume you do. Lets assume you have paid a high tax rate your entire life. Lets assume you (inflation adjusted) had a 100k salary which only 4% of kiwis have. Lets assume you got the NZX50 return which compounds your investment your entire 45 years.
Today’s Average salary is $60k and so we can assume that our fake individual earns 67% above the average wage his entire life (again only what 4% of people do)
Just to clarify, you are one of the fortunate people to earn above $100k NZD AND you have had this salary non stop for 45 years instead of starting at a low wage and going higher. I have used bulk average wages and have taken a very easy 4.49% of gross going towards pension which should again be over the top to showcase this example.
Yes I know tax rates have changed…. I am hoping that my ridiculous example is enough to play these out.
As you can see with tax pie, you would pay $4’488 towards your pension today at 100k which is why I based it on 4.48%
So lets have some maths fun (runs off)
|Year||Closing Level||Change||Average Wage||4.48% Tax||Gross|
At a few years away from retirement, this wealthy individual who was taking 67% more than the average New Zealander has a total contribution of $343k
So how long does this last?
Using 4.92% which is the average return of the NZX50 (remove inflation) and $450.1 a week payment you get which is $23k with a yearly return of $16k this wealthy individual will last 24 years. With average age in NZ sitting at 81.4 this means this individual (assuming the wealthy don’t live longer which they do…) we can safely assume this individual just about pays for himself.
|Year||Av Return||Yearly Pension||Remaining|
So if the top 4% in our population…. Who get paid the largest salaries for 45 straight years…. Who get the NZX50 return which is a risky portfolio investment that most would not do….. AND THEY DIE in their early 80s (which is not the trend we are seeing) then and only then…. Can someone say. I paid my tax and therefore I deserve my pension.
For the average person in NZ?
Well you started earning 5k at the start of your career and ended up on $60k (which again I highly doubt you left school and for 45 years had the average wage) which gives you a whopping $205k in your pot if you assume that you got the highly risky NZX returns. Most importantly its only going to last you 10 years.
Based on the mean averages we see that barely 5-10% of pensioners would be able to say they paid for themselves based on the above calculations and seeing as the returns of 75-90% of people are closer to bond prices we can happy say that it’s the 1% that are happily paying for their own pensions…
The other 99%… you WANT someone ELSES pension.
I can happily say that my third point has been objectively proven. I have tried to make the figures work and we can see there is a clear factor that is needed to pay for this benefit.
Impact on Society
To pay for this rising system we need either the average age group to decrease or more specifically the wealthier people to die earlier then the average (not happening), we need to have more immigration at the lower end of the age spectrum, raise the pension age or we need to raise taxes.
The taxes have been raising slowly when I can only assume each politician realizes these figures. Politicians are not dumb; I can not believe they do not have access to this information or even more depth analysis that I can not easily reference. John Key our late PM wouldn’t raise the pension age but did increase immigration and the National Government in the 2017 elections is not giving the middle kiwis a tax break (which we were promised), Labour are anti immigration and so they are promoting more tax in order to pay for it. Act are taking early action by raising the age of the pension (although this is not exactly popular).
Kiwisaver will be about 20 years before we see reliance drop from the state. Which subjective evil seems to be the wiser solution to you? More Tax? Raise the Age? or an ever growing Immigration?
My choice is to raise the age to 70 as soon as practically possible. The additional compound interest from 5 extra years of work will mean feasibility this can be paid for including growth for the next 20-30 years and by that time we can look to move to a benefit system once again, a system where the state pension is a safety net for kiwis that didn’t quite make it how they wanted. I also feel that there should be no difference between this magical number of 70 and someone who has worked in the trade and can’t work anymore at 60… these people are both retired to me.
For me and my family? We will have a private pension, even if a state pension was available in 35 years time, I will not be accepting it.
p.s the UBI however is a viable alternative to the entire benefit structure.