Retirement Security and Financial Literacy in New Zealand: Policy Lessons from Abroad

Retirement Security and Financial Literacy in New …
01 Mar 2013


Most industrialized countries have in recent decades seen their long-standing retirement income policies challenged by demographic challenges (longer life expectancy and lower fertility rates), accompanied by slower and uneven economic growth and fiscal stress. These challenge have forced most of these countries to reconsider the sustainability of their pension commitments. Countries have responded in a number of ways. For countries with contributory pension systems, policy changes generally began with payroll tax increases, and continued with "stealth" reforms to benefits and eligibility and phase-out of early retirement. Reform initiatives in many countries have become more aggressive in the past decade, and have further transferred longevity risk from government to current and future pensioners, notably by increasing pensionable ages (the minimum age at which a state pension could be received without a benefit reduction), and by lowering pension benefit levels. There has been a widespread breaking of the 65 "upper limit" on standard retirement ages. Some countries have even put in place mechanisms that will increase pension ages or reduce benefits automatically in the future if life expectancy grows further or economic growth slows (OECD, 2011: chapters 1, 5; OECD, 2012). A number of wealthy countries have also shifted part of their retirement income system away from benefits defined by statutes to mandatory or quasi-mandatory retirement savings vehicles that create an increased market risk for retirees.

New Zealand has not been immune from the demographic and fiscal challenges posed by an aging population, though its demographic challenge is not as strong as in many other wealthy countries. New Zealand remains distinct in important ways: it stands out among the wealthy countries for its high reliance on a single, universal flat-rate pension paid out of general revenues as its primary government-sponsored vehicle for providing retirement income. However, like most other industrialized countries, New Zealand has responded to demographic and fiscal challenges by making a number of changes in its retirement income system. The most notable changes are a large and very swift increase in the age of eligibility for New Zealand Superannuation from 60 to 65 beteen 1992 and 2001, a reintroduction of tax incentives for retirement savings through KiwiSaver, the introduction of and subsequent modifications to the KiwiSaver program, and the introduction and later suspension of government contributions to the New Zealand Superannuation Fund to help smooth the burden of financing NZ Super across generations.

The diversification of instruments for promoting retirement income in recent years in New Zealand means that lessons from a variety of foreign countries are potentially useful for policymakers in New Zealand. This paper examines some of these lessons. The first section of the paper addresses general constraints on retirement income policy suggested by the experience of other industrialized countries that may limit the range and practicality of choices that are open to New Zealand policymakers. The second section focuses on specific policy choices, and the trade-offs that international experience suggests that New Zealand policymakers will confront in making those choices.

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