Dr Judith Davey
Many of the (many) discussions about retirement income and about the financial aspects of retirement, talk about the “three pillars” model (originally put out by the World Bank in the 1990s), recognising that income in retirement could come from several sources. In the New Zealand context, the first pillar will be NZ Superannuation, which everyone receives at the same age, subject to residence requirement and with the same amount of money, depending on their living circumstances – living alone, living with others.
The second pillar is an occupation-based pension, based on contributions throughout working life. Workers’ contributions may be supplemented by employers’ contributions and the money invested. In NZ this is Kiwi Saver (KS), which is a relatively new scheme. It is not compulsory and it will take a while before people receive significant lump sums when they reach age 65 and their schemes mature.
The third pillar is either a private pension, arranged by individuals themselves, or income from savings – interest, dividends, possibly rents. The third pillar therefore depends on the ability of the individual to save and to invest.
As the proportion of the population over pension age (please do not say retirement age, as I will hit the roof. THERE IS NO RETIREMENT AGE IN NEW ZEALAND) increases, governments around the world are becoming more and more concerned about the cost of providing retirement incomes to older people. This has led to increases in the age of eligibility and other means of cutting back. It has also led to great “financialization” . What this means is that government policies are shifting more of the responsibility for retirement income planning to individuals. In this case, more and more, retirement income will be funded from financial market returns, subject to market fluctuations.
Our first pillar – NZS – does not fall into this category, although it may be subject to political fluctuations. Even here, the New Zealand Superannuation Fund (the so-called “Cullen fund”), which is intended to help pay for NZS as the demand grows, is invested in the international financial system and its returns cannot be guaranteed. Kiwi Saver – our second pillar- is certainly financialized. Contributions from regular wages or salaries go into investment funds run by private companies. The size of the lump sum delivered on maturity depends on the state of the financial markets over the period of investment and also on the skills of the fund managers to deliver good returns. Individual Kiwi Savers are subject to these uncertainties. They also have to be sure they have chosen the right KS scheme in the first place. Two people could have put the same amount into their KS pots but will get different pay-outs depending on the performance of their separate schemes.
To turn to the third pillar – self-funding. Could individuals do better by managing their own savings and investments to produce an adequate retirement income? Do people have adequate information and expertise to make appropriate and informed investment decisions. Not to mention enough self-discipline to save enough. This pillar does not get any subsidy from government, like KS. There is no tax relief on contributions to private schemes, which was the case in earlier times. Earnings from investments are subject to taxation. But, in this approach, people are freer to choose how they use their own resources to plan for an adequate retirement income.
There may be a fourth pillar to make our retirement income edifice more stable. I spoke about decumulation in my blogs last September. This means running down savings and investments to increase current income. Some people can trade-down to smaller/less expensive dwellings (perhaps moving into retirement villages), or take on commercial equity release schemes, mainly in the form of reverse mortgages.
Many people die with money in the bank, perhaps for a “rainy day” which never came; perhaps to provide inheritances; perhaps through inertia. But perhaps our savings could be used for a new form of retirement planning and a new source of income in later life to supplement the less reliable sources I discussed above.
In March this year I blogged about older people and entrepreneurship. Could this be a new source of retirement income? Could people develop businesses from their fifties onwards specifically to derive income from them when they retire from employment? There would be several advantages – it would allow more control over personal resources. It would provide stimulation and a way of applying accumulations of wisdom and know-how and a lifetime of building networks and contacts. It would avoid age discrimination by potential employers. The business could operate from home, allowing work to be more easily combined with caring responsibilities for relatives and grandchildren. Work at home would reduce costs. Modern technology can provide sophisticated communications and even production – 3D printers. It would be a new concept of home-work balance.
Risky, are you saying? But no more risky than seeking to create income through the volatile and uncertain financial markets, which have been called “the gaming tables of a global casino.”
What are the possibilities? Internet shopping, personal service delivery, writing and editing, small scale printing, catering, cakes for special events, bed and breakfast. The possibilities are endless. Older entrepreneurs rule!
 Thomas Wainwright and Ewald Kibler (2013) Beyond Financialization: older entrepreneurship and retirement planning. Journal of Economic Geography, vol.14 pp 849-864