Income extremes threaten ideal of pension equality

New Zealanders are less likely to live in hardship in retirement than at any other time of their lives. However, the gap is growing between the rich and poor on the pension, with a likely cost for the taxpayer. Eloise Gibson reports.

Sir Robert Muldoon was hardly a feminist icon. Yet the crotchety, socially conservative late prime minister gave older women a new level of income equality. Former government statistician Len Cook chuckled this week when he painted Muldoon as a champion of women. ‘‘The arrival of New Zealand Super brought a degree of gender equity to retirement income that did not exist before,’’ Cook told a Wellington summit of researchers and savings honchos.

It was not just women. Muldoon’s expensive universal pension, then set at 70 per cent of the working income, starting at the age of 60, brought newfound egalitarianism to retirement.

A new report, prepared for the Commission for Financial Literacy, concludes that equality is fast disappearing. At one end, there are more long-term unemployed entering retirement in bad financial shape.

They may put pressure on the social services that currently keep most elderly out of poverty, says former Treasury economist and report author David Preston. At the other end, there is a growing crop of affluent double-career couples set to keep working healthily for longer. They will retire with tidy government and employer-subsided KiwiSaver nest eggs and comfortable freehold houses. These sprightly elderly may help take the pressure off the economy by earning and growing the labour force for longer.

In the lower middle, heading downwards, is a cohort of workers who increasingly cannot afford a house but won’t have saved enough by retirement to pay market rent.

‘‘What you have is a peculiar situation where the two extremes of retired population are both growing rapidly,’’ Preston told the summit. ‘‘On the one hand you have the ‘young’ elderly in a prosperous group still working – a group that has high living standards and is doing very nicely, thank you.

‘‘At the same time you have a tail at the other end of former beneficiaries who are moving into retirement in a poor financial state.

‘‘The middle is shrinking and the two extremes are growing. Do we just say: that’s life, it is going to happen?’’

The summit was organised to gather feedback for the commission’s next retirement policy review, due to go to the Government in September. Top of mind for many attending was how to get the proposals taken more seriously.

In 2010, the commission suggested superannuation could be made affordable by tweaking the age of eligibility and altering the way pensions were tied to wages. Neither has rippled the pond of government policy. Britain’s House of Lords last month virtually ordered the British Government to come up with a vision for an ageing society.

The commission’s research manager, Malcolm Menzies, joked to the summit that it was probably too late for New Zealand to set up its own House of Lords.

Menzies suggested New Zealand’s challenge was working out how to cater for growing old-age diversity, while keeping the best bits of New Zealand Super – low poverty, little red tape, and an incentive to keep working. Oh, and keeping a lid on the fiscal costs.

Not everyone agrees inequality should be part of it. New Zealand Institute of Economic Research principal economist Shamubeel Eaqub says welfare policy is for the struggling, retired or not. He has yet to be convinced that today’s real strugglers will require more services once they hit 65. Many are already claiming non age-specific benefits such as unemployment benefits and the accommodation supplement, he says. ‘‘The wealth disparity exists now. ‘‘We have welfare policy to deal with the most vulnerable,’’ he says. Fixing the income gap is not a new challenge, he says. ‘‘It is much more about labour market policy and education and skills training, and job matching but not under the umbrella of [retirement policy].’’

Preston and two other authors writing for the commission – Lillian Grace and Dr Rick Boven, former executive director of the New Zealand Institute – take the opposite view. Pressure on state services will rise with growing numbers of poverty-stricken retirees, they say.

In their eyes, this could add to the existing pressure from rising NZ Super and healthcare costs with the population ageing. Boven and Grace explored the possible effects of different international social and environmental trends, and suggested the Government should explicitly address inequality as part of its retirement policy. ‘‘Inequality in New Zealand has increased during the last few decades . . . there is a portion of the adult population who will be less well prepared, financially and socially, for their retirement years,’’ they said.

‘‘If economic conditions become more difficult, it could be harder to fund assistance for disadvantaged retirees, resulting in suffering, conflict and deaths.’’

The pension plays a big part of keeping the elderly out of poverty – it is even a pay rise for people who have been on benefits. But by itself it does not explain why the number of over-65s living in hardship is just 4 per cent.

That is less than a third of the overall rate for New Zealanders and almost a fifth of the rate for children.

Preston tots up the other factors that help towards that. Half the elderly have a community services card, compared with a quarter of working-age adults.

Proportionally, more older people use disability services – 21 per cent of superannuitants were on a disability allowance in 2012 (usually about $20 to $40 a week). Then there is state housing, the SuperGold Card, targeted free healthcare, and means-tested rest-home subsidies. That package gets pricier if more people need more of it. ‘‘In terms of government budgets, the growth in the disadvantaged group among the elderly will lead to more pressure for additional resources, things like the accommodation supplement, disability allowances, state housing, possibly the rest-home subsidy,’’ Preston says.

Exacerbating matters are other social changes. More former beneficiaries will be hitting retirement. In 1970, when today’s retirees were young or middleaged, income-tested beneficiaries were just under 31,000, or 2 per cent of the working-age population. Half were widows. By mid-2012 there were 300,000 beneficiaries, or nearly 11 per cent of the total, Preston found.

At the same time, the share of housing stock allocated to Housing New Zealand rentals has been declining and little new local government social housing has been developed for a decade, his report says. Unless the rising number of people without houses retire with sizeable nest eggs, they may struggle with rents. ‘‘Home ownership is falling rapidly. ‘‘If this doesn’t change, the Government will be faced with increased costs for things like accommodation subsidies.’’ In the past decade, demand for accommodation supplements for over-65s has crept up marginally from 3.6 per cent to a still-modest 4.9 per cent. Then there are the family factors. Baby boomers had fewer children than their parents and more of their children will spend time working overseas, he says. Incoming migrants will replace them as workers but not as support for their parents.

But it is not all doom and gloom – at least not for the economy. A widening gap would have positive economic effects, too, Preston says. Increasingly well-off and healthy savers will boost the workforce by working for longer.

That may help go some way to counteracting any pressure on subsidies, he says. Already the proportion of people still working aged 65 to 69 – the first of the wave of baby boomers – has been rising strongly and they are proving less of a burden than feared, he says.