KiwiSaver: New Zealand's new subsidized retirement savings plans.

Introduction Since July? 1, 2007, New Zealanders have had a new option for their retirement savings?KiwiSaver?a type of subsidized, defined contribution retirement savings plan offered by private-sector providers. New labor force entrants in permanent positions who are aged? 18 or older are automatically enrolled in a KiwiSaver plan, but are able to opt out of the plan if they wish. Also, all individuals younger than age? 65, including anyone not in the labor force, are permitted to set up a KiwiSaver account. A law passed in September? 2006 created the KiwiSaver to encourage New Zealanders to save more for retirement and to supplement the New Zealand Superannuation (NZS) benefit, a flat-rate universal old-age pension. Although lower earners mainly rely on NZS benefits for their retirement income, middle and higher earners must supplement this benefit to maintain their preretirement standard of living. Workers may also purchase supplementary retirement plans, called superannuation plans either through their employers or directly from an insurance or other financial services company.1 The New Zealand government introduced the KiwiSaver, in part, because by the end of 2005, less than 30? percent of the active labor force was covered by some type of superannuation plan. This note provides a brief description of the New Zealand public pension system and its sources of funding, statistics on the country's savings rates before the KiwiSaver law was passed, and a detailed description of KiwiSaver. New Zealand's Public Pension New Zealand Superannuation is the flat-rate public pension available to all New Zealand residents aged? 65 or older who have lived in the country for 10? years since age? 20, or for 5? years since age? 50 (SSA 2007). NZS benefit amounts depend on marital status and living arrangements and are taxed as income. Each year benefit amounts for a married or civil union couple are adjusted for inflation and then adjusted to fall between 65.0? percent and 72.5? percent of the country's net average wage.2 The NZS retirement benefit for other categories is computed as a percentage of the benefit amount for married couples and civil unions: single persons living alone receive 65? percent of the benefit, and single persons living with others receive 60? percent. NZS benefits are adjusted according to changes in the consumer price index (Toder and Khitatrakun 2006). NZS is the government's largest single budget item with a current net cost of 3.4? percent of gross domestic product (GDP), which is expected to rise to 6.9? percent of GDP by 2050 with the aging of the population (NZSF 2006). Although NZS currently is funded by general revenues, as the population ages this program will need an additional source of funding to meet benefit payment projections. The New Zealand Superannuation Act 2001 created a separate investment fund called the New Zealand Superannuation Fund (NZSF, or the Fund) to partially finance the projected rise in costs of New Zealand Superannuation benefits as the country's population ages. From 1970 through 2005, while the overall population grew by 44? percent, the number of people aged? 65 or older doubled. In 2006, the number of people aged? 65 or older represented 12? percent of the population and is expected to reach 26? percent by 2051 (Statistics 2006). According to the National Population Projections, the ratio of the working-age population (aged? 16-64) to the population aged? 65 or older was 5.5 to 1.0 in 2004. This figure is expected to drop to 3.0 to 1.0 in 2028 and to 2.2 to 1.0 by 2051 (Statistics 2004). The government expects to finance the NZSF from general revenues with an average contribution of NZ$1.95? billion (US$1.6? billion) a year until about 2027.3 In September? 2003, the government made the first payment to the NZSF of NZ$2.4? billion (US$1.9? billion). By October? 30, 2007, its assets totaled NZ$14? billion (US$11.3? billion), and the average nominal rate of return since 2003 was 14. …