The pension: Lotto for retirees
Every Kiwi couple has a million-dollar gift waiting for them, but most of us are totally unaware of its high
value.
To get our hands on it, all we have to do is turn 65 and last the distance in terms of life expectancy.
Yet we forget to be grateful for this gift. We forget to thank our children (the taxpayer) and we forget to thank our elected MPs for the generous country we live in and the legislation that creates it.
We are talking about the gift of superannuation. That squiddlydiddly amount of $633 a week. An amount many belch and moan about. It’s roughly $33,000 a year for a household of two retirees.
Ever stopped to think about how much it’s worth? Or how much you’d need to save yourself to replicate it? Many retirees trot out that well-worn yawn of having paid taxes all their life and they’ve earned it.
The financially transmitted disease of entitlement sets in. Most of us don’t come close to paying our way in the tax system.
Granny and granddad are expensive
A woman aged 65 today is expected to live to age 89. A man is expected to reach 86. On that basis age 90 is quickly becoming the norm, not the exception. It makes retirement a 25-year reality at the centre of the bell curve.
If our $33,000 is increased by inflation of 1.5 per cent each year, we’ll be receiving a joint income of $47,000 at age 90. When you add up those 25 years of cash-flows it comes to an impressive $988,833 gift from the government. Just shy of a million. It’s akin to winning Lotto at the tender age of 65.
For those who feel like tormenting the taxpayer, hang on in until age 95 and the bonus ball takes you to over $1.2 million. It’s not even much of a challenge with medical science and early intervention keeping us alive longer.
Strike out early at age 80 and you’ll be a bargain at just under $550,000.
What are the costs of replication?
How much would we need to save ourselves to create a pension pot that could recreate this annuity?
To calculate this we work out the net present value (NPV) of our income stream. Income starts at $33,000 and rises slowly by 1.5 per cent for 25 years. We invest our lump sum in shares and bonds with annual returns of 5 per cent net of tax and fees. Our starting pension pot is the unknown value we’re solving for. Bung all this in the tumble dryer and it spits out an NPV figure of $537,000.
As a couple, you would require an extra half-a-million dollars in household savings to replicate superannuation.
Plus we are running three additional risks that superannuation removes. Investment risk, as we don’t know the returns of equity and bond markets. Inflation risk, as 1.5 per cent is only an estimate so we’d lose $27.8b $15.5b $2b $19b purchasing power. And longevity risk, of outlasting the average person and having no money left. The taxpayer removes all these issues.
New Zealand’s most expensive beneficiaries
There’s an old gag about the most expensive beneficiaries in Britain being the royal family. By New Zealand standards that honour belongs to our pensioners.
The 2019 Wellbeing Budget allocated $27.8 billion to the welfare system.
Who cracked off with more than half of it? Granny and granddad. A cool $15.5b or 55 per cent of welfare payments.
The unemployed hardly make a ripple at $2b or 7 per cent.
Accommodation assistance costs $1.8b and solo parents support is just over $1b. Student loans are $1.5b and are required to be repaid.
We run the entire health system on $19b and the Ministry of Health tell us the over-65s use 42 per cent of the DHB budget when they represent 15 per cent of the population. The education system is run on $3b less than we pay retirees each year.
That’s not to say any of this is wrong or unaffordable. Keeping the economy on steroids is vital and will be the crucial factor in generating a growing tax base to support our longer-living population.
We all have a high personal level of responsibility to save for retirement and we can take heart that the government and younger taxpayers present us with that million-dollar start.
Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.