“A sobering reflection”

Sisyphus was the cunning king of Ephyra (later Corinth). Zeus finally had enough of his deceitfulness. So, Zeus punished Sisyphus by making him roll a boulder up a hill. As soon as he reached the top, the boulder rolled back down the hill and Sisyphus had to repeat the process again; for all eternity. Through the classical influence on modern culture, tasks that are both laborious and futile are therefore described as Sisyphean.

Are the efforts of government policy makers puzzling over how to fund an optimum retirement program for their citizens Sisyphean in aspect?

The most recent Cassandra-like warnings in the New Zealand press about retirement funding and the ability for a Kiwi to have a comfortable retirement recalled several times the identical issue surfaced in the same form over the years.

My first recollection was work done while consulting on the pension schemes in Iraq from 2005-2008. At that time, I used work done by then-World Bank Economist Dr. David Robalino et al, in the “Pensions in the Middle East and North Africa/Time for Change” publication (page 104.).  In that study, the point was made that a sustainable pension system, has only three levers policy makers can adjust: (1) Accrual Rate; (2) Normal Retirement Age and; (3) Contribution Rate. Indeed, policy makers can only adjust two of the three, with the third forced by the choices taken for the others. “For instance, if the accrual rate is set at 1.25 percent a year and the normal retirement age is set at 60, the contribution rate has to range between 25 and 30 percent, depending on the growth rate of the index used to revalorize past wages. If the retirement age is set at 65 years, then the contribution rate can be lower (between 15 and 20 percent).”

No self-serving politician (an oxymoron) would win re-election by proposing to raise the normal retirement age to 70, in order to reduce the contribution rate (Employer, Employee, Tax Funding), and raising the contribution rate would likely mean a rise in taxes so that is equally unpalatable. And reducing the accrual rate defeats the purpose entirely as it would reduce the ultimate pension payout. So, we are left with the hope and the need for the markets to outperform with the invested contributions in order to provide a sustainable system.

Next up, the substantial underfunding of public pension systems in the United States, something that has gone on for several years if not decades. Wilshire 2019 State Funding Report shows a funding rate of 72.2% for the 134 public systems it surveyed through 30 June 2018. While the funding has increased year over year, with an average investment return of 8.87%, the retirement “glass” for these systems is still 27.8% empty with a shortfall of $1.190 trillion.

The funding shortfall does not address directly the actual benefits or replacement ratio a retiree will receive from those 134 systems, but the shortfall will have to be bridged somehow, notwithstanding above-median investment returns.

Simply put, and without the benefit of a substantial boost through investment return, a 70% replacement ratio for a final salary of $100,000, means $70,000 per year in retirement. If you retire at 65, and live for example 20 years, that means your KiwiSaver (KS) balance at retirement needs to be near $1.4 million in total. KS @ 3% Contribution. So, to make retirement planning more soberly realistic the FMA has decided that retirement calculators should all use the same and grimly realistic assumptions. That may get a Kiwi closer to reality regarding planning for their retirement, but certainly no closer to the real thing. The three levers are unchanged.

The well-meaning push by the FMA to encourage movement from the KS conservative default option provided by the KS default providers to other default provider investments options with greater opportunity for asset appreciation is simply a realisation that the entire superannuation system will not provide a reasonable replacement ratio of final employee salary. What else could motivate government to move from low appreciating assets to higher appreciating ones? And what happens if there is a global recession?

Finally, very recent talk in New Zealand about controlling the KS withdrawals by using a method of instalment payments with some form of guaranteed, means-tested floor. An interesting concept, but it would likely be best addressed in the private sector with variable annuities tied to a guaranteed minimum per annuitant.

Increased life expectancy, as desirable as it is, has challenged the established views of superannuation funding. When U.S. Social Security system began operations in 1935, the life expectancy was 61, and there were 37 workers contributing jointly with their employer to the funding for every retiree who made it to 65 and retirement. The 2019 U.S. life expectancy is about 78.5, with a mere 2 workers for every retiree and absent an unprecedent surge in the workforce, this number will not improve. So, with an increase in age and a decline in funding support, U.S. Social Security continues in arrears, as the day of reckoning approaches.

To the suggestion of annuities or instalment payments for KS, I would add reverse mortgages in some super-charged form that might suggest tax incentives.

Also, add corporate tax incentives to enhance employer contributions to KS or other superannuation schemes. The relentless competition for qualified employees means that employers must get creative about how they attract and retain them. Some tax incentives to enhance employer KS contributions or help employers establish other superannuation schemes could help bridge the shortfall and increase the replacement ratio.

Finally, increasing the retirement age to 70 which, when recently floated in NZ met with unanimous disapproval. Will taking positive action on all of these options close the distance?

“Yet every distance is not near” -Bob Dylan

As a practicing Catholic, I have always seen this marvellous work as a depiction of how close God is to us, yet how far. The distance between the fingers is at the same time slight and immense. Governments seem to be close to retirement funding policy solutions, but the gap for some, even many may be immense.

 

In these few words, I have envisioned a retirement program or system to encompass private, public, and personal savings. Since KS has become the principle vehicle for retirement savings in NZ, I have focused mostly on that program as part of the three-legged stool used in the United States to describe retirement savings (Public=Social Security, Private=Pension Schemes, and Personal=Savings, home equity, etc.).

In New Zealand, as elsewhere, Sisyphus has just found himself back at the bottom of the Waitakere Range. As the KS program matures, the superannuation funding solutions remain unchanged; the boulder rolls back. Perhaps the best any policy types can hope for is a few tweaks, recognizing that the program itself is, ultimately, fated to underdeliver. Regardless, for the sake of our future generations, we are destined to push the boulder upwards and seek a final path.