OECD recommends NZ overhaul pension system

New Zealand needs to reform its pension sector, increasing the age at which retirement savings can be accessed and no longer taxing those savings, according to the Organisation for Economic Co-operation and Development (OECD).

In its latest report on the state of New Zealand's economy, the OECD said the nation's ageing population is putting increasing pressure on its fiscal deficit and, without reforms, public debt will rise towards 200% of its gross domestic product.

As a result, it recommended New Zealand implement a combined public and private pension and NZ Super Fund reform under which public pension eligibility would be linked to life expectancy, with consideration for ethnic and occupational differences.

The OECD said linking the eligibility age to life expectancy "would enhance intergenerational fairness, ensuring that as people live longer on average, the ratio of retirement to work years is more constant across generations, which is key to maintaining both sustainability and adequacy in public pension systems."

However, it noted New Zealand's situation is complex given significant differences in life expectancy across ethnicities, "meaning a simple increase in the public pension age could have regressive effects, particularly for Māori and Pasifika, who on average have shorter life expectancy."

It said public pension reforms would therefore need to include redistribution and protection for vulnerable groups to avoid inequitable outcomes, while enhanced support for older workers in physically demanding roles should also be offered, including stronger health and employment programmes, and transitional arrangements for groups expecting to receive the public pension for a shorter period.

It also wants to see means testing introduced and tax reforms to increase private pension accumulation.

In terms of tax reforms, the OECD suggested changes to the way in which retirement savings are taxed.

As it stands, money directed into a KiwiSaver account is taxed before it goes in. The earnings on the KiwiSaver account are also taxed. However, drawdowns are not taxed.

The OECD has suggested New Zealand align its taxation of retirement savings to other nations and not taxing the money on the way in or while it's in the account. This would help boost private pension accumulation and ensure higher NZ Super Fund contributions.

"Implementing reforms as a cohesive package is essential to achieving fiscal sustainability while delivering high standards of retirement income and doing so in a way that mitigates potential adverse effects on household saving incentives and ensuring fairness across generations, genders, and income groups," the OECD said.