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Feb 15, 2022

NIS - Raising the Retirement Age

I got a question in the comment section of the last NIB post which I thought was important enough to warrant its own post. The question was, what is the rationale for the NIB pushing for an increase to the retirement age and an increase in the contribution rates?

Initially I thought the question was Ludicrous (not in a prolific Atlanta rapper/actor kinda way) given all that I explained in my original post. However, upon reflection, I realized there were some things to unpack in this question that may not have been obvious to some people.

So let me take the contribution rate part of it first as this is the most straightforward. Basically over the years the required increases to the contribution rate were never fully implemented when they were supposed to be. Now, the rate that would allow you to pay all benefits and administrative costs of the fund from contributions alone, without the need for investment income, is known as the pay-as-you-go (PAYG) rate. That is your main target if you want balance the fund going forward. If you're more focused on political matters then that rate is more of a general guideline, nice to know but not that relevant to you.

The last time I was intimately involved in the process the PAYG rate was way higher than the contribution rate which was about 13.2%. Them rocket scientist actuaries project that the PAYG rate would reach bout 22% in 2036 and 40% in 2066 (don't hold me to them numbers because I does drink plenty gin). Therefore the existing rate is way too low to sustain the fund.

Regarding the retirement age, according to the NI Act the retirement age is 65 however persons can access their NIS pension from age 60 and get the same pension as someone retiring at 65 which is not factored into the current pension formula. Basically that allows persons to contribute over a shorter period and receive a pension over a longer time. That isn't how social insurance should work. In fact that's not how any pension should work.

Pensions are a function of the time your contributions have to compound or grow. If you retire early your funds have less time to compound. Thus everyone should either access pension at the retirement age of 65 or receive a reduced pension if you retire earlier.

What the NIB is seeking to do is make it so that you need to be 65 to get your full pension as is already established in the Act or have your pension reduced by 6% per year for every year you retire early before the age of 65. Sounds fair to me. This measure would only impact new retirees, so if you're already retired you ain't need to study this. Go back to watching Matlock and the Andy Griffith Show. What current retirees need to accept is that you're probably not getting an increase in pension for the foreseeable future.

At the end of the day, NIS is for all of us by all of us. Everyone needs to pull their hand. It should be all hands on deck right now because water more than flour.

Crick crack, monkey break he back....wire bend, story end.


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