Facing the Future: Retirement Income Policy Review 2019

The three-yearly review of Retirement Income Policy came out recently, prepared, as is their statutory duty, by the Commission for Financial Capability (formerly Retirement Commission). It is the latest in a series of policy reviews, going back to 1991-2, in which I have taken a lot of interest in and even contributed to. The report itself contains a section on previous reviews and their outcomes. A common conclusion has been that a mixture of public and private sources of retirement income is needed, but exactly what the mix should be has been hard to arrive at.

There is an easily readable executive summary and an interesting forward to the report. Here I pick up what I found the most interesting points, adding my comments.

• The “Language” of retirement

I could not agree more that it is outdated and misleading. “Retirement” means withdrawal, stepping back. That is certainly not how see my later life . “Transition” is suggested by Peter Cordtz the current (interim) Retirement Commissioner and that is an improvement, if not a complete alternative.

• The Centrality of NZ Superannuation (NZS)

The main, and sometimes the only, news media reaction to the review was to point out that it did not support raising the age of eligibility for NZS and that its present settings are sustainable for the near future. NZS is seen as “good value”. The report points out that NZS supports 85% of older people to maintain a foundation standard of living. There are other means of ensuring affordability as time goes on – tax clawbacks for the wealthy, changes in length of residence for eligibility and international pension contributions.

• Oncoming challenges

But the review foresees and documents large oncoming problems for ensuring adequate retirement incomes. Falling home ownership rates, rising debt and inequality make large sections of the ageing population vulnerable to poorer outcome in the future. Accumulated advantage and disadvantage have resulted in significant disparities, particularly for Maori and Pacific people. These have been pointed out in several policy reviews, but have not been seriously addressed, in the opinion of the 2019 review.

• Preparation for retirement

In view of these trends, the report places considerable emphasis on preparing younger age groups – especially those aged 55-64 – for reaching NZS age. Research findings, backed up by quotes from submissions to the review (which appear in each chapter), show that people are concerned about their future and worried about achieving a decent standard of living in retirement.

This calls for a better coordinated and aligned pre-retirement policy system, so that people have the best opportunities to prepare. Elements for developing a foundation for security in retirement are education, regular employment, home ownership and building up savings. Policies should intervene early in these areas and receive attention on a whole of government basis (see my blog posts for September and October 2018).

• The importance of home ownership

The review concludes that supporting home ownership is one of most “impactful” ways of reducing financial vulnerability in retirement. A paper prepared for the review goes into this aspect in detail and is a useful read. [1] This suggests that home equity can be mobilised in retirement, extracting capital tied up in housing to support retirement standards of living. But, at the same time the report is doubtful that downsizing is a practical way of doing this (supported by the Savile Smith paper). So……………

• Decumulation

The terms of reference of the review call for an examination of decumulation – drawing down on accumulated assets in retirement. But there is confusion about choices for doing this; the means are not well known, and people need assistance. Reverse mortgages and annuities are mentioned, but the former get little support, and annuities, although used overseas, have not developed widely in this country. The review suggests an expert advisory group to be set up to look at this area.

• KiwiSaver and KiwiSpend

Lifelong savings are an important aspect of preparation for retirement.  The review has a range of suggestions for improving KiwiSaver. A particular concern is the use of lump sums as KiwiSaver schemes mature. In their paper the Auckland Retirement Policy Research Centre[2] suggest KiwiSpend. This would involve an annuity, to provide cash for retirement living but also for health services and long-term care. It would require careful management to make the funds last through later life. The state would have to be involved but there appears to be no consensus on the details of its role. This would have to confront the fact that many people are unwilling to lose control over money – the result of their saving.

• The Role of the CFFC

The CFFC is tasked with monitoring and evaluating retirement income policies. The coordination of diverse public sector agencies is a daunting task.  There is also the challenge of avoiding political influences and frequent policy changes which have caused uncertainty in the past. The review calls for a “purpose statement” for the retirement income system and a Senior Officials Group to work on its recommendations. We await reaction and results.

 

[1] Housing, New Zealand’s Tenure Revolution and Implications for Retirement. By Kay Saville-Smith of CRESA, November 2019 (on-line link in review report).

[2] Decumulation: Time to Act by Associate Professor Susan St John and Dr Claire Dale of the Retirement Policy and Research Centre, University of Auckland (on-line link in review report).