Summary of the 2003 Review

(i) New Zealand’s social security policies have been developed in an ad hoc manner.  The system is now outdated, becoming increasingly difficult and cumbersome to administer.  NZ Super is plagued with inconsistencies and inequities, resulting in unequal, discriminatory treatment for many people.  The current system is neither stable nor sustainable.

(ii) New Zealand’s Direct Deduction Policy, the deduction of foreign retirement income (earned by migrants and New Zealanders who have worked overseas) from NZ Super entitlements is repeatedly criticized as unfair and a major impediment to social insurance arrangements with many world nations that have high pension rates.  As a result, the loss of potential pension funds flowing into New Zealand represents considerable cost to the New Zealand government.

(iii) The report contains a startling admission: “It is often complicated to determine whether or not an overseas pension is direct deductible”.

(iv) The government is warned that in retaining the status quo it is at serious risk of being challenged under the Bill of Rights Act 1990 because of the discriminatory nature of the direct deduction policy.

(v) The principle of genuine sharing of social security costs with other countries is not supported by existing policy.  New Zealand is evading cost sharing obligations.  Examples included in the report show that even though a migrant may have lived, worked and paid taxes for many years in New Zealand, New Zealand provides nothing in return in the way of retirement income but leaves it entirely up to the migrant’s country of origin to foot the bill.

(vi) The report discloses that the International Division of MSD is set annual targets to track down undeclared overseas pensions: the target for the year 2002/2003 being NZ$25 million.  (This disclosure of tracking down undeclared overseas pensions may be related to visits made shortly thereafter by MSD officials to China and South East Asian countries.)

(vii) Attention is drawn to the 150,000 New Zealanders of retirement age living in countries with which New Zealand does not have social security agreements.  Of these 150,000 overseas New Zealanders, only 511 persons are receiving NZ Super - and at just 50% of the going rate.

(viii) The report recommends that foreign workers in New Zealand “should not be subjected to double social security tax”

(ix) and that the restrictive residency requirement when applying for NZ Super should be removed.

(x) The current policies are an impediment to attracting skilled workers.  “We are in danger of being uncompetitive with countries such as Australia if we retain the status quo.”

(xi) The current policies act as a deterrent to returning home for overseas New Zealanders, of whom many have become highly skilled and successful.

(xii) The failure to secure a social security agreement with the United States is identified as a major problem.  The report calls on the government to remove the obstacles to an agreement with the US.  Obtaining such an agreement with the US should be treated as a major objective.

(xiii) Three options to resolve the troubled nature of NZ Super are set out for the government to consider.  The most logical of these options and the one most recommended is “Package A”, the adoption of a proportionate system.

(xiv) Under Package A, a person’s level of entitlement to NZ Super would vary as it would be paid in proportion to the number of working life years (between 20-65) he/she has been resident in New Zealand (i.e. 1/45th for each year).  Most people would not experience any change because they would have accrued enough periods of New Zealand residence to receive full NZ Super.

(xv) Package A would include safety nets: allowances would be made for “time out” (e.g. overseas experience, study abroad), immigrants from countries without pension schemes, and so forth.  Foreign retirement income would no longer be subject to the direct deduction policy.  The existing special provisions for Pacific Islanders would be improved.

(xvi) There is a risk that the public might perceive changing to Package A as a change in entitlement provisions, a risk that may be mitigated through a communications strategy (such as reassuring the public that NZ Super will remain “65 at 65”).

(xvii) Package A has significant advantages.  It meets the requirements of an increasingly globalized economy where people, during their working life, live in more than one country.  It would open the way to agreements with many countries including the United States.  It would lead to potentially significant fiscal gains for the New Zealand government.  Equity would be achieved.  The contentious direct deduction policy would be eliminated and genuine cost sharing with other countries would be established. 

Last modified: February 21, 2007