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Prepared by Ranil Salgado (Ext 3-4182).
NZS is a universal pension benefit that is provided by the government to all eligible citizens or permanent residents over the age of 65. The eligibility requirement, with some exceptions, is that the beneficiary has spent 10 years in New Zealand after the age of 20 and five years after the age of 50. The benefit is not subject to means tests or income history requirements. For a married couple (both eligible), the minimum pension level (for both) is 65 percent of the national average ordinary time weekly earnings. For estimates of net pension cost, for example, see McCulloch and Frances (2003). Net cost, which is defined as the after-tax cost, is considered the relevant cost to the government, as NZS payments are taxed as income to the recipients. These estimates are broadly consistent with those found in Sarel (1998), Polackova (1997), and other studies.
As of end-February 2004, the value of the NZSF was $NZ 3.2 billion, with roughly 41 percent in international equities, 9¾ percent in international fixed income, 8¼ percent in New Zealand private fixed income, 6¾ percent in New Zealand equities, and 34 percent in domestic Treasury bills and cash (NZSF, 2004).
An alternative, which has been implemented in countries such as Australia and Switzerland, would be a publicly-mandated retirement scheme in which assets are managed in private individual accounts. Such a scheme (combined with a public top-up provision to guarantee a minimum pension) was almost universally rejected by voters in New Zealand in a 1997 national referendum. See Sarel (1998) for more information on the proposed scheme.
Based on estimates by the NZSF staff. Currently, the stock market capitalization in New Zealand is about 44 percent of GDP. At its peak in the mid-2030s, the size of the funds invested in domestic equities is projected to be about 3 percent of GDP.
For example, see Masson et al. (1995). The offset is generally known as Ricardian equivalence—namely, as government balances improve individuals believe that taxes in the future will be lower than otherwise, so expected permanent disposable income rises and consumption increases. Feldstein (1996) similarly finds that the U.S. Social Security System reduces private saving by about 50 percent.
It is unclear how domestic investment would be affected by the NZSF, given that New Zealand has a very open capital account. Theoretically, domestic investment could increase if the marginal product of capital rises (due to an increase in productivity) or if interest rates fall. The latter could occur if increased national saving due to the NZSF allows for a decline in the risk premium for New Zealand.