New Zealand Superannuation’s state pension age has a significant influence on the behaviour of older workers. Aspects of this were covered in the RPRC’s 2012 PensionCommentary 2012-4, A commentary on older workers and some HR issues facing employers(accessible here).
Internationally, the state pension age is the eligibility age for the state pension payable at the ‘normal’ rates. In some countries (such as the US), state pensions can start at a reduced rate from an earlier age (62 in the US; 63 in Germany) or at an increased rate from a later age (up to age 70).
The retirement age is when workers stop their ‘main’ paid employment and start to depend on income from pensions or other resources. There is often no clear break between ‘work’ and ‘retirement’, with some workers gradually reducing their paid hours in the transition from full-time work to ‘full-time’ retirement. Also, many change ‘careers’ as part of the work/retirement transition. Nevertheless, some workers have no choice about ‘retirement’ as sickness, unemployment or family duties force the transition.
In recent decades, the retirement age in the developed world tended to be earlier than the state pension age as labour force participation rates amongst older workers reduced. The gap has narrowed recently. In part, that has been caused by economic conditions but changes to state pension systems have also directly influenced change. Longer healthy lives are also a factor.
As New Zealand’s baby boomers are now entering the retirement ‘window’, what they decide to do about retirement will have very large fiscal, labour force and investment consequences. Baby boomers have had significant impacts on New Zealand’s social, economic and fiscal experiences since the first of them were born in 1946. As New Zealand experiences the process of their retirement, we must anticipate similar impacts on pensions, savings decumulation, housing and age-care services.
The RPRC’s Updating data on older workers (PensionBriefing 2014-4, accessible here) summarised data on labour force participation rates of older workers:
“In 2013, about 130,000 people aged 65+ were labour force participants, about six times the number of 27 years earlier. The population aged 65+ grew by 77% over this period… while the population as a whole increased by only 30% (from 3.27 million in 1986 to 4.24 million in 2013).”
Participation rates of an increasing number of New Zealanders in the age 65+ group should be of interest to policymakers, but we do not know enough about this group. We know that New Zealanders are, on average, stopping paid employment at later ages than 20 years ago; also, that some of those changes are probably influenced by the changes to the state pension age between 1977 and 2001. The anti-discrimination provisions of the Human Rights Act 1993were also likely to have been an influence.
Some work has been done to understand the main drivers for New Zealanders’ ‘retirement’ decisions. Gorman, Scobie and Towers used three waves of data (2006, 2008 and 2010) from the Survey of Family Income and Employment (SoFIE) and concluded:
“In summary, we find poor health and eligibility for benefits or pensions to encourage exit from the labour force for both males and females; whilst continued employment of a spouse is associated with further participation for males. For females, financial security appears to be a relatively important factor: higher household net wealth is associated with earlier retirement, and the dissolution of marriage with a higher likelihood of participation. Additionally, we find that unobservable effects, specific to the individual, explain a substantial proportion of the retirement decision.”
Other influences beyond individual circumstances include:
“…growth of service industries, increased opportunities for part-time or contractual work, skill shortages and a more buoyant economy in the early years of the new millennium…” (Khawaja and Boddington, 2009, p.75)
United States evidence suggests that the state of the local job market also has an influence. The higher the local unemployment rate, the lower the rate of voluntary retirements. That is possibly because retirees want different or part-time work as part of their transition to retirement and if that isn’t available, they prefer to stay put. As a consequence, the lower the rate of voluntary retirements, the higher is the rate of ‘forced’ retirements.
The changes in New Zealand’s state pension age between 1977 (reduced from 65 to 60) and 1991 to 2001 (increased back to 65) were a natural experiment on the impact of the pension age on labour force participation rates. Roger Hurnard (2005)found that being becoming eligible for NZS dropped the participation rate for males by about 21 percentage points and by 7 percentage points for females. For females, there is another inflection point that sees another “drop of a further 11 percentage points” a few years before the state pension age. This presumably reflects the typical age difference between partners where the older male reaches state pension age first. Hurnard also suggested that, because of the relative generosity of NZS, the state pension age may have a larger influence on the retirement age than in other countries with a relatively larger private component to retirement incomes.
The state pension age was not the only influence in those changes to the labour force as major economic changes happened in the mid-1980s when New Zealand’s economy was opened up. That resulted in significant changes to the labour market. The availability of NZS then from age 60 would have helped many through that transition.
The chart on the next page illustrates the changes in older-age participation rates in New Zealand in the last 30 years:
We know very little about the present transitions of New Zealanders from fulltime work to ‘fulltime’ retirement. We do know that more New Zealanders, aged 65 and older, are working and that those proportions are still increasing; also, that the men’s participation rate is significantly higher than for women: 1.4x at ages 65-69 through to 2.1x at ages 81-85 (for a very small group at these oldest ages).
