LAUNCH OF RETIREMENT SAVINGS SCHEME WHITE PAPERDeputy Prime Minister
Prime Minister, ladies and gentlemen, thank you for attending the launch of the Retirement Savings Scheme.
This is an important debate at a critical time.
The issue is the future of our retirement savings.
Under the present retirement system, those in the workforce need to provide not only for themselves and their families, but also - through their taxes - for New Zealand Superannuation for those who have retired.
New Zealanders are living longer and having fewer children. As a greater percentage of the population retires, the ratio of workers to retired people will grow smaller and smaller.
Next century it will be harder to provide an adequate retirement income from taxation.
[GRAPHIC 1 - Number of people aged 65 and over]
Today, just under 12 % ,or one in every eight New Zealanders, is aged 65 years and over.
In 50 years time around 25% of New Zealanders will be 65 year and over - one in four people.
[GRAPHIC 2 - Number of people 16-64 for every person aged 65 and over]
To put this another way:
There are today around 5« people of working age for each person over 65 years.
By the middle of the next century there will be just over two people of working age per retiree.
Fewer workers per retiree means that the taxation burden of providing retirement income will substantially increase.
This means that unless there are policy changes, age-related expenses will rise significantly in the next century.
For example, in 50 years the cost of providing New Zealand Super will double from 5% of GDP today to more than 10%.
[GRAPHIC 3 - Superannuation expenditure as a % of GDP, with NZS]
A good Government cannot ignore the fiscal implications of an ageing population.
[GRAPHIC 4 - Government expenditure as a % of GDP, without RSS]
That's the reason some of us do not believe that the current arrangements will be there to deliver the same level of assistance in retirement that our parents currently have.
There is, therefore, a very real need to consider changes.
The Coalition Agreement committed the Government to design the best compulsory super scheme to put before voters at a referendum.
In doing so, it took the best possible independent advice from the public and private sectors.
We also paid full regard to the concerns raised over recent months.
There is nothing more powerful than an idea whose time has come.
This Retirement Savings Scheme announced today in the White Paper "You and Your Retirement Savings," has been approved by the Coalition Government in keeping with the Coalition Agreement between the National and New Zealand First parties.
It offers security and certainty in retirement income to all New Zealanders and helps ensure superannuation is no longer subject to the whims of political intervention.
The Retirement Savings Scheme delivers on our set of objectives. Our aims are:
to ensure a guaranteed income at retirement no less than that paid as at July 1 1998,
to ensure those who can save do, and those who can't save, will be looked after,
to ensure current retirees and those close to retirement will not be affected,
to ensure those aged under 60 are given increased security about their retirement,
to ensure existing savers are recognised.
[GRAPHIC 5 - Flow diagram of RSS]
Under this scheme, people contribute some of their income into a private sector retirement fund of their choice - the Retirement Savings Scheme.
Contributions start at 3% in 1998/99, and will rise to 8% within five years. That is, a further 2% in 1999 and a further 1% in each of the years 2000, 2001 and 2002.
Contribution rates will only increase provided it is possible to make sustainable tax cuts broadly matching these increases.
People will not be required to contribute if their income falls below $96 per week ($5,000 per year), or once their savings reach the target amount.
The savings target amount is up to $120,000. This figure applies only to people born on or after 1 April 1973.
For those born before 1 April 1973, the older you are now, the less you will be required to save under the Retirement Savings Scheme by the time you retire.
And yes the scheme is compulsory, just as the financing of New Zealand Superannuation through taxation is compulsory now.
The scheme will cover all New Zealanders except, temporary foreign workers.
All forms of taxable incomes will be subject to the scheme.
The savings target for young people who enter the job market now is up to $120,000, substantially lower than some of the figures bandied about over the past couple of months.
This amount can be achieved in 35 years time, if you make $30,000 per annum and your investment earns 3% net interest.
We will confirm the exact savings target before the Retirement Savings Scheme comes into effect, but it will be no more than $120,000.
This target is the same for men and women.
Savings will be invested in the individual saver's name until the saver reaches the age of 65.
Savers will be able to choose which fund to join and to transfer between them.
They will only get access to their savings at 65.
If you die before you reach 65, your Retirement Savings Scheme funds will become part of your estate.
At age 65, the saver will purchase a whole-of-life annuity - an amount that will be paid in fortnightly or monthly payments for as long as the person lives.
All New Zealanders, at the time they retire, are guaranteed to receive an income which starts at 33% of the average ordinary time wage (after tax) for an individual as now and 66% for a married couple.
They will receive the guaranteed income, regardless of how much they have saved under the Retirement Savings Scheme.
This income is tax free, and everyone will continue receiving it for as long as they live.
Their retirement income will be inflation indexed to retain its purchasing power.
At 65 this income is higher than they would receive under the current New Zealand Superannuation.
Such an income guarantee means the scheme is fair to all New Zealanders: European, Maori, Pacific Islander, Asian, men and women, high and low income earners, and those on no income at all.
In short, this scheme is fair to everyone.
It also ensures an adequate and secure level of income during retirement however long one might live.
Because women on average live longer than men, the Government will pay all women a top-up to purchase the standard annuity, which is more expensive for women than for men.
[GRAPHIC 6 - Male/female chart]
If you die between 65 and 75, the unused portion of your personal Retirement Savings Scheme savings will be paid as a lump sum to your estate.
