A special tax scale for those aged over 65 could help claw back NZ Superannuation from high income earners.

This is one suggestion up for discussion in the three-yearly Review of Retirement Income Policies, being undertaken by Interim Retirement Commissioner Peter Cordtz.

It comes from a report on the sustainability of NZ Super prepared for the Review team by Susan St John and Claire Dale of Auckland University’s Retirement Policy and Research Centre.

NZ Super is paid out of the general tax take, and currently costs $39 million a day. It is projected to cost $120 million a day in 20 years.

Using a range of projection figures to 2060 from Treasury, St John and Dale concluded that Super would create an “explosive” rise in national debt, making Super unsustainable unless policy settings were changed. They assessed that raising the age or reducing the amount received by Superannuitants could create new problems. Means testing of assets was also discarded, but they did see merit in a new tax structure for high income earners over 65.

Their “blue sky proposition” sees Super remain as a universal grant not part of taxable income. When additional income is earned, it is taxed under a progressive tax regime so that high income earners effectively pay back the grant. One scenario would see a tax rate of 39% imposed, whereby the Superannuitant would have to earn $123,000 before the “break even” point was reached. A two-tier tax scale, with a lower rate of 17.5%, would protect the majority of Superannuitants with only modest extra income.

St John and Dale state this approach “retains simplicity and universality while reigning in expenditure at the top end”.

If their suggested tax regime had been in place in the 2017-18 financial year, together with an alignment of the single and married Super rate, around 16% of the cost of Super could be saved.

Peter Cordtz said St John and Dale’s suggestions were worthy of consideration.

“Tax has always been about the redistribution of wealth, so it’s worth looking at ideas where income could be redistributed more equitably, particularly between generations,” says Cordtz. “Reductions in payments to high income Superannuitants may release more taxes to fund services that benefit the population as a whole.”

“NZ Super was established to prevent poverty in old age, and is still important to ensure all New Zealanders have an acceptable standard of living as they age. We want to make sure it remains as a backstop for future generations.”

Public submissions on the Review are open until October 31 and can be made through the website cffc.org.nz. Cordtz will deliver his report with recommendations to government in December.

Background

The Retirement Commissioner is required by law to carry out a Review of Retirement Income Policies every three years.

Click here for the 2019 Review’s Terms of Reference

Interim Retirement Commissioner Peter Cordtz is overseeing the 2019 Review, being undertaken by the staff of his office, the Commission for Financial Capability.

Independent research papers commissioned for the Review are posted on the CFFC’s website: cffc.org.nz The views expressed in these reports are entirely those of the authors and do not necessarily reflect the views of CFFC or the recommendations to be made at the end of the current Review.

Public submissions are open until October 31.

The Retirement Commissioner’s report and recommendations will be tabled in Parliament in December.

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