Comparison of the New Zealand and Australian Retirement Income Systems

Comparison of the New Zealand and Australian Retir…
01 Mar 2013

There are two main differences between the retirement systems of Australia and New Zealand. First, Australia’s age pension is means tested while New Zealand’s is universal. Second, Australia has a compulsory employer funded superannuation scheme, the Superannuation Guarantee (SG). New Zealand’s version, KiwiSaver, is not compulsory – employees are automatically enrolled but can opt out. If they do not opt out both employees and employers are required to contribute. Both systems have been subject to frequent changes in rules to the point where public confidence has been damaged.

How do the two systems compare on the criteria of adequacy, economic efficiency, equity, sustainability and stability? Once KiwiSaver and the SG are mature schemes (which will take at least several decades), and after including the respective age pensions, the Australian retirement system will score higher on adequacy because it will provide a higher pre-retirement income replacement rate: about 90 per cent compared with about 60 per cent in New Zealand. This applies to a representative individual on average earnings throughout their working life. On economic efficiency criteria, the New Zealand system probably comes out in front overall, but more clearly on some of the economic criteria than others. It outperforms the Australian system in encouraging labour participation and employment, as well as better facilitating lifetime consumption smoothing. Neither system is a clear winner on labour productivity. On national saving, the universality of New Zealand Superannuation (NZS) is on balance likely to be positive for the level of saving but the relative generosity of NZS has the opposite effect. KiwiSaver has a smaller positive effect on saving relative to Australia’s SG.

There are two dimensions to equity: between generations (intergenerational) and within any given generation (intragenerational). Intergenerational equity is usually evaluated according to the degree of cost-shifting to future generations. New Zealand imposes more cost-shifting because the fiscal cost of NZS is roughly twice that of Australia’s age pension. However there is arguably more intragenerational equity in the New Zealand system due lower poverty among the over 64 age group and slightly less inequality across all ages.

The fiscal cost of NZS also has implications for sustainability. New Zealand’s overall retirement system is currently more expensive by about 1 per cent of GDP. Under current policies, this gap will grow mainly because the fiscal cost of NZS will grow relative to the cost of Australia’s age pension. Partially offsetting this is the slightly lower fiscal cost of KiwiSaver relative to Australia’s SG. However, long term fiscal projections are very uncertain due to continual speculation about further tinkering with the rules. Tax concessions are under threat in both countries and in New Zealand there is perennial debate about making KiwiSaver compulsory. Hence neither system scores well on stability, although perhaps New Zealand is in front on this criterion due to somewhat less tinkering than in Australia.

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