Michelle Perkins, 12 April 2017

In early March, National announced plans to lift the age of entitlement for New Zealand Super from 65 to 67, starting in 20 years time. Below we discuss the implications for individuals impacted by the change.

While the proposed change to the age of entitlement for New Zealand Super has several hurdles to pass before it’s enacted (the most significant of which is National being re-elected to government and obtaining the support it will need to pass the change from other parties), one thing is clear – individuals need to take increasing responsibility for saving for their retirement.

Raising the age of entitlement, whether now or in the future, is inevitable and this should be taken into consideration when planning for your retirement. While the 20 year lead in time proposed by National has been criticised by some, it provides those affected by the proposed lift in the age of entitlement with sufficient time to prepare for the change, and time is one of your best friends when it comes to saving for retirement.

New Zealand is not alone in the conundrum faced from the rising costs associated with an ageing population. This developed world phenomenon has already seen the likes of the US, UK and Australia lift the age of entitlement for the pension to 67, as well as introducing other measures to lessen the burden on government finances, such as means or asset testing eligibility for the pension. Unlike New Zealand, some countries also have compulsory super. For example, in Australia 9% of an individual’s salary is automatically deducted for super contributions. This will rise to 12% by 2020.

What is National proposing and what are the actual implications?

If re-elected, National are proposing to lift the age of entitlement for New Zealand Super from 65 to 67, starting in 20 years’ time.

  • The age of entitlement to New Zealand Super will increase by six months each year from July 2037 until it reaches 67 in July 2040.
  • National have said they will leave the age at which you can access KiwiSaver at 65.
  • National also propose doubling the residency requirements for New Zealand Super to ensure applicants have lived in New Zealand for 20 years, with five of those after the age of 50.

NZ Super table 1

In terms of implications, anyone born before 1 July 1972 will not be impacted by the proposed change and is eligible to receive New Zealand super at age 65. Anyone born on or after 1 January 1974 will be eligible for New Zealand Super at age 67.

Based on our calculations and the underlying return assumptions for a balanced portfolio, we estimate the impost of the proposed change for a person born in January 1974 is $29.00 (single) or $44.00 (married couple) per week. This additional weekly saving would be sufficient to bridge the shortfall in New Zealand Super from age 65 to 67, allowing you to retire at age 65 if desired.

NZ Super table 2

Key takeaway

The over-riding takeaway from National’s announcement, previous comments from the Retirement Commissioner, and the eligibility for the pension in many other countries, is that costs are rising, government finances are constrained and individuals need to take increasing responsibility for saving for their retirement.

If you wish to enjoy a retirement lifestyle, more than which is afforded by New Zealand Super, the easiest way is to start saving today. This will allow you to maximise the benefits of compounding, which sees not only your capital earn returns but your returns also earn returns (see chart below). Someone age 25 who regularly saves just $30 a week will have grown their savings to $256,000 by age 65 (assuming capital growth of 6%pa). This halves to total savings of $130,000 for someone who started saving the same amount just 10 years later, and $61,000 for someone who started saving at age 45. However, the more telling number, due to the benefits of compounding, is the difference between the actual contribution and the end value.

Someone who commenced saving at age 25 would have contributed $62,400, with the return on their investment amounting to more than 3x their contribution. The return on investment for someone starting just 10 years later would be 1.8x their contribution, while a 20 year delay in savings would amount to a return on
investment of around 1x their contribution.

NZ Super table 3

Time is the most important ingredient to compounding, so the sooner you start saving the greater the benefit will be over the life of your savings/investment period.