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 unique among similar nations. The policy mix has also had egalitarian consequences for the distribution of income among the retired and for the relatively few who 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.

The New Zealand retirement income system appears highly unusual when compared to other countries. There are no separate, compulsory savings schemes and no tax incentives for private saving for retirement of any kind. The state provides a flat-rate, taxable, universal pension (New Zealand Superannuation) which is set at a significant level so that for those with few private resources, few additional means-tested income or tied supplements are necessary, especially for those retirees who own their own home. Eligibility for New Zealand Superannuation is based on meeting the qualifying age and residency requirements.

As a flat rate taxable pension for all, without the need for a contributions record it is also an equalising force for incomes among the elderly. 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 who are 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.

Eventually an Accord on retirement incomes was signed by the three major political parties in 1993. The Accord cemented in the voluntary tax neutral arrangements for private saving, a flat rate taxable pension between 65-72.5 % of the net average wage and a surcharge for higher income retirees. Between 1993-1996 the Accord gave retired people protection against ill-considered changes, and those coming up to retirement could plan with a reasonable degree of certainty. This framework was endorsed after a comprehensive review as required by the Retirement Income Act 1993 (Periodic Report Group,PRG, 1997).

This review found that expenditure on the net state pension had fallen significantly since the age of eligibility began to rise. The net retirement pension cost approximately 4% of GDP in 1996/7. The net cost of NZS was projected to reach around 9% of GDP over the next 50 years under the 1997 settings. In comparing this cost with other countries it must be remembered that New Zealand has no hidden tax expenditures for retirement income provision, and a very low cost regulatory regime for private schemes. The PRG concluded that the current pension, with the rise in the age to 65 by 2001 and the wage band formula was adequate, efficient and sustainable. The after-tax cost of the pension as a fraction of GDP was not expected to reach the level of the early 1990s again until 2020 so there was no crisis and no need to panic. From 2015, some well-signalled, moderate modifications could reduce the cost, but it was considered that the detail of these required no urgent decisions.

The political events of 1997 following the new coalition government in 1996 had however begun to undermine the Accord. While agreement had been reached on the surcharge for 1997/98, it was abandoned from 1^st April 1998 as part of the coalition agreement. This was the kind of decision that was supposed to have been taken within the Accord process to remove the disruptive influences of election year politics. Then, just as the pension for a couple threatened to fall below 65% of the average wage the government announced in September that the wage band floor would now be lowered over time to 60%. In 1999, the Accord might be fairly judged as over, but the legislation endorsing its provisions remains.

The reduction to the wage-band floor over the next ten years will affect the living standards of the 50-60% of superannuitants who get almost all of their income from NZS. Thus the pension will be linked only to prices until the wage floor is again triggered as expected in around ten years. As the rate of inflation in New Zealand as currently measured is very low indeed, virtually no increases in the dollar value of the pension are likely in the immediate future. Sacrifices have been made by low-income superannuitants over the last decade, but they will now be denied participation in any recovery in the economy's fortunes.

In the last year of the surcharge (1997/98), only 16% of all recipients were expected to pay any surcharge. Only about 5% found that all their superannuation was clawed back (PRG, 1997a, p.48). A further small percentage of those who were eligible chose not to receive NZS at all, because the surcharge would effectively take it all back. The surcharge as an income test was a rather lenient one, and was always based on individual not joint income for married couples. The abolition of the surcharge in 1998 means that, just as prior to 1985, the pension payment is fully universal. The difference between the early 1980s and the late 1990s is that, the top tax rate has been considerably reduced, so that the very wealthiest can now retain 67% of the gross compared to only 34% in 1984.

As a result of the tax cuts in 1996 and 1998, and the removal of the surcharge better-off two-income superannuitant households have benefited by up to $350 a week A couple going on the sickness benefit now gets $30 a week a less. Low taxes for middle income families are a mirage. The bulk of families face effective marginal tax rates (EMTRs) of above 46%, 53% and higher over long income ranges, due to the abatement of family support and other income supplements.

So, the state pension now looks more vulnerable than it has since 1991. The process of rational change has been destroyed, and the inequities now evident are likely to provoke more unilateral action.

Very few superannuitants receive other add on benefits such as the special needs grant. Less than 1% claimed a special needs grant for food in the year ended March 1997 (PRG 1997, p.37). There are few elderly patronising foodbanks, and relative to low income families, superannuitants appear to have been well treated. This picture is now changing.

NZ provides other non-financial benefits to pensioners. Government spending on the public health system is currently 5.7 % GDP. Medical care is not provided free at the point of use to all NZ residents, but a community services card is available to those on low incomes, and a high use card for those with chronic illness. New Zealand Superannuation recipients do not automatically qualify for the community services card, but their relatively low incomes mean that over two thirds hold one. This entitles them to a higher subsidy for visit to the GP and for prescription subsidies. Access to the public health system for many formerly widely available services such as cataract operations has diminished markedly and many superannuitants now hold private insurance, although the insurance companies have excluded many by sharp premium rises in recent years.

Home help services are provided in some instances and meals on wheels operates on a user pays basis. There are a range of modest concessions available at the local level, such as for transport, cinema, library but these are insignificant in the overall picture, and far diminished from their role in the 1970s, and their current role in countries like Australia.

Residents in all long-term residential or hospital care face the same income and asset test. After a review, a maximum personal contribution of $636 per week was introduced in 1994 for care in all long stay institutions including private and public hospitals as long as that care is appropriate to the needs of the person concerned.

Private pension provision in 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, 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. 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.

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