Super history: NZ's super system unique
In the second part of our series on the history of superannuation we discover many of the current issues have been around since the 19th Century.
Monday, March 26th 2001, 3:09AM 2 Comments
New Zealand is similar to other developed countries in having a significant public pension system. However, the New Zealand system is unusual in its complete reliance on taxation funding and its focus on universal benefits. This reflects New Zealand's social and political history since the 19th century.
The 19th century pattern
Until 1898 New Zealand had no public pensions. The 19th century British colonists did not bring the Poor Law into New Zealand, and the relatively small number of elderly pakeha were expected to provide for themselves or be supported by their families. Older Maori were supported in the traditional way by their whanau or extended family.
The expectation that immigrants would provide for themselves and their family members was enshrined in the Destitute Persons Ordinance of 1846 and subsequent Destitute Persons Acts in 1877, 1883 and 1894.
New Zealand was seen as a land of opportunity and the government focus was on getting individuals and families to be self-supporting through developing land, setting up businesses, or obtaining waged and salaried work. New Zealand was to be a land without poverty, and thus a land that did not need public income support for the elderly or others.
This theory did not entirely match the facts, despite the prosperity of the 1860s and 1870s. Some settlers were unable to escape poverty and their numbers grew in the wake of the "Long Depression" of the 1880s and 1890s.
In addition, many older, single workers, particularly single men, had no family in New Zealand and appeared to suffer unemployment or under-employment more than the fitter, young workers.
There were few elderly people in the early decades of settlement. As late as 1881 people aged 65-plus comprised only 1.3 percent of the census population.
Average life expectancy for males was only 54 years, and less than half of those born could expect to reach 65 years of age.
The lack of a formal public pension system did not mean the public sector did not help the elderly. A small group received Imperial or New Zealand war pensions for military service, and some former public servants obtained government pensions on retirement.
The really destitute elderly could receive charitable aid, which attracted some government subsidies.
This process, pioneered in the original provinces, was formalised in the Hospitals and Charitable Aid Act 1885.
However, the majority of those aged 65-plus had to find their own source of support throughout the 19th century.
By the late 19th century the problem of poor elderly people was growing. People aged 65-plus reached 2.1 percent of the population in 1891 and 3.8 percent by the 1901 Census. Demographic projections indicated that the proportions would keep on rising.
The pensions debate and the 1898 Old Age Pension
The late 19th century saw a vigorous debate on the appropriate way to respond to the growing numbers of relatively poor elderly people.
Some proposed widening the scope of family responsibility or private charity, while others favoured expanding the role of Friendly Societies, or replicating the English Poor Law.
Colonial Treasurer Sir Harry Atkinson proposed a compulsory national insurance scheme in 1882. Others proposed a universal pension. Funding any public pension was a key problem for the debt-burdened Government.
In 1898 an Old Age Pension was introduced, for which those aged 65-plus could apply subject to a rigorous means test that covered both income and assets.
The pension was set at a maximum of £18 a year (about a third of a working man's wage) and twice this for a couple.
Other provisions included evidence of good character (designed to exclude criminals, drunkards and wife-deserters) and the requirement to apply in a public court session.
Overall, slightly more than one-third of the population aged 65-plus qualified for the pension.
The total costs were calculated as being only one-third of the alternative cost of a universal pension set at the same rate.
Maori were entitled to the pension, although the inclusion of shares of communally owned Maori land as individual assets for asset test purposes and other targeting measures meant that most Maori received less than the full £18 rate.
Asians were excluded, a discrimination that continued until the Pensions Amendment Act 1936, which also stopped Maori land being included in the asset test.
The 1898 pension structure lasted four decades and substantially shaped the subsequent Age Benefit that emerged from the Social Security Act 1938.
The relationship of the Old Age Pension to wages varied within this period, as did the stringency of the means test. However, the combination of moderate pension rates and tight income and asset testing allowed:
• real poverty among the elderly to be avoided without massive cost
• the cost of a rising proportion of older people to be met within early 20th century budget constraints.
Fortunately, economic conditions improved from the latter 1890s.
The debate on alternatives continued, reflecting the contentious means testing and the fact that the system did not appear to provide for the retirement income aspirations of middle and upper income groups.
The alternatives of compulsory social insurance, tax concessions for private provision and universal pensions each had their supporters.
Early 20th century initiatives
With the highly targeted Old Age Pension in place, New Zealand governments looked for ways to encourage people to provide for their retirement privately rather than expanding the scope of the tax-funded pension.
In 1910, the National Provident Fund was set up, providing large government subsidies for those who joined as contributors to its superannuation scheme. However, despite virtually pound-for-pound subsidies in its early years, the fund attracted only a minority of earners.
A second wave of initiatives involved tax concessions for private superannuation. In the Finance Act 1915, individuals contributing to private superannuation funds received deductions from taxable income of up to £100 a year.
In 1916 concessions were extended to the investment earnings of superannuation funds, and in 1921 employer contributions qualified for tax concessions.
The 1938 Act and the pensions debate
In the aftermath of World War I, government attention largely focused on the need to fund adequate war pensions for disabled returned servicemen. For a time, war pensions were more costly than the Old Age Pension. However, the debate on alternatives to the Old Age Pension continued.
Officials in the Pensions Department promoted a compulsory national or social insurance scheme during the 1920s.
In 1927 a National Insurance Bill was drawn up but did not proceed. Others mooted the case for a universal pension or at least higher Old Age Pensions.
British experts visiting in 1936 advocated a compulsory national insurance scheme and for a period the Labour Minister of Finance, Walter Nash, championed the idea and had officials develop a proposed scheme.
