Super History: Understanding recent changes
The many changes superannuation has weathered over the past two decades are examined in the third part of our series on the history of superannuation in New Zealand.
Monday, April 2nd 2001, 1:48AM 1 Comment
Cutting back superannuation - 1979-92
The National Government made the first cutback in the National Superannuation scheme in 1979.
The original legislation had provided for gross pensions to be set at 80 percent of gross ordinary time wages. However, wage earners on average paid higher tax rates than superannuitants without other income.
This meant that by 1978 the net rate of National Superannuation for a couple was over 89 percent of net after-tax wages. In 1979 the wage-link provision was changed to reduce the net rate of National Superannuation for a couple to 80 percent of net ordinary time wages after tax.
Because prices and wages were then inflating at high rates, this change did not involve any actual reduction in superannuation rates.
In 1985 the fourth Labour Government introduced a taxation surcharge on the other income of National Superannuitants. While this was not legally an income test, it had a similar effect.
In the first year of the surcharge about 10 percent of superannuitants paid the equivalent of their full superannuation back in surcharge payments, and about 13 percent repaid a partial amount. This total of 23 percent affected by the surcharge compares with the two-thirds excluded under the original 1898 means test on the Old Age Pension. However, the surcharge was highly unpopular with superannuitants.
In 1988 tax concessions on contributions to private and occupational pension or superannuation schemes were abolished, as were tax concessions to the superannuation funds themselves. The funds were required to pay standard company tax rates.
The new "level playing field" on investment meant that private superannuation paid out from fully taxed funds was tax-free for recipients. For surcharge purposes half of any private pension was counted as income.
For a short period in 1985 and 1986 National Superannuation rates were adjusted by price movements. As prices were rising faster than wages at the time, the ratio temporarily exceeded 80 percent of net wages again. However this development was short lived and the ratio returned to 80 percent by 1987.
In 1989 the Labour Government announced it was suspending the 80 percent link of superannuation to wages. The renamed "Guaranteed Retirement Income" was to be adjusted by the lower of price and wage movement, and intended to move in a band of between 65 and 72.5 percent of net wages. The Government also signalled a future increase in entitlement age, although this was not to start until early in the 21st century.
A new "Single Living Alone" pension rate was announced for 1990, set at 65 rather than 60 percent of the couple rate. Provision was also made to separately identify the part of income tax required to fund the pension. However, this arrangement did not proceed when the Government changed.
In 1990 and 1991 the new National Government introduced three main sets of measures to further trim the cost of the pension:
1. Pension adjustments for 1991 and 1992 were cancelled, and from 1993 onwards rates were to be adjusted by prices alone. By this period wages were rising faster than prices, so the measure implied a downward trend in the pension-wage ratio.
2. The age of entitlement was lifted from 60 to 61 effective from 1992, with a further phase up to 65 programmed for the period 1993 to 2001.
3. The taxation surcharge rate was increased from 20 to 25 percent and the income exemption lowered so that more superannuitants were affected by the surcharge. The tighter surcharge replaced an initial proposal for an income test on superannuation.
As a result of the changes affecting public pensions under their several successive names, the share of public pensions in GDP reduced from nearly 8 percent in the early 1980s to just over 5 percent by the late 1990s, with major savings achieved.
However, the speed and nature of the changes also produced considerable public concern over pension issues, a period of intense review of policy alternatives, and a search for political consensus on a more stable longer-term pension policy.
The Taskforce on Private Provision
In 1991 the National Government set up a "Taskforce on Private Provision for Retirement", chaired by Jeff Todd. It was to look at how to improve private provision for retirement, with the terms of reference also including the interface between private and state-funded retirement income. The taskforce's August 1992 report evaluated three options:
1. Reintroducing tax concessions to stimulate private retirement income provision.
2. Introducing compulsory contributory superannuation.
3. Continued public provision of a tax-funded pension, with voluntary retirement income provision on top of this, but without tax concessions.
The taskforce favoured the third option - the "voluntary savings option" of continuing public provision supported by increased voluntary savings by income earners.
To make the ongoing cost of public pension provision affordable for an ageing population, the taskforce endorsed other adjustment policies, including:
• gradually lowering the pension-wage ratio
• targeting the pension.
It also endorsed the 1991 policy of raising the age of pension entitlement to 65 by the year 2001.
The taskforce rejected tax concessions, noting:
• their high financial costs
• the disproportionate gains for high-income individuals
• the distortion of investment patterns
• doubts about whether tax concessions would really produce a net increase in national savings.
It also rejected the compulsory contributory superannuation option, citing:
• negative effects on low-income people
• rigidities in investment results
• lack of flexibility for people to access their own savings
• disruption of the financial sector and the wider economy.
However, the taskforce did develop a model for a possible compulsory scheme which was to influence subsequent initiatives.
The multi-party Accord
In 1993 the main parties represented in Parliament developed an Accord on Retirement Income Policies - the result of the taskforce report and the desire for a more stable pension policy.
The Accord drew heavily on the taskforce proposals and included:
• setting up an income-tested Transitional Retirement Benefit for the groups most immediately affected by the increased entitlement age for what was now called "New Zealand Superannuation"
• an allowance for superannuation to be adjusted by prices while it remained within a specified band in relation to wages. A "floor" for pensions set at 65 percent of net wages was agreed, with the "ceiling" to be 72.5 percent of net wages
• establishing the Office of the Retirement Commissioner, whose tasks included publicising the need to increase private retirement savings
• provision for a Periodic Report Group to report in 1997 and six-yearly thereafter, on trends and developments in public and private provision of retirement income. The report was to identify any areas of risk or unsatisfactory performance, and suggest any required policy adjustments.
