Cost Sharing of Pensions Paid Under the 2001 New Zealand-Australia Social Security Agreement: Should It Be Time for Change?

Abstract

Starting in 1943 New Zealand and Australia have negotiated a series of social security agreements to coordinate and harmonise the payment of pensions to individuals who migrated between the countries. Until 2001 these were negotiated on a “host country” basis meaning the state where the claimant resided would largely meet the cost of any benefits paid to them even though the claimant had spent part of their working life in the other state. In 2001 a revised SSA was negotiated which adopted a shared funding model where each state pays a part pension to a claimant based on of how much of their working life the claimant has spent in each state. This is intended to produce a fairer allocation of pension costs when taking into account the tax that would have been collected by each state from the claimant. However, in calculating the amount of pension each state must pay two factors come into play which complicates the calculation. Firstly the total amount of the two part pensions payable to the claimant is determined solely by the domestic pension rules of the state where the claimant has retired. Secondly, the amount the other state must contribute to that pension is determined by their domestic pension rules, not the rules of the state where the claimant has retired. As a consequence the costs of meeting the overall pension may be disproportionately borne by one of the states.This paper will examine which state has the greatest liability for pension payments under the 2001 SSA by analysing the results obtained by a simple model. The results obtained show that Australia is liable for a greater than proportionate share of pension costs if low or moderately wealthy persons migrate to Australia from New Zealand or vice-versa. The reverse is true for more wealthy migrants, however, if their wealth exceeds a certain threshold New Zealand gains absolutely if they retire in Australia. The results obtained raise questions about the sustainability of the 2001 SSA especially if Australia’s economy continues to perform better than the New Zealand one.