The ageing workforce carries with it a number of challenges that will have a direct bearing on ‘quality of life’ issues for older New Zealanders. It also has significant implications for New Zealand’s employers as skilled/knowledgeable workers retire. Employers should be thinking of strategies to retain (or retain access to) skilled older employees. It would be interesting to see whether employers are doing anything about that.
Participation rates at older ages affect the debate we need to have on the state pension age and on the size of the NZS pension itself. While some of those challenges are for employers to deal with, the government also has a role. As explained in section 11 (the role of the government) only the government can deliver “impeccable, deep, accessible information on population trends, saving and investment behaviour and poverty issues associated with ageing.”
Terms of reference for 2019 Review
The Terms of Reference for the Retirement Commissioner’s 2019 Review asked for information with respect to:
“3 An assessment of the impact that the following will have on government retirement income policies, including KiwiSaver and New Zealand superannuation:
“(a) The changing nature of work, including the increasing number of people who are self-employed and/or working in temporary and flexiblejobs;
“(c) Changes in labour market participation of those 65 years andolder.”
If the more detailed questions we suggest below are addressed, the government’s assessment request will be covered.
Questions New Zealand needs to discuss on retirement data and experiences:
We need to know much more about workforce participation of New Zealanders from age 50 onwards – when does the ‘career’ stop and the ‘retirement’ process begin and how does it progress? At those older ages, the analysis should be detailed – say, by each year of age and longitudinal (tracking particular workers).
What happens now at about the state pension age? In other words, how does the start of NZS affect decisions about paid employment (and so, how might changes to the state pension age affect those decisions)? This information could form the basis of a model that allows New Zealand to have a proper discussion about the state pension age. A data-driven discussion of this key public policy issue was absent from the recommendations of the Retirement Commissioner’s 2016 Review (and also from the last government’s announcement about the proposed increase to age 67 by 2040).
What influences the choice of work during the ‘retirement’ period and is that different in different parts of the country, for different groups of New Zealanders and for different ‘working life’ skills/qualifications?
How does paid work post-‘retirement’ help in financial preparations for ‘part-time’ and ‘full-time’ retirement? What lessons might New Zealanders learn from the experiences of current older workers?
What, if anything, are employers doing about retaining access to the skills of baby-boomer retirees? Is this an issue of ‘public’ importance?
How might the government help employers and New Zealanders to bridge information gaps?
Interestingly, even though the US state pension age is increasing to age 67 by 2027, there has been no change to the early payment age (from 62) and the late payment age (70). Details are here.
For example, in Europe, theemployment rate of the 55-64 age group increased in the EU-27 from 37.7% in 2001 to 46.3% in 2010 – see White Paper: An Agenda for Adequate, Safe and Sustainable Pensions, (2012) European Commission (accessible here). New Zealand’s 2010 equivalent was 75.9% - see Comparison of the New Zealand and Australian Retirement Income Systems, Ross Guest (2013) accessible here at page 15 (citing ILO data) Australia’s 2010 equivalent number was 62.6%. The latest European data (2015, accessible here) show that the age 55-64 employment rate is now 53.3%.
People ‘participate’ in the workforce if they work at least one hour a week. In 2013, 52% of those aged 65 and over who were employed (about 69,000 people in 2013) worked for at least 30 hours a week. Of the 130,000 in all who worked at least one hour a week in 2013, 62% of men and 40% of women worked at least 30 hours. (Census data accessible here).
Section 22 of the Human Rights Act (accessible here) outlaws the retirement of an employee on account of age.
Health and Retirement of Older New Zealanders, Emma Gorman, Grant Scobie and Andy Towers, New Zealand Treasury Working Paper 12/02 (2012) accessible here at page 34.
Too Early to Retire? Growing Participation of Older New Zealanders in the Labour Force, Mansoor Khawaja and Bill Boddington, New Zealand Population Review, 35:75-93 (accessible here).
Identifying Local Differences in Retirement Patterns, Leora Friedberg, Michael Owyang and Anthony Webb, (2008) Center for Retirement Research, Boston (accessible here)
The effect of New Zealand Superannuation eligibility age on the labour force participation of older people, Roger Hurnard, (2005) New Zealand Treasury Working Paper 05/09, Wellington (accessible here).
The chart shows that the proportion of all those age 65+ who participate in the workforce has grown from a low of 5.3% in 1993 to 22.1% in 2015. The latest number on this (accessible here) has the New Zealand participation rate for age 65+ at 23.4%. Also, the proportion of those age 60-64 has grown from a low of 23.9% in 1989 to 72.9% in 2015. The state pension age was 60 until 1992 but rose to 65 by 2002.
Some suggest though that the demographic future might not be as grim for productivity as feared. Ross Guest concluded in Good News about an Ageing Workforce(for a 2005 Treasury workshop and accessible here) that there could be a ‘dividend’ from the change in the age distribution of the workforce that raises labour productivity ‘naturally’. “The gains could be sufficient to substantially offset the effect on output per capita of the decline in the worker to population ratio that will occur with no increase in [labour force productivity ratios].” (at page 12). As ever though, the author says we need more information on this issue.