The Periodic Report Group's 1997 reports endorsed the voluntary savings option and the continued existence of a tax-funded public pension. They discussed a number of ways New Zealand might adjust to demographic change, which included phasing out the difference between payment rates based on marital status. The July 1997 report also expressed regret at the government decision to abolish the superannuation surcharge, and at the broken link between public and private provision.
The Coalition Agreement and the Referendum
The Accord provided several years of stability in retirement income policy. However, by 1996 differences emerged among the political parties about the best direction of longer-term policy, including the future of the surcharge.
The 1996 general election resulted in a coalition between the National and New Zealand First parties. New Zealand First was not a party to the Accord, was committed to abolishing the surcharge, and favoured a compulsory superannuation savings scheme of a social insurance type.
The Coalition Agreement provided for a referendum on the superannuation savings scheme in 1997. A Compulsory Retirement Savings Scheme (CRSS) was designed and put to the voters, involving contribution rates rising from 3 to 8 percent of income between 1997-98 and 2002-03, matched by an "equitable programme of tax cuts".
It provided for retirement annuities to be paid at age 65, which were to be purchased from individual contribution accounts with the government providing capital "top ups" for those who had been unable to reach the required CRSS savings target.
The CRSS was rejected in the referendum by 91.8 percent of voters.
The late 1990s - universal pensions at lower rates
The 1996 budget had announced changes in surcharge policy effective from 1 April 1997, which reduced the impact of the surcharge and cut the numbers of superannuitants affected by it. From 1 April 1998 the surcharge was abolished entirely as part of the Coalition agreement of the National-New Zealand First Government.
For the second time in its history New Zealand had a universal pension with no form of targeting. However, compared with its predecessor in 1977-1985 the pension was set at a lower level in relation to wages, and with a rising age of entitlement.
Income tax reductions in the late 1990s meant that tax-paid New Zealand Superannuation was projected to fall below 65 percent of the net ordinary time wage; thus triggering the "wage floor" provisions of the superannuation legislation.
In addition, domestic and external economic developments in 1998, including the "Asian Crisis" produced a weaker fiscal position. The National and New Zealand First Coalition Government dissolved, and in 1998 the National minority government introduced and passed legislation that:
• removed the 65 percent "floor" on the pension wage ratio
• specified that New Zealand Superannuation was to be adjusted on the basis of prices subject to a new 60 percent pension-wage ratio floor
The Superannuation 2000 Taskforce
The referendum result, the erosion of the Accord, and continuing changes in superannuation policy renewed uncertainties about the longer-term future of public pensions in New Zealand.
In December 1998 the National minority government set up a new Superannuation 2000 Taskforce. It was charged to develop longer-term parameters for superannuation policy consistent with long-term sustainability, including modifications required to New Zealand Superannuation, and to report on these in the year 2000.
The Super 2000 Taskforce prepared a number of information reports, and set up a research programme. When the Government changed after the 1999 election the taskforce was disbanded.
However, some of the work started by the taskforce has been continued by the Ministry of Social Policy, the Treasury or the Office of the Retirement Commissioner.
Policies of the new Labour-Alliance Coalition Government
The Labour-Alliance coalition which took office after the 1999 election reversed the pension-wage ratio decision of the previous government. It announced the restoration of a 65 percent floor for the ratio of the married couple rate of NZ Superannuation to average net ordinary time wages, with counterpart increases in the minimum ratios for other superannuation rates.
A superannuation fund
For the longer term, the new government announced its intention of setting up a dedicated Superannuation Fund which would finance part of the projected future cost of New Zealand Superannuation. The aim of this investment fund would be to reduce the net fiscal cost ratio of NZ Superannuation to GDP in the future.
The objective was described as a "smoothed pay-as-you-go" arrangement which would bring forward part of the future fiscal cost of rising New Zealand Superannuation payments.
The fund would be managed independently by a Crown Entity, the Guardians of New Zealand Superannuation, which would receive and invest Government contributions. A three year transition phasing towards the level needed in the fourth year was expected to be completed in 2004-05, at which stage the annual transfer into the fund could exceed $2 billion.
Actual funding requirements would be calculated each year by the Treasury and reported in the Budget Economic and Fiscal Update. These net fiscal transfers into the fund would begin to decline again as the actual current spending on New Zealand Superannuation rose.
Transfers would eventually fall to zero, and the fund would begin contributing to meet the cost of New Zealand Superannuation.
While future Governments would not be bound to fund the specific transfer amount indicated in the Treasury calculations, the proposed legislation would require any government which did not do so to explain in its Fiscal Strategy Report the reasons for the deviation from the target, the implications for future contribution rates, and the action it planned to take to return to the required funding levels.
It was also proposed that the accumulated assets and income of the fund would not be able to be drawn on until after the year 2020, and then only to fund New Zealand Superannuation payments.
The Government indicated that in addition to establishing a funding framework, the legislation would define statutory minimum entitlements to New Zealand Superannuation. This would include an entitlement age of 65 from 1 April 2001; and setting the minimum married couple rate at 65 percent of average net wages. The single sharing rate would be 60 percent of this figure, and the single living alone rate 65 percent of the couple rate.
These entitlements were expected to be stable because of the resources built up in the fund. Future policy changes were not entirely ruled out in the light of demographic developments. However, the policy intention was that any such changes would be made in a measured and predicable manner. Provision was to be made in the legislation for other political parties to sign up to the funding and/or entitlement provisions of the Bill.
Submissions on the New Zealand Superannuation Bill closed in February and the first select committee hearings are expected to be held later this month.
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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