New Zealand has taken a unique approach to the provision of retirement income. A simple, adequate state-funded basic income is provided on an individual basis through general taxation. There are no tax incentives to encourage pensions or any other particular form of saving for retirement. Attempts to shift New Zealand to compulsory-funded private scheme as a replacement for the state pension have been strongly resisted. Simplicity and efficiency are the principal advantages from this approach, making New Zealand unusual among similar nations. The policy mix has also had egalitarian consequences for the distribution of income among the retired and for the relatively few that need extra assistance to escape poverty. From an intergenerational perspective, New Zealand appears well placed to meet the demographic challenges of next century. Nevertheless there has been a demise of private employment-based retirement schemes, especially pension schemes, suggesting that relatively few new retirees will have additional pensions in the next century. This may raise efficiency concerns, especially for the funding of long-term care, and has worrying implications for the income distribution of middle income retirees.

Long term care has been relatively neglected in the discussions about the ageing population to date. Other countries have considered social insurance arrangements to share the burden. Following the failure of the Accord there is a dearth of discussion about the need for an integrated approach for all retirement provisions.

This paper represents work in progress. Please check with author before quoting

The World Bank's influential report on pensions (World Bank 1994) popularised the notion of the three-legged stool. The idea being that it was sensible to have retirement income from a variety of sources not just the state. The three pillars or legs are usually the state pension, occupational or other mandatory pensions, and private saving. 'Spreading the Insurance function across all three pillars offers greater income security to the old than reliance on any single system' (World Bank, 1994, p.xiv). The Australians can boast a 'four legged chair': The old age pension, the Superannuation Guarantee charge, occupational savings schemes and voluntary schemes. To carry the analogy over to New Zealand arrangements it might be fair to say we say we would be foolish to try to sit on our chair but may be we can stand on our own two legs. The two legged approach consisting of only a state pension and voluntary saving is however greeted with much scepticism in other parts of the world.

For the first leg, the New Zealand Government provides a non-contributory, flat-rate, taxable, universal pension (New Zealand Superannuation) which is set at a level so that only a small minority of those with few private resources need additional means-tested income or tied supplements.[1] This is a substantial leg, providing over 75% of retirement income for nearly three quarters of all women over 65, and well over half of all men (Statistics New Zealand 1997).

While the married person rate is lower than the single rate or the living alone rate, the pension is based on the individual and taxed in the hands of the individual. For older married women, many of whom have not worked outside the home, the pension represents independent income. It is not conditional on a partner's work record or income. Unusually, the non-contributory basis of NZS has seen women of eligible age receive the pension on the same basis as men. The individual entitlement basis means that divorce or widowhood do not pose any special administrative problems.

The voluntary 'leg' is based on tax saving in a tax neutral environment in any way that suits the individual. This makes it difficult to measure as the form of saving may be in trusts, physical assets, housing, both owner-occupied and rental, as well as in financial income- yielding assets. This diversity gives this leg the advantage of maximum flexibility and gives a sense of ownership and control.

There is however now no certainty that this two-legged arrangement is stable and secure. Both legs must be strong for the New Zealand model to attain credibility. The turbulent history of political machinations over the state pension in New Zealand is documented elsewhere (St John 1999). The nature of this history, especially the controversial surcharge and the undermining of the 1993 Accord between the major political parties led Paul Johnson to comment in a recent international publication:

The experience of 'reform' in New Zealand has been especially unhappy, protracted and frankly absurd. A full description of all the reforms, proposed reforms, counter-reforms and about turns read like an implausible script for a farce (Johnson 1999)

While the framework of retirement incomes policies set out in the 1993 Accord was endorsed by a comprehensive review as required by the Retirement Income Act 1993 (Periodic Report Group, 1997), political events subsequently led to the demise of the Accord. The first blow was the abolition of the surcharge as an outcome of the Coalition Agreement (Coalition Agreement 1996). The final mortal blow was delivered when the government announced in September 1998 that the wage band floor would fall to 60% (from the 65% floor that had just been breached). Then a new taskforce (Taskforce 2000) was announced with many of the same objectives as given to the Periodic Report Group of 1997. They are to find 'equitable and sustainable solutions by the end of 2000.[2]

Nevertheless, NZS has proved to be resilient and a popular scheme. A 92.8% rejection of the compulsory private scheme out to referendum in 1997 is an indication that few New Zealanders want radical change. But in the meantime many of the issues concerning an ageing population are failing to receive much attention. For example, the needs of housing for an ageing population and the funding of long term care and health needs. Of these, long term care is possibly the most in urgent need of attention.

