Labour's Super Policy : The $65,000,000,000 Question?
Act's Rodney Hide says the NZ Super fund has five main flaws.
Thursday, January 25th 2001, 8:47PMFinance Minister Michael Cullen has a simple solution to the fiscal problem posed by the number of elderly more than doubling over the next 30 years. His plan is to take $65,000,000,000 of taxpayers' money over the next 25 years, put it into a monster state-run pension fund, and then pay it out, plus interest, over the next 75 years.
It's a big policy. It will affect every one of us. First, as taxpayers, and second, as pensioners. It also involves a lot of money. The Monster Fund demands $30,000 from every taxpayer. Nobody here would spend $30,000 without conducting a thorough cost-benefit analysis of the alternatives. In considering the Cullen proposal, the duty of Parliament is clear. It must conduct this analysis on behalf of every New Zealander.
The ACT party supported Mr Cullen's scheme to Select Committee where it can get a rigorous scrutiny and where the true options available can be examined.
Superannuation has been an ACT cornerstone policy since the party's inception. There should be no surprise in this. The ACT party is founded on the principles of individual choice and personal responsibility. We are passionate about our vision of a New Zealand that is free, vibrant and prosperous.
Our present super policy sees us as anything but free or prosperous. The outlook for the great majority of us is to spend our last years utterly dependent upon the state for our livelihood. That same policy sees us working to pay one dollar in four of all income tax we pay to support the elderly. That ratio is set to rise to five dollars out of every eight.
We spend our retired years chained to the state. And we spend our working years nose to the grindstone trying to support an ever-increasing number of elderly. We are trapped paying for existing retirees and unable to save for our own retirement. Our future is set to be just as dependent upon the generation of taxpayers growing up behind us as superannuitants are now - except that there will be twice as many of us. We remain unable to save for our own retirement because of the high taxes we must pay to support an unsustainable pay-as-you-go super scheme. These high taxes make New Zealand an unattractive country to invest in and thereby ensure that our long-term growth prospects remain dismal.
Ballooning numbers of elderly - and the savage effect tax has on our economic potential - make it impossible to provide security for retirees in the future. The problem is a serious one and any proposal to address it deserves serious attention.
First, a little history
The history of pension policy in New Zealand is of an ever-more generous system over its first 75 years and then of continual cuts over the last 25 years as the exploding number of elderly put taxpayers under severe pressure. The state pension dates from 1898. The pension back then wasn't generous - one third of a working man's wage. And a ruthless means and asset test applied. That test cut out two-thirds of people over 65. Crooks, drunkards, wife deserters and Chinese were ruled out. The pension was increased and expanded successively over the years reaching its height under Sir Robert Muldoon in 1975.
Sir Robert's scheme provided a universal pension from age 60 with the pension set at 80 percent of the average wage for a couple and 60 percent for a single pensioner. Because the pension was set by the gross wage, and because pensioners were typically in a lower tax bracket than workers, the net rate of National Superannuation for a couple was 89 percent of the net after-tax average wage.
Applying that scheme today would nearly double the costs of super.
The cuts to Super began almost immediately. Sir Robert himself did the first in 1979 by setting the 80 percent wage-link provision in terms of after-tax rates instead of before-tax rates.
The Fourth Labour Government introduced the infamous surcharge in 1985 that saw about 10 percent of superannuitants pay the equivalent of their full pension back with a further 23 percent paying some back. In 1989 the Labour Government suspended the 80 percent link of super to wages and the renamed "Guaranteed Retirement Income" was adjusted by the lower of price or wage increases with a new floor set at between 65 and 72.5 percent of the net average wage.
Prime Minister Jim Bolger swept to office in 1990 promising to abolish the surcharge. He instead cut the pension further with three swift policy shifts. The pension adjustments for 1991 and 1992 were cancelled and from 1993 the pension was to be tied to inflation instead of wages.
The age of retirement was set to shift out progressively to 65 over 10 years. National also tightened the surcharge by increasing the abatement rate from 20 percent to 25 and by lowering the income threshold where the surcharge kicked in. The political heat from Grey Power was huge. Both major parties were in trouble. Labour and National buried their pension differences with the 1993 Accord and the now-called "New Zealand Superannuation" was income tested with the pension band to lie between 65 and 72.5 percent of net wages.
