Normally, someone is entitled to a full NZS pension after ten years’ residence and with at least five of those years being after age 50. However, if someone has what the Ministry of Social Development (MSD) decides is an equivalent state-administered pension from another country[1], the MSD’s Chief Executive can reduce NZS by that overseas pension under section 70 of the Social Security Act 1964. This is called the ‘Direct Deduction Policy’ or DDP.
The Retirement Policy and Research Centre (RPRC) has done a lot of work on the difficulties associated with the administration of section 70 including, most recently, a report for the Retirement Commissioner’s 2016 review[2]. That work includes two forums, six working papers, a PensionBriefing and a published article. They are listed here.
In summary, there has been no major change to the way the MSD administers section 70 despite the significant difficulties highlighted by the RPRC’s work. Even Parliament’s Social Services Select Committee expressed concern about anomalies and unfairness but, in April 2013, declined to initiate an enquiry.
In brief, the problems with section 70 stem from two aspects of the design of NZS:
The universality of NZS – everyone over age 65 receives it, regardless of other income or assets;
The relatively short qualification period (currently 10 years).
If NZS were calculated by reference to a complete contribution record or a lifetime of residency (as is often the case with similar overseas pensions), we would not need section 70.
The DDP’s underpinning principle is that a New Zealand resident should not receive two Tier 1 age pensions and we support that principle. It does not matter if a pensioner has ‘contributed’ to the other country’s pension; nor does it matter if that pension has ‘accrued’ by years of residence or years of work in that country. As long as that pension performs a similar function to NZS in the other country then we agree that the overseas pension should be topped up to the level of NZS. Another way of expressing that is to deduct the overseas pension from NZS.
At March 2016, 83,982 or 12.1% of all NZS recipients[3]were affected by the DDP with pensions totalling $343 million a year from 70 countries[4]. For the eight countries most affected, the number of pensions has grown by 43% in five years (to 2016). With increasing international mobility, the proportion of pensioners affected by the DDP will grow.
The DDP’s principle is correct but the devil is in the detail. Here are the main difficulties with the MSD’s current policy:
1. Spousal pensions: NZS is an individual entitlement (and is relatively unusual internationally in that regard) – each person who qualifies receives the pension directly – the amounts differ by status (married, ‘single sharing accommodation’ and ‘single living alone’). Until 1 July 2020, if Spouse A (married to Spouse B) received an overseas pension that was greater than NZS, the excess reduced Spouse B’s pension even though Spouse B has no direct entitlement to that overseas pension and may have never lived in the other country, the so-called ‘spousal deduction’[5].
However, it seems that this feature of NZS might disappear from 1 July 2020. An unheralded post-Budget announcement by the Ministry of Social Development[6]stated:
“If your partner gets an overseas pension
From 1 July 2020, your NZ Super or Veteran’s Pension won’t be affected if your partner’s getting an overseas pension.”
No further information on this was available at our report’s release date. However, if the MSD can establish a specific spousal allowance as a component of Spouse A’s overseas pension[7]then we think it can reasonably apply that allowance under the DDP to Spouse B’s NZS. The MSD currently makes no such distinction and should.
2. Occupational entitlements: The MSD thinks that if a pension is administered by the government in the other country then it automatically performs a similar function to NZS. That is wrong though we can see it makes the MSD’s job much easier.
Canada illustrates the issue – there are two state-administered pensions: Tier 1 (the ‘Old Age Security’) performs a similar function to NZS and should be subject to the DDP. Tier 2 (the Canada Pension Plan or its mirror, the Quebec Pension Plan) is entirely different. It is wholly funded by members and their employers and is very like the Tier 3 private occupational pensions that are common in many countries[8]. Although the Tier 2 CPP is administered by the Canadian government (and the QPP by the province of Quebec), there is no possible justification for suggesting that it performs a similar public policy role to NZS. The fact that section 70 gives the MSD the power to say it does (as demonstrated by the unsuccessful appeals by affected pensioners) does not justify the MSD’s position.
3. The particular case of Australia: Australia and New Zealand have similar Tier 1 pensions – nominally universal and currently paid after 10 years’ residence. Two things make the Australia/New Zealand pension ‘relationship’ different:
(a) Because of the 2016 Social Security Agreement between the two countries[9], residence in either country counts in the other, regardless of nationality;
(b) The Australian ‘Age Pension’ is income- and asset-tested.
Australian residents who fail to qualify in Australia for the Age Pension or whose Age Pension is reduced because of their income/assets can retire in New Zealand on full NZS from the day they arrive in New Zealand (as long as they have at least 10 years’ residence in Australia)[10]. Conversely, New Zealand superannuitants who retire to Australia, lose NZS and become entitled to the Age Pension and subject to the income/asset tests. On the face, this seems an unbalanced relationship and leaves New Zealand taxpayers vulnerable.
