NZ Super works well, but increasing longevity puts Kiwis’ retirement savings at risk

Increasing longevity means Kiwis need to rethink how long we might live in retirement, and do more and better planning about how to ensure our retirement savings go the distance.

That’s the message from the Retirement Income Interest Group of the New Zealand Society of Actuaries, which today published its submission to the 2019 Review of Retirement Income Policies including a new report, Longevity in New Zealand – Implications for Retirement Income Policy.

The actuaries highlight that average lifespans are expected to keep increasing.  However, they point out that life expectancy, or the average age at death, is not the only or best indicator of how long life might be, or how long retirement savings need to last. 

“There should be more information available to guide people through the options available in later life to decumulate savings,” said Group convenor, Daniel Mussett.

“Not just better information on lifespan prospects, but also the costs of end-of-life care that might require personal funding, decumulation options and KiwiSaver drawdown strategies.”

The actuaries suggest that New Zealanders in their 40s or older should use an estimate for their likely lifespan of 25 to 30 years after age 65 (to age 90 to 95). Testing a retirement plan to age 100 would be cautious for this group, and sensible for younger people, especially if female, with a healthy lifestyle or with long-living parents or grandparents.  

Despite lengthening lifespans, the actuaries are not necessarily calling for an increase in the age of eligibility of New Zealand Superannuation (NZS).

“It is a policy choice to keep funding NZS at age 65, which can be afforded,” said the lead author of the Longevity in New Zealand report, Alison O’Connell.

She said New Zealand has unique issues of equity to consider, particularly with regard to ethnicity.

“New Zealanders generally want the current system to stay in place. NZS resonates with New Zealand values, and sustaining that resonance should be considered alongside fiscal sustainability.”

The Group suggests that if the Government did decide to change NZS, then of the possible changes, increasing the age of eligibility is a reasonable option, with manageable consequences.

Alternatives include reducing the level of benefit, which risks adequacy; or, means-testing which risks inequity, complexity and associated costs, and barriers to working or saving.

Understanding longevity prospects and longevity risk – the risk of living longer than expected – must be central to considering retirement income policy,” said O’Connell.

“New Zealand Superannuation is the best protection against longevity risk, and we all need a good NZS system. It is quite possible that, despite the introduction of KiwiSaver, younger cohorts will need NZS just as much, if not more, than older cohorts, because of lower home ownership, lower wage growth, less stable jobs and lower savings rates.”


Notes

Life expectancy is usually quoted as the average length of life left at a given age, assuming people experience the population’s current longevity experience.  But longevity is expected to keep improving, so a better indicator takes into account an estimate of what the future holds. 

Also, life expectancy is an average, but it is the range of possibilities that means people may live longer than expected – this is longevity risk.  So it’s important to understand what the range might be, and we think it’s best shown in charts like the one below.  This shows various indicators for a female who reached age 65 in 2017 (the latest data from StatsNZ).

A life expectancy often quoted would be 82 or 89 years, but we suggest planning for a lifespan that might reach 90-95 years would be sensible.

Estimated number of deaths at each age from 100,000 female New Zealanders born in 1952 who reached (or are expected to reach) age 65

In their 2017 report Decumulation Options in the New Zealand Market: How Rules of Thumb can help RIIG defined a set of Rules of Thumb to help consumers decide how to draw down their KiwiSaver or other savings.

Actuaries work day-to-day across a range of disciplines: mathematics, statistics, business, finance, economics, risk management, demography, behavioural science and politics.  The members of RIIG have many years of experience in pensions, insurance and investment.

NZ Actuaries