In contrast, under the current system, entitlement to New Zealand Super ceases on death, whether you die before or after 65 years.
If you have other, non-Retirement Savings Scheme savings, you will benefit by having extra money to spend in retirement.
Some people perhaps because of family commitments or low income, won't be able to save the target amount to purchase an annuity.
When these people turn 65, the Government will make up the difference between their Retirement Savings Scheme savings and the amount required to purchase the annuity.
Retirement income will therefore be a shared responsibility between the individual and the Government.
Those who can save will be required to do so.
Those who can't will be assisted by the Government to purchase an equivalent annuity at the point of retirement.
All single people, living alone or sharing accommodation, will also be automatically entitled to additional regular payments, just as single people on New Zealand Super are today.
These will continue to be made by the Department of Social Welfare.
People born on or before 31 March 1938 won't join the scheme.
The Retirement Savings Scheme will not affect those already receiving New Zealand Superannuation.
You will be able to continue in retirement safe in the knowledge that your future New Zealand Superannuation income is assured.
If the Retirement Savings Scheme is not introduced, the current New Zealand Superannuation scheme can only work by either:
increasing taxes, or
raising the age of qualification still further, or
further reducing the level of New Zealand superannuation, or
increasing debt, or
a combination of all of these.
All of these options would adversely affect those who have already retired and those about to retire.
For all those over 60, the Retirement Savings Scheme will improve their security.
It solves the problem of future affordability posed by the impending retirement of the "baby boom" generation.
The Government of the day will have enough money to keep up your New Zealand Superannuation payments throughout your retirement without running out of cash and without changing the rules at a time when it is too late for you to make up the difference.
Government funded retirement income support has to be affordable.
Not just now but in the future.
This Retirement Savings Scheme ensures this, both for those about to and those already retired, and for all future retirees.
The transition from New Zealand Superannuation to the Retirement Savings Scheme has been designed to ensure a smooth changeover:
it will take 40 years,
all current retirees and all those retiring before April 1, 2003, will receive a full entitlement to New Zealand Superannuation throughout their retirement,
meanwhile younger people will begin saving in Retirement Savings Scheme funds with gradual increases in contribution rates matched by tax cuts.
[GRAPHIC 7 - NZS/RSS phase-in chart]
Between 2003 to 2038 there will be a phasing down of New Zealand Super and a phasing up of the Retirement Savings Scheme annuity income.
From 1 April 2038 new retirees will get all their base income payment from Retirement Savings Scheme annuities.
Any extra savings individuals accumulate outside the Retirement Savings Scheme will not affect their entitlement to Government top-up support to buy a standard annuity.
In summary, the Retirement Savings Scheme will mean improved security of retirement incomes for those retiring during and after the phase out of New Zealand Superannuation.
The impact of Retirement Savings Scheme expenditure on the Government is dramatically less than New Zealand Super.
This supports a favourable economic environment in which New Zealand can continue to prosper.
[GRAPHIC 8 - Superannuation expenditure as a % of GDP]
The Retirement Savings Scheme will ensure superannuation is no longer subject to the whims of political interference.
Future politicians will be far more reluctant to fiddle with private savings than with a tax-payer funded scheme.
If anyone doubts that, they just need to look at the constant changes made to Government-run schemes both in New Zealand and abroad.
In 1978 National Superannuation was worth 80% of the gross average wage - now it's worth 67.2% of the net average wage.
Under the current arrangement, New Zealand Super is calculated to drop to 65.8% of the net average wage at April 1 1998. Under the Accord, the current floor is 65%.
This scheme guarantees the Government can't spend your money.
Under the Retirement Savings Scheme, current superannuitants will not only be protected but have their current level of superannuation guaranteed.
Younger generations will have their own savings to finance their retirement secure from the reach of the long arm of Government but supported by Government money if they are unable to save enough themselves.
Many New Zealanders are already saving for their retirement.
And, the Retirement Savings Scheme is designed not to interfere with existing savings arrangements.
However, it does allow existing schemes to be accommodated in the Retirement Savings Scheme if people choose to do so.
The Government will introduce special rules to facilitate changes by schemes which wish to join the Retirement Savings Scheme.
No existing savings funds or savers will be forced to convert existing funds into Retirement Savings Scheme-qualifying funds.
Any changes under the special rules will need to be approved by the Government Actuary who will publish principles to be followed by funds wishing to become part of the Retirement Savings Scheme.
They, the principles, will protect members' existing interests and rights and will ensure that the aims of the compulsory scheme are not compromised.
The Retirement Savings Scheme will be fair to all New Zealanders: men and women, and high and low income earners.
Retirement income will be a shared responsibility between the individual and the Government.
Those who can save will be required to do so, and those who can't will be assisted by the Government.
It will, over time, significantly reduce the cost of retirement income to the taxpayer.
It will give New Zealanders security and certainty about their retirement income, because once they have purchased their annuity, they will be unaffected by changes in Government policy.
If an annuity provider fails, retirees' incomes will be unaffected. The Government is in consultation with the industry to ensure safety mechanisms are put in place. The Government will guarantee the top-up for any saver who is unable to make the savings target.
It is now your responsibility, to retire and inform the public well and not retire from informing the public.
This is a once in a life time chance for we New Zealanders to solve a problem facing all of us, in a lasting, sustainable, fair and open way.
I'm confident that if we New Zealanders are given all the facts, then we will make the right decision.