New Zealand has a tradition of a highly targeted and in many respects, inequitable, approach to the funding of long term care for the elderly. This stands in contrast to the simple, flat rate universal approach for the tax-funded pension. While there has been much debate about the issue of long term care in other countries, such as Australia, little discussion is ensuing in New Zealand. This paper reviews the problems and the policy changes to date in the area of long term care and suggests that an integrated approach to all the facets of the needs of the retired is needed.

In July 1993 the rest home means test was extended to other institutional forms of long term care for the elderly. In justifying this extended regime the government reminded critics that asset testing for rest homes had been in place since 1961 and that asset testing also applied to other social welfare benefits such as the accommodation supplement.

Rationalisation seemed logical and equitable but once the changes began to bite in early 1994 there was an explosion of rage from the elderly community. The government ignored calls for a full review by an independent working party or multiparty group, and a Private Member's Bill to abolish asset testing failed to pass in the House. Instead, some changes to the regulations were announced in March. The niggardly treatment of prepaid funeral expenses was rectified by exempting this payment from the asset test and a cap was introduced to limit private contributions to $636 a week for those in 'appropriate' care.

The limit for the asset test was doubled from $20,000 to $40,000 for a married couple with one spouse in care. This increased the gulf between the treatment of the married person with a 'spouse' still in the community and a single person without dependants who could keep only $6500 with no exemption for the family home. A married couple, both in care, were effectively treated like two single people with a joint exemption of only $13,000.

The Coalition Agreement 1996 promised to remove the income and asset test for geriatric care in a public hospital and the asset test for care in a private geriatric hospital. This promise was to be implemented on 1 October 1998, but never enacted. In its place, some more relaxed thresholds for the income and asset testing were announced.

The asset test threshold for married couples with one spouse in long stay care is now $45,000 with house, car, personal effects and prepaid funerals (up to $10,000) remaining exempt. A single person without dependent children may retain $15,000 with no exemption for the family home. A married couple, both in care have a joint exemption of $30,000.

The amount of subsidy for those who pass the asset test, is based on the difference between the fee-for-service rate and the resident's total income from all sources. The government provides up to $29 per week for those who pay full fees but who do not have enough income left for a personal allowance. The income of the spouse is counted on a dollar for dollar basis in the income test. When the spouse is working, the exempt amount for this test is $28,927 of spouse's earnings where there are either no dependent children or only one child. For three or more children, the exemption is $36,553 (Minister of Health 1996). These thresholds were not changed for 1998. Also exempt is income from any benefit, and income from assets below the threshold levels. There is no allowance for older children at tertiary institutions who may also be dependent.
 

The winners and losers of long-term care policy have not been carefully identified. Wealthy residents in expensive hospitals, who can pay high fees entirely out of the income from their assets, now retain more of their income. As the cost of intensive hospital care is around $1000 a week, the cap effectively subsidises their further asset accumulation by around $18,000 per annum. This may then be bequeathed in full, as estate duties have been abolished.

For those who are actually running down their assets to pay fees, asset stripping proceeds as before, even if for some, depletion with the cap takes a little longer. While the 1998 changes to the thresholds were welcome, the issues identified in 1994 have not been solved:

One of these issues concerns the use of the married couple as the unit for the income and asset test. In the last two decades social change has been rapid with increases in two earner households and much more diversity in family types.

The asset testing regime depends on stereotypes and assumptions about the family and marriage that are less relevant to a growing number of people. Under the Human Rights Act 1993 discrimination is now illegal if it is based on family or marital status. It seems a pity therefore that the opportunity to review the issue in the context of the 1990s has not been grasped. (St John 1994)

Under the revised (1998) asset test, the married person in care with a spouse in the community is still treated better than a single person with a non-marital partner or other close companion. The discrimination is reversed for the income test. Unless classified as a de facto spouse the income of a person living with the single person who goes into care is not taken into account. For 'married' couples (including de facto but not same sex) joint income must be used to pay for the partner in care. The spouse at home must contribute all his or her 'unearned' income over and above income on exempt assets. The income test applies regardless of whether or not the $45,000 exempt under the asset test has actually been accumulated. Even if this capital sum is available at the time when long-term care is required, the spouse in the community may have to replace assets such as the car, and pay for repairs and maintenance. Thus the exempt sum may be used up before retirement and the restrictions on what may be earned make it unlikely that a younger spouse would be able to save for retirement. The sum of $45,000 should also be put in perspective; for a woman it represents an annuity of just over $3000 at age 60.

Some of the anomalies of the existing scheme are obvious. The family home is exempt for a couple so long as the spouse or dependent child continues to live in it, no matter what its value. A couple with one in care, without a family home but with cash assets must run these down to $45,000. However, if they owned a valuable home, $45,000 and other exempt investments they would be eligible for the full subsidy. Funds in a registered superannuation scheme are not counted in the asset test even though in modern schemes they are often not locked in. A private pension is partly a return of capital but only features in the income test, where one half is counted.