However, as in 1882 and 1927, the national insurance proposal did not go ahead. 1936 saw pension levels lifted by 28 percent, from 17 shillings and sixpence to 22 shillings and sixpence a week.
More dramatically, the Social Security Act 1938 installed a two-tier public pension system that was also to last for nearly four decades.
The main feature of the 1938 scheme for pensioners was an enhanced, non-taxed but means tested pension called the Age Benefit.
This came into effect in 1939 and was largely the Old Age Pension under a new name. However, the age of entitlement was lowered from 65 to 60 and the pension was boosted to 30 shillings a week, or £78 a year. In effect, pension rates had risen by 71 percent in four years, shifting pensioners from a somewhat marginal situation after the austerity measures of the early 1930s to a very favourable economic position by contemporary standards.
At age 65 those not entitled to the Age Benefit received a small universal superannuation payment of £10 a year effective from 1940, plus the promise that this payment would gradually be increased to match the Age Benefit. However, it was not until 1960 that this point was actually reached.
At its inception the new pension scheme was expensive, with more costs signalled through the universal superannuation promise.
A new Social Security tax of 5 percent of earnings (one shilling in the pound) was introduced to cover the increased costs of pensions, other social security payments and health. In practice the tax was not enough, and much of the social security cost increases had to be funded from general revenues.
Pensions and the post-war boom
The 1938 Act placed age beneficiaries in a favourable economic situation. Even as late as 1947 the Age Benefit for a couple was equal to about 72 percent of the average ordinary time wage after tax, although subject to an income and asset test.
However, after World War II the needs of returned servicemen and their families and the rebuilding of an infrastructure base depleted by six years of war took higher priority than pensions.
Health, education, housing, roading and power development all competed for public funds. An increase in the social security tax rate to 7.5 percent (one shilling and sixpence in the pound) was earmarked to fund the 1946 Universal Family Benefit.
Time and circumstances eased the problem of funding the 1938 pension commitments. After 1945, production and real wages rose strongly for several decades.
A policy of allowing the Age Benefit to decline in relation to wages eroded its relative costs without actually reducing the living standards of age beneficiaries. The special tax treatment of Universal Superannuation also recouped some of its rising cost.
During the 1950s and 1960s the Age Benefit for a couple varied between 50 and 60 percent of the average gross wage, with a general downward trend. However, the downtrend was less marked as a proportion of net wages, as taxes were rising as a proportion of average wages.
As late as 1972 the Age Benefit for a couple was around 68 percent of net ordinary time wages. However, the gradual decline in the relative incomes of many older people in a time of general prosperity created pressures to reconsider public pensions.
Pensioners considered they had not shared in the growth of living standards to the same extent as wage earners or other employed groups.
Some of the pressure was relieved by providing more special assistance in the 1950s and 1960s, and by raising the benefit rate for a single person from 50 to 60 percent of the married rate (recognising that single retirees often had higher living costs than couples who were sharing a household).
The better-off group among the retired had also gained from the continuing rise in payment rates for Universal Superannuation. The abolition of the asset test on the Age Benefit in 1960 also benefited some of the older group (although the income test was retained).
The 1970s - renewed debate
By the 1970s public pension policy had moved back to the top of the political agenda. Three major changes took place:
1. In 1972 the Royal Commission on Social Security recommended higher real pension levels, with parallel proposals for increased rates for other benefits. Pensioners received a boost in the real rates of Age Benefit and Universal Superannuation - by 1976 the Age Benefit for a couple had risen to over 72 percent of net ordinary time wages. However, these changes represented increased generosity within the existing system; the basic two-tier pension structure itself did not change.
2. In 1975 the third Labour Government set up a compulsory contributory superannuation scheme. Combined contribution rates for employees and employers were to be phased up to 8 percent of earnings, funding individual contributions-related pensions at retirement. The contributory scheme was short-lived and repealed by the newly elected National Government in 1976.
3. In place of the contributory pension, the Government announced a revised National Superannuation scheme for a taxable universal pension at age 60, effective from 1977. The new scheme meant the pension for a couple was set at 80 percent of the average wage by 1978, and for a single person at 60 percent of the married pension. Only 10 years of residence in New Zealand were required to qualify, and there were no income or asset tests. There was no requirement to be actually retired to claim the pension.
Consequences of National Superannuation
The new National Superannuation scheme involved a massive rise in costs, the result of higher pension levels, the abolition of the income test previously applied to the Age Benefit, and the increased numbers who qualified.
Between 1975 and 1977 alone, the number of people receiving a public pension rose 28 percent. Total pension costs increased by 69 percent between 1975-76 and 1977-78, although a part of this cost reflected the shift from a non-taxed Age Benefit to taxable National Superannuation.
However, in one year National Superannuation had become the most expensive single cost in the government budget.
Pension costs had already risen from 3 percent of gross domestic product in 1971-72 to 4.1 percent of GDP in 1975-76, partly as a consequence of the Royal Commission proposals.
By 1978-79 National Superannuation had pushed this cost ratio to 6.9 percent. A projected rise in the proportion of the elderly in the population indicated this cost ratio would keep on rising if National Superannuation continued on its announced basis.
There were no dedicated tax increases to cover the increased costs of the expanded pension spending. At the same time, New Zealand's medium-term economic situation deteriorated from the mid-1970s, adding to the strain on government finances.
The results were a large overseas borrowing programme and a series of initiatives by successive governments to trim the costs of the new pension scheme and remove tax concessions for private provision.
This policy shift reflected a swing back to concerns about the affordability and sustainability of the public pension system.
This is an extract from Retirement Income in New Zealand: The historical context, written by David Preston for the Office of the Retirement Commissioner.
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