What NZ Superannuation provides and where it fits in

New Zealand Superannuation

The gross annual amount for a single person is $27, 585 and a couple who both qualify is $45,738. These are subject to tax. This is not a lot of money but would provide a basic (very basic!) living. However, there are a lot of people who live on NZ Super and nothing else.

NZ Super is not means tested and is available to everyone legally resident in New Zealand and over 65. You must have lived in New Zealand for at least 10 years since age 20 with five of those years in New Zealand since you turned 50. You have to apply for NZ Super, which you can do online or with a visit to your local WINZ office. When you have successfully applied, you will also get a Gold Card, which gives some discounts and things like free travel off-peak on public transport.

By global standards, NZ Super is very generous. As a universal pension scheme, it is very cheap to administer because NZ Super is simply paid out of Government funds. Although the NZ Super Fund (a.k.a. the Cullen fund) was set up in 2003 to help pay for NZ Super as a baby boomers retired, today this stands at only $58 billion. Although this may sound a lot, the cost to the government of NZ Super on an annual basis is about $15 billion and growing. NZ Super is not a fully funded scheme and will have to continue to largely come out of taxes as they are collected.

The debate in New Zealand regarding whether NZ Super is affordable and can continue in its present form is ongoing. Politicians’ pussy foot around it, but my guess is that it will continue pretty much as is for the foreseeable future. There are a lot of baby boomers and we vote!

I think you can make your plans and build NZ Super into them. Barring some catastrophe, it seems most likely to continue much as it is (although the age of entitlement may increase, and qualifying rules may change).

NZ Super – where does it fit in?

The most important features of NZ Super are:

• It is passive income – you do not have to do anything to get it other than stay in New Zealand for six months each year;
• It is regular and likely to continue come what may; and
• It is inflation adjusted.

While I am sure you do not want to live solely on NZ Super, it is indeed the foundation of most retirees’ plans. Although there are a few retirees who give their NZ Super to the kids or to a charity, these people are, in fact, very rare (or, they still have a lot of work/business income beyond age 65 years). Most of us have NZ Super as a key component of our retirement income.

The fact that it is regular, and you need do nothing to get it, makes it unlike any of your other income (other than additional pensions a few people might have). NZ Super is unlike work, unlike a small business, unlike renting out a room, and unlike returns from your investment portfolio. It is not volatile, and it will hit your bank account as regularly as your salary once did.

NZ Super is adjusted each year to maintain the spending power of 66% of the average, ordinary-time wage for couples. The fact that it is effectively adjusted for inflation every year makes it even more certain – it will not get whittled away and diminished over time. Inflation is always a threat for retired people. The retired complained bitterly through the 1970s and 1980s when inflation ran riot, and most retirees has their money in bank deposits. Over the last 30 years or so, inflation has not been the problem it once was - partly because it has been a lot lower, partly because more people have invested smarter, and partly because NZ Super is hedged against inflation.

Nevertheless, you need to plan for a retirement of at least 30 years and, over that time, anything can happen – including a return of high inflation. Knowing that a proportion of your income (NZ Super) is hedged against inflation should be a great comfort.

Because NZ Super is so dependable, many people set it aside for certain costs. I know many people who use the NZ Super payment to pay for the basics (groceries, utilities and transport) or some other set of regular expenses (rates, insurance and groceries). I think this kind of money management can be very useful and, as I show below, can be taken further.

The important thing is that NZ Super is the most passive (least work), most reliable and inflation-proof income that you will have in retirement. That is why the great majority of retirees treasure it.