Older people who entered care on or after 1 October 1995, may recognise caregiving by gifting up to $5000 per year for up to five years retrospectively. But under current administrative rules, gifts in excess of $5000 for each of the five years prior to accessing the subsidy may be included in the asset test. Thus the ability of an older person to balance out obligations and responsibilities to family members may still be compromised in a way that causes considerable pain and unfairness.

Policies of recent governments have abolished death duties on the wealthy, persistently favoured the high income earner in tax policy and failed to implement a proper capital gains tax such as applies in virtually every other developed country. The wealthy can accumulate assets unimpeded while a small group of very unfortunate middle income New Zealanders and their families are subject to punitive tax extraction.

Asset testing may also have a marked disincentive effect on saving for retirement for some people, far greater than that engendered by the surcharge on New Zealand Superannuation. The spectre of asset testing and the fear of departmental probing may encourage an inappropriate early divestment of assets with an unfortunate loss of autonomy for the older person. There are several books on trusts that quite openly describe the ways in which the asset testing rules may be avoided. (See for example, Holmes 1997). To the extent that trusts are more widely used as an effective means of asset protection, the more arbitrary and ineffective asset tests become as a means of funding long-term care.

At present, about 28,620 people are in long-term residential care, or around 6% of those over 65 years of age. Of these, two thirds qualify for a subsidy. The cost to government of the long stay subsidy is around $450m or nearly 9% of gross New Zealand Superannuation payments. Some of this cost is attributable to the use of asset protection mechanisms. Around 100,000 New Zealanders now have trusts, and the numbers are increasing rapidly as an aggressive campaign setting out the need for them gets underway (Stone 1998). It has been suggested by one senior IRD analyst that a 'look through rule' should apply to trusts when assets are not at arms length and are still controlled by the person facing the means test (Frawley 1995). Reform of trust legislation is no easy matter however and a replacement of the asset test is another option.
 

A direct contribution from individuals for their long-term care will always be required and is a reason why people should be expected to save for their own retirement. Nevertheless there is a strong case for paying for the long term care of the elderly more equitably than is currently the case.

Apart from New Zealand Superannuation, which is income that cannot be gifted away or disguised in trusts, there is no explicit collective insurance provision for the old against the possibility of long-term care in New Zealand. The costs of the subsidy are met from the state and the balance from the pensions and other resources of the old person and their family. Many of the features of long-term care make it an unlikely candidate for private insurance. In particular, those most in need are the ones most unlikely to be able to pay an actuarial premium. Women live longer than men and have fewer resources and are much more likely than men at each age over 65 to be in long-term care (Statistics New Zealand 1995).
 

A study on the Australian arrangements and their reform concluded that some form of collective provision was needed. The following scenario explains the gaps that have been identified in the Australian approach to long-term care in contrast with the other pillars.

Source (Howe 1999)

As the table shows, long-term care does not have the supporting pillar from a dedicated levy, and private insurance is non-existent. In contrast to New Zealand, the user contribution is not linked to assets, only to the age pension. In 1997 there was an attempt to increase user charges that proved highly unpopular and rejected. The ageing of the population has suggested that a special fully funded scheme might be developed to supplement other sources (Howe 1999). Howe claims that Australians are used to paying separate levies and do not regard these as adversely as they would another tax.

Another suggestion, this time for the USA is that a portion of social security be set aside for long-term care insurance (Chen 1994). Chen estimates that by trading 5% of social security cash benefits, the USA could finance a basic amount of long-term care coverage through social insurance. Low-income people would be exempt. The benefit would be that the retired would be paying from their own resources thus avoiding intergenerational conflict.

Chen suggests that mandatory private long-term care insurance policies might also be used to provide a supplement.

'...if out of pocket payments were unavailable for the supplemental private insurance, then, applying the same trade-off principle, it should be possible to link private insurance to occupational pensions and/or saving vehicles, such as Individual retirement Accounts, Keogh plans and the like that are already in place' [Chen, 1994 p493].

Private pensions are an obvious source of income for long term care; they cannot be gifted away or hidden in trusts. They provide the valuable insurance function of transferring the costs of old age care from those who live longest and hence are more likely to need care to those who die young.

Private pension provision in NZ occupational schemes is now the preserve of a relatively small fraction of the working age population. Saving for retirement is largely considered a matter for individual choice, with some special features of the New Zealand system that are operating to the discouragement of the traditional employer-subsidised schemes. The tax-funded nature of the state pension itself can be regarded as the core compulsory arrangement for most workers. They may choose to supplement the state pension with saving in a wide variety of ways including repaying the mortgage on their own home or investing in their future earning capacity by undertaking education.