Winston Peters with New Zealand First gained support amongst the elderly and in coalition with National abolished the Surcharge in 1998. Working people must now pay a pension to millionaires once they have had their 65th birthday, whether they are working or not, and no matter their income.
New Zealand First Leader Winston Peters put a compulsory savings scheme to public referendum only to have it thumped by over 92 percent of voters. That vote perhaps had more to do with what we thought of Winston and his New Zealand First party rather than any consideration of our long-term options for super.
Following the Coalition break-up in 1998 the pension floor was set at 60 percent.
Labour on winning office increased the pension back up to 65 percent without a viable plan on how to pay for it when the number of retirees (and hence the cost) doubles. That's where Finance Minister Michael Cullen's scheme comes in. The promise of the fund is a magical one. Michael Cullen declares that under his scheme: "The problem of sustainability disappears." Sadly, it doesn't. Indeed, the Fund as proposed suffers five savage flaws.
1. There is no Fund
The first is perhaps the most serious. There is no Fund. All that Mr Cullen provides is an equalisation account that is built up for 25 years and then run down to nothing over the next 75 years.
Mr Cullen's Fund is the exact opposite of Norm Kirk's Fund. Norm Kirk's Fund was a self-sustaining Fund that was to be built up with interest used to pay for super. Not Michael Cullen's scheme. He doesn't just plant the tree and pick the apples. He plants the tree, picks the apples and hacks the tree down branch by branch.
2. The Fund does not address the problem
Mr Cullen's Fund does not in any way reduce the costs of superannuation. The government has to pay out the same each year to support pensioners whether or not there is the Fund. The Fund doesn't make super any more secure or sustainable.
Indeed, the Fund may well make the problem worse as New Zealanders mistakenly believe Mr Cullen and rely on the government to save for them.
The Fund doesn't improve the performance of New Zealand's economic performance in any way, shape or form. It simply shifts assets from the private sector to the state. The higher taxes needed to beef-up the fund in the early years will cripple New Zealand's performance. So too will the poorer allocation of capital that a state-run Fund will produce.
3. It's a state-run monopoly
The Fund is a monster. It peaks at 50 percent of GDP. That's a fund over $50 billion dollars in today's terms.
Mr Cullen's Monster Fund would be stuffed with enough money to purchase every share in every public company listed in New Zealand - this is nothing but socialism by stealth disguised as a more secure retirement.
The Fund is run as a state monopoly with all the eggs in one basket.
The Fund in this respect is the opposite of Winston Peter's compulsory scheme. Under Mr Peters' scheme, we would each have our pension account under our own control. Not so under Mr Cullen's scheme. His is a monster Fund, centralised and state-run.
The Fund is to be managed by politically appointed Guardians. The Fund will be politically driven just like TVNZ, NZ Post and Timberlands as SOEs have found themselves politically driven over who they hire (Kit Richards), what they pay (TV newsreaders), and where they invest (Jim's Bank).
Political interference will severely compromise the Fund's commercial operation. The Alliance already wants to constrain the Fund's ability to invest overseas while the Greens want to restrict the Fund's investment to what they deem to be ethical.
The Fund at 50 percent of GDP will distort financial markets. The prudent thing for such a Fund before the last election would have been to increase its off-shore investments thereby weakening the dollar and driving up interest rates. It's hard to see politicians not meddling in such decisions.
The Guardians are always going to be treading a fine line between getting the best return for taxpayers and satisfying their political masters. Taxpayers will be the losers.
A State-run Monster Fund will mean the state carrying more debt and more assets than it otherwise would. That exposes the government's balance sheet to greater fiscal risk. Certainly, foreign exchange movements will bash the Fund about year to year.
For example, if the government was still carrying the net foreign debt that it was carrying just 10 years ago, last year's foreign exchange movements would have knocked $2,300 million off the operating surplus and plunged the government into savage deficit.
4. Cullen doesn't fund the Fund
The scheme depends upon successive Finance Ministers running surpluses of two percent or more and kicking in an average of $2,500 million a year for the next 25 years, long after Mr Cullen is just a bad memory.
Mr Cullen has yet to explain how this is to be done given that Governments have achieved the surplus necessary only eight years out of the last 50. Successive Governments up until the late 1980s ran deficits every year for 35 years.