4. The particular case of China: There is no national pension in China that is equivalent to NZS. Individual programmes of various kinds have covered urban and rural, salaried and non-salaried workers separately with different social insurance and compulsory saving accounts that have been enforced and administered disparately. Since 2011, the social security programmes are gradually being unified under a national programme. The government aims to have this completed by 2020[11]. The minimum pension under this ‘national’ scheme applies only after 15 years of contributions.
The relevance of this patchy and currently deficient arrangement to the DDP debate is that Chinese immigrants arrive with no or very small state pensions and so the major share of the cost of NZS for this group is borne by New Zealand’s taxpayers. In the context of the treatment of immigrants from other countries, that seems generous.
5. The particular case of the United Kingdom: Until recently, the UK had a two-tier state pension – Tier 1 (the ‘Basic State Pension’) performed a similar function to NZS but was somewhat less generous and depended on a complete contribution record. Tier 2 was a work-related, defined benefit ‘State Second Pension’ that started in 1978 and was related to workers’ pay and length of membership. Together, they can reasonably be aggregated for the DDP[12].
However, employers could contract-out of the State Second Pension by providing a private scheme that offered benefits that were at least as generous as the State Second Pension. In exchange, both the employer and employees paid reduced ‘National Insurance Contributions’. Those private, state-equivalent benefits are currently not caught by the DDP whereas the State Second Pension is. That is inconsistent.
6. The particular case of the United States: NZS and most pensions deducted under section 70 are Tier 1 pensions. The US has a Tier 1 pension called the ‘Supplementary Security Income’ or SSI. However, it is a poverty-alleviation, low level pension that is paid to very few people – less than 20% receive any SSI. It cannot be paid outside the US. The main state pension is at Tier 2 (‘Social Security’) and that is currently deducted under section 70’s DDP. We think that is correct, but it does illustrate the need to look at each country’s arrangements to see what pension performs a similar role to NZS.
The RPRC has suggested a number of possible reforms and we need to discuss those. The Retirement Commissioner also recommended “[r]emoving spousal/partner deductions with immediate effect”[13]. The Budget 2019 announcement seems at last to be responding to those calls for change. But that is not the only change that should be made to the DDP policy.
The Retirement Commissioner and the government have been talking past each other, underlying the main message of this report which is that New Zealand needs better information and a proper, evidence-led discussion. We need to agree the DDP’s principles before discussing the detail and the government must agree to starting that fuller discussion.
Terms of reference for 2019 Review
There was no mention in the Terms of Reference for the Retirement Commissioner’s 2019 Review of the issues associated with the DDP under section 70 of the Social Security Act 1964. Past governments have ignored the recommendations of many reviews.
We do not, therefore, expect the 2019 Review to address this on-going problem. However, at some stage the following questions will need to be addressed. Ignoring these will not make them go away.
Questions New Zealand needs to discuss on overseas pensions and section 70:
Should New Zealand ‘look after’ (provide NZS benefits for) periods before an immigrant arrives in New Zealand? In other words, is the principle of ‘universality’ more important than what might be regarded as ‘equity’ as between the ‘obligations’ of different countries to their citizens’ periods of residence?
If NZS is not to be truly universal for immigrants, what is the fairest way of calculating their entitlements to NZS? The main alternatives are:
a. Top up the overseas pension(s) to NZS – broadly the current DDP policy;
b. Increase the New Zealand residency period and ignore the other countries’ pensions;
c. Pay immigrants a proportionate amount of NZS based on the period of residency between the ‘minimum’ age (currently age 20) and the state pension age (currently 65) – that means New Zealand would pay no regard to the overseas pensions themselves.[14]
If the overseas pension is to form part of the NZS calculation (option 2 a. above), which particular overseas state pensions should be counted?
If the DDP continues, why aren’t the pension arrangements of every country that provides immigrants examined and a guidance note issued by MSD for each country explaining why that programme is included in the DDP?[15]
Again, if the DDP continues, why isn’t section 70 moved from the Social Security Act 1964 to the New Zealand Superannuation and Retirement Income Act 2001? NZS is an individual entitlement and needs its own tailored version of section 70[16].
[1]“The benefit, pension or periodical allowance, or any part of it, is in the nature of a payment which, in the opinion of the chief executive, forms part of a programme providing benefits, pensions, or periodical allowances for any of the contingencies for which benefits, pensions or allowances may be paid under ... the New Zealand Superannuation and Retirement Income Act 2001 ... which is administered by or on behalf of the Government of the country from which the benefit, pension or periodical allowance is received ...”(The Social Security Act, 1964, section 70(a) here).