The theory has been that the form of saving should not be determined by differential tax treatment between savings products. Neither is it deemed to be in the best interest of savers to compel them to save at certain times in their lives at certain prescribed rates, in narrowly defined products.

Overall, only around 11% of all individuals over 65 have income from an occupational pension scheme or a private pension. Of the current workforce, membership of occupational schemes has been declining and new schemes have tended to be defined contributions schemes reflecting a shift away from defined benefit schemes (PRG 1997a, p.184). It is clear that men are much more likely to make contributions, and when they do, are much more likely to make larger contributions than women. Higher income contributors are also more likely to have matching or greater contributions from employers.

Including the Government Superannuation Fund, which closed to new members in June 1992,[3] total membership of employment based schemes was 25% of all employed people in 1990, dropping to 19% in 1997. Total assets, inclusive of the GSF, were $11.6 billion in 1990, rising to $13.1 billion in 1997 (PRG, 1997 p.183).

There are three major likely reasons for the fall off in membership and assets. The first is the change to taxation. Tax incentives were fully phased out between 1987 and 1990. The second is the imposition of regulations and requirements. The third is that changes in the labour market, have led to a shift towards compensation in the form of "total remuneration" packages whereby the employee chooses the nature of the savings instrument and how much to save in it, while the employer's role may be minimal or advisory only. The fluidity of the labour market, increased casual employment/self employment, higher part-time work of both men and women contract work has called into question the appropriateness of the design of the traditional employment based scheme with long vesting periods.

There are severe problems for formal superannuation saving implied by the tax cuts of 1996 and 1998. For those who are on a marginal tax rate of 21%, taxing employer contributions to super schemes and fund earnings at the top rate of 33% is clearly penal. As well, such schemes are taxed on their capital gains and must meet new disclosure rules under the Securities Amendment Act 1996 and the Investor Advisors (Disclosure) Act 1996, both of which came into force on 1 October 1997. These issues are proving intractable and the recent exercise design to remedy the situation appears to have stalled (TOLIS 1997).

Pensions are likely to continue to decline in importance in the retirement income mix, while the direct investment in assets and trusts increases. The annuities market is thin in New Zealand with few people voluntarily choosing to buy an annuity on retirement. The market is unlikely to develop without considerable state regulation, intervention and even subsidisation.

The New Zealand system for pension is simple, egalitarian and unique. The retired have not been conspicuous in the population experiencing difficulties because of inadequate income. This achievement may be regarded as a real success story. Nevertheless it is under threat from possible future attacks on the pension now there is no agreed process of policy adjustments such as provided by the 1993 Accord. In addition there has been no policy agreement for funding arrangements for long-term care and inequities affecting mainly middle income families are severe.

A further weakness in the New Zealand approach is that private pensions are declining as a form of retirement income. It can be argued that there are social advantages if the retired are encouraged to take their saving in the form of annuities or pensions. Such income distributes the risks of living a long time. It also facilitates the funding long-term care from income. When assets instead are held, their early dissipation or diversion via gifting can preclude their use for long-term care. In light of the ageing of the population, New Zealand may have to re-examine the tax penal arrangements for pensions and annuities. If this was the case, the New Zealand retirement income system could evolve into a three pillar approach: State pension at adequate but basic level, state-encouraged pension to spread the risks of living a long time and to provide some continuance of living standards, and voluntary private savings and assets. Long-term care might be funded by, the individual's state pension, the individual's private pension and other income, and a long-term care insurance plan paid for by a separate compulsory levy on income of the retired (with exempt amounts) and possibly those in the workforce over a given age.

1. Especially for those retirees who own their own home. Means-tested benefits have been and remain a very small component of pensioners incomes. The major supplementary benefit is the accommodation supplement, received by 3% of men and 5% of women. Those who qualify receive a payment based on their actual rent, the maximum set for the region, income and cash assets. Homeownership is high among the retired with only around 14% living in rented accommodation. Only 11% of those on NZS pay more than 25% of disposable income on housing costs compared to 72% of those on benefits and 32% of all households Less than 1% claimed a special needs grant for food in the year ended March 1997 (PRG 1997, p.36-37).
2. The taskforce is reported to be well-funded.
3. Public sector employees may or may not be offered the opportunity to join new defined contribution schemes, subsidised by their organisation. Increasingly, those on employment contracts are not offered such schemes following the introduction Total Remuneration packages. In some cases, Unions have successfully fought the inclusion of an employer subsidy in total remuneration, but these victories may be short-lived as they have depended on interpretation of trust deeds which can be changed.

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