NZ Super works well, but increasing longevity puts Kiwis’ retirement savings at risk.

Every three years, New Zealand’s Retirement Commissioner must “review the retirement income policies being implemented by the Government and … report to the Minister”*. The 2019 Review of Retirement Income Policies was, as always, an opportunity for organisations to submit their analysis of trends.

The Retirement Income Interest Group (RIIG) of the New Zealand Society of Actuaries focused its submission to the 2019 Review on longevity. In the report, Longevity in New Zealand – Implications for Retirement Income Policy, the actuaries highlighted that average lifespans are expected to keep increasing.  However, they point out that life expectancy, or the average age at death, is not the only or best indicator of how long life might be, or how long retirement savings need to last.

• Life expectancy is usually quoted as the average length of life left at a given age, assuming people experience the population’s current longevity experience.  But longevity is expected to keep improving, so a better indicator takes into account an estimate of what the future holds.
• Also, life expectancy is an average, but it is the range of possibilities that means people may live longer than expected – this is longevity risk.  So it’s important to understand what the range might be, best shown in charts like the one below.  This shows various indicators for a female who reached age 65 in 2017.

As shown, the life expectancy most often quoted for this group would be 82 or 89 years, but given the most common age at death, planning for a lifespan that might reach 90-95 years would be sensible.

Given trends and characteristics of healthy lifespans, RIIG suggests that New Zealanders in their 40s or older should use an estimate for their likely lifespan of 25 to 30 years after age 65 (to age 90 to 95). Testing a retirement plan to age 100 would be cautious for this group, and sensible for younger people, especially if female, with a healthy lifestyle or with long-living parents or grandparents.

The actuaries called for better information to be made available to guide people through the options available in later life to decumulate savings.  This would include more, and better explained, information on lifespan prospects, information on the costs of end-of-life care that might require personal funding, decumulation options and KiwiSaver draw down strategies.

RIIG also published a background paper Retirement income policy in New Zealand: A discussion of context and principles. Despite lengthening lifespans, the actuaries did not call for an increase in the age of eligibility of New Zealand Superannuation (NZS).

It is a policy choice to keep funding NZS at age 65, which can be afforded, and New Zealand has unique issues of equity to consider, particularly with regard to ethnicity. As has been covered in this post, New Zealanders generally want the current system to stay in place. NZS resonates with New Zealand values, and sustaining that resonance should be considered alongside fiscal sustainability.

RIIG did suggest that if the Government decided to change NZS, then of the possible changes, increasing the age of eligibility is a reasonable option, with manageable consequences. Alternatives include reducing the level of benefit, which risks adequacy; or, means-testing which risks inequity, complexity and associated costs, and barriers to working or saving.

“Understanding longevity prospects and longevity risk – the risk of living longer than expected – must be central to considering retirement income policy. New Zealand Superannuation is the best protection against longevity risk, and we all need a good NZS system. It is quite possible that, despite the introduction of KiwiSaver, younger cohorts will need NZS just as much, if not more, than older cohorts, because of lower home ownership, lower wage growth, less stable jobs and lower savings rates.”

 

RIIG – the Retirement Income Interest Group – is a team of actuaries who are all members of the New Zealand Society of Actuaries and have many years of experience in pensions, insurance and investment. I am a member of RIIG.  RIIG’s report represents the collective personal views of RIIG members and does not necessarily reflect the positions of their employers or other members of the New Zealand Society of Actuaries.

 

* New Zealand Superannuation and Retirement Income Amendment Act 2005