[2]New Zealand Superannuation and overseas state pensions, M. Claire Dale and Susan St John, September 2016 (accessible here). Since 2016, the number of affected pensioners has grown to about 90,000 in 2019 and the reduction in NZS payments to affected pensioners to about $390 million (data from presentation by Alex McKenzie, Principal Analyst, Ministry of Social Development at the RPRC’s ‘Summit’ on 26 April 2019).
[3]There were 741,300 NZS recipients at 30 June 2018 – see Financial Statements of the Government of New Zealand for the year ended 30 June 2018 (accessible here), page 11.
[4]Details cited in Dale and St John, op cit at pp16-17.
[5]The Periodic Report Groups (1997, 2003), the RPRC, Retirement Commissioner’s reviews (2004, 2007, 2010, 2013, 2016) and the 2014 MSD Briefing to Government have all drawn attention to the need to remove the spousal deduction provision.
[6]2019 Wellbeing Budget – changes for superannuitants, 30 May 2019 accessible here. The MSD suggests that there will need to be a change to the Social Security Act. We don’t agree. Section 70(1)(a) of the Act (accessible here) gives an unfettered discretion to the MSD’s Chief Executive decides that the deduction is appropriate. The Chief Executive needs only to decide that Spouse B is not entitled to the pension currently affected by the spousal deduction, as indeed will usually be the case.
[7]Some countries (such as the UK) pay a pension to Spouse A (in our example) that is specifically increased if Spouse A has a dependent adult (that will stop in 2020 with the new ‘Single Tier State Pension’). In that situation, the overseas spousal allowance is analogous to Spouse B’s NZS.
[8]A pension that arises from government service is excluded if it qualifies under the definition of a ‘government occupational pension’ in section 3 of the Social Security Act. That must, however, relate to the person’s government service. The fact that it is an occupational pension rather than one that is analogous to NZS should be all that matters. If the pension’s derivation drove the distinction as we suggest, Canada’s CPP and QPP would be outside the DDP.
[9]The 2016 Agreement on Social Security between the Government of New Zealand and the Government of Australia is accessible here and came into effect on 1 July 2017. The Australian agreement is one of eight similar agreements with different countries – the others are the United Kingdom, the Netherlands, Canada, Greece, Ireland, Denmark, Malta and Jersey and Guernsey (see here for the list).
[10]New Zealand’s state pension age is now out of phase with Australia (see here) as that shifts from 65 to 67 between 2017 and 2023 while we keep age 65. The Australian qualifying age is now 65½. If the Australian government realises its wish to increase its state pension age to 70 between 2025 and 2035 (see here), that discontinuity will become more pronounced and permanent. In a press release about the new arrangements here, the Ministry of Social Development implied that New Zealand’s state pension age for a former Australian resident is now the same as the increasing state pension age in Australia (“The age of entitlement for those accessing an age-related pension under the Agreement has been aligned following an increase in the qualifying age for the Australian Age Pension, on 1 July.” However, there is no reference to this in the public explanation of the new Australian arrangement on Work and Income’s own website ‘Getting a pension benefit in New Zealand’ here. The only age requirement stated is that the applicant must be “65 or over”. That, at least, needs fixing.
[11]Source: Social Security Programs Throughout the World: Asia and Pacific, 2016 accessible here.
[12]This two-tiered arrangement was replaced from 6 April 2016 by a single-tier State Pension, with protected rights for accruals under the previous State Second Pension. The special case of the UK will eventually cease to be an issue under New Zealand’s DDP because there is no ‘contracting out’ under the single tier pension.
[13]Retirement Commissioner’s 2016 Review of Retirement Income Policies accessible here, at page 25.
[14]This kind of calculation applies when a superannuitant leaves New Zealand after age 65 – NZS is re-calculated based on months of residence after age 20. The full pension remains payable only after 45 years’ residence.
[15]The Retirement Commissioner’s 2016 Review recommended the publication of those details (see here at page 25). The government, for no stated reason, disagrees. In the Minister’s letter of 7 June 2017 to the Retirement Commissioner, she said: “While the Government is not in favour of publishing a list of overseas pensions that are deducted from NZ Super and social security benefits, the Ministry of Social Development will consider how to improve the accessibility of information through its website. (letter accessible here). We don’t understand why the Minister supports that view, nor why the Ministry hasn’t already agreed to publish that information. As a service-provider, it should be thinking about its ‘customers’.
[16]This change means that the income-testing measure in the Social Security Act (based on household income) could be tailored to the NZS benefit that is an individual entitlement. Currently, there is a disconnect between the benefit-design policies that underpin NZS and all other income-style benefits.