Mr Cullen, the scheme's architect, is kicking in only $600 million and then not until 2002. Treasury figures show this to be $1,500 million short. He's then swept out of office. Nevertheless, he's planning that the next Government put in $1,200 million, which is only half what Treasury estimate is needed. In 2004, he's $770 million short.
The entire Funding plan doesn't kick into balance until election year 2005. Mr Cullen has no plans to invest sufficient into the Fund as long as he's Minister of Finance.
Mr Cullen gets to keep spending tax money buying votes for Labour while future governments get the blame if the Monster Fund fails to do what we are told it will. Mr Cullen wants his cake and wants to eat it too.
5. Fund contributes little to payouts
The Monster Fund is big but actually covers very little of the future cost of Super. In the pay-out years 2029-2070 the Fund covers an average of only one-tenth the cost of super and at best only one-seventh. This is pitiful.
The comparison to the pay-in years is not favourable. From 2005 to 2010 taxpayers are putting 50 cents into the Fund for every dollar they are paying to the existing retired. The squeeze on the younger generation in the pay-in years will be extraordinary.
The young will be squeezed twice. Once for their grandparent's generation, and again, for their parents who are now still working. They'll get zip when they retire because the Fund will be running down but are having to pay twice. Where's the "social justice" in that?
Michael Cullen is trying to sell the country a $65,000,000,000 pup. The one thing that pension policy should have taught us over the last 25 years is that we can't trust politicians to deliver on their pension polices, no matter how sweet or magical.
The hard fact is that the number of over 65s is set to double over the next 30 years. We need to front up to the costs of super long-term and to our options for dealing with them.
Future governments are going to have to grapple once again with the following issues whether or not Mr Cullen has his monster Fund in place:
1. Hike taxes
Super payments account for about one quarter of all income tax collected. Unless cuts are made elsewhere, doubling the number of retirees means hiking income tax 25 percent. Such a hike in tax will diminish the economy and drive our best and brightest overseas.
The very best that governments can do now is get their own spending under control, reduce government debt and provide tax cuts to allow working the people the chance and opportunity to save for their own retirement.
2. Benefit or birthday present?
Present pension policy is stand-alone from other welfare payments and exists as a universal payment to every New Zealander in the country upon reaching their 65th birthday irrespective of their need, income or circumstance. As the number of over 65s increases from 450,000 to over a million this assumption will inevitably be tested and re-examined. There are already calls for a uniform benefit set by need not age. The very question of whether the pension should be just a part of social welfare or a separate policy will be increasingly asked.
3. 65 or 70?
Shifting the age of retirement out to 65 has reduced the cost of super by a quarter. There is nothing magical about age 65. People are living and working longer. A 60 year-old today lives four years longer than a 60 year-old 100 years ago.
Shifting out the age to 70 over the next fifty years would reduce the cost of the pension by twenty percent.
Successive government will need to re-examine the age of retirement over the next 30 years.
4. Wages or inflation?
Unlike other benefits, the pension is now tied to the average wage rather than simply adjusted for inflation. This makes a dramatic impact. Treasury's long-term fiscal projection is for inflation of 1.5 percent a year and wage growth of 3 percent. Tying the pension to wages rather than inflation doubles the cost of the pension over fifty years. Once again, this policy needs cool, hard examination.
5. Universal or targeted?
The question of whether multi-millionaires should enjoy a pension paid out of the weekly budgets of hard-pressed working families will be forever questioned. For 90 years some form or other of income testing has been applied to pension policy. The policy now is for a universal entitlement.
The dreaded surcharge that operated from 1985 to 1998 reduced the net costs of super at best by about ten percent. In 1996/97 the surcharge reduced the pension of nearly one third of all pensioners.
Tough trade-offs can't be avoided
None of the options available for confronting the doubling of the numbers of superannuitants are easy or agreeable but they have to be confronted one way or another. We can blunder on and hope that everything will be okay or we can confront them and consider them seriously and comprehensively. Over the last 25 years the number of over 65s nearly doubled and the value of the pension in terms of size and age of entitlement has been halved. We face exactly the same pressures over the next 25 years whether we like it or not.
Mr Cullen is to be commended for keeping the pension problem in front of Parliament. The danger is that we get distracted by the wistful hope that some how or other his monster Fund makes the problem magically go away.
Rodney Hide is an Act MP
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