A new take on Cullen's speech
Michael Littlewood gives his views on a recent speech by Finance Minister Michael Cullen.
Wednesday, May 30th 2001, 2:32PM
I (like Good Returns' editor) am really concerned at the inadequate debate that some very large superannuation issues are currently attracting. We are set for a reprise of past superannuation initiatives as the present government chisels a new monument in the superannuation graveyard. Even if the Big Cullen Fund actually gets off the ground, it will have a limited life because we aren't discussing the things that really matter. The Big Cullen Fund will be large but it will be an even larger distraction to future generations.
Here is my take on the Minister's
latest contribution to this process of sleepwalking our way to
yet another unsatisfactory "solution".
The Budget is being presented on Thursday. The Select Committee is due to report back on its consideration of the New Zealand Superannuation Bill on 12 June.
Under these circumstances it is very difficult for me to offer you a detailed report on progress under way.
What I intend to do today is to restate
the high level policy objectives of the government with regard
to superannuation, and to respond to some of the issues that have
emerged in the public debate since the Super Bill was introduced.
There are two very powerful drivers of our
approach to superannuation: macroeconomic stability and personal
security. They rank right up there with the core responsibilities
of the modern state, and underscore why I see superannuation as
a key strategic issue rather than a political tactic. This attempts to place the government
on the moral high ground but fails - why is superannuation so
different an issue from future health costs (that have the same
demographic content) or unemployment (of much more immediate importance
to economic growth) or education or entrepreneurship both of which
are more important to the issue of the future affordability of
New Zealand Superannuation (NZS) than a pot of money run, ultimately,
The economy faces a number of structural
problems, not the least of which is the problem of substantially
upgrading our collective human capital. A less visible, but similarly
important problem is our low rate of national savings.
The free market purists would say that the
savings rate does not matter. I
think "purists" would argue that flows' measurements
of so-called "savings" are of doubtful value given that
their focus is really on the absence of consumption (it's simply
the difference between income and expenditure and says nothing
about what happens to the difference). Quality investment is
likely to be more relevant in this area. They
point to countries with high savings rates, like Japan, experiencing
protracted stagnation, and countries with low savings rates, like
the USA, having a strong currency and have experienced protracted
growth. The Minister
doesn't actually address this seemingly unexpected situation.
According to the thesis that underpins the BCF, higher savings
should lead to higher growth. They also
argue that in purely rationalist terms, we benefit by borrowing
from foreigners. We
can benefit, but not necessarily - again, the investment issue
is the one that matters. The theory
is that rational individuals would not borrow if they could not
get a better return than the rate of interest they are paying
on the borrowings, so there is a net gain in economic wellbeing
by leveraging returns off foreign borrowing. The flip of this is that rational investors wouldn't
lend unless there were profit to be gained from that. I don't
see anything wrong with that as a concept.
I do not buy these arguments for two reasons. The first is that borrowers do not have perfect knowledge - particularly about the future! Neither do governments or investors or taxpayers. In the last few decades we have seen evidence from widely different economies that what seems rational for the individual is not necessarily rational for the collective. Agreed - putting surplus income into retirement saving plans may be rational for an individual but it doesn't follow that having governments put tax "surpluses" into overseas shares for the whole country is a sensible idea, particularly when there is debt to be paid off. If there are capital gains to be made, it makes sense to borrow. If there are equity-related profits to be made, it also makes sense to borrow. The concept of borrowing for just "capital gains" isn't relevant. A sensible investor borrows for the total return.
But if everybody chases the same capital gain there is eventually an oversupply of investment funds relative to potential investment returns. Which is one of the major impacts that the Big Cullen Fund is likely to have on local markets unless it is all or mostly invested overseas. There is evidence of this effect in Australia from the pressure of funds created by compulsory private provision. There is also evidence of that same effect from Chile. More savings (such as from the BCF) will put upwards pressure on local prices but won't necessarily increase quality investment (which is what really matters).
Assets are inflated above values that would be justified by underlying earnings potential and the bubble bursts. Investors herd in and stampede out. In the case of the BCF, taxpayers will be the losers from this effect. Remember that the BCF will eventually be bigger than the entire NZ share market. And that also ignores the potential effect that the large international flows from and back to NZ will have on the NZ$.
Secondly, even if we could enhance economic
growth and production by using the savings of foreigners to do
so, the benefit to New Zealanders is reduced to the extent that
we have to divert a part of that production to pay the foreigners
for the use of their capital. But
NZrs will still be better off than if the investment had not taken
The last work done by Bryan Philpott stressed this point. He calculates that between 1984 and 1999, GDP - the total value of output from within our national boundaries - increased by 1.8 percent a year in real terms.
However, because of our very poor savings record (investment record actually including, most spectacularly, the stunningly bad investment record of past governments) and our reliance on the savings of others, the net income paid overseas - to the overseas owners of capital used in production here - rose from $1.6 billion a year in 1984 (before which the NZ economy was unrealistically walled up from the rest of the real world - that's a conveniently chosen starting point) to $7.4 billion in comparable dollars in 1999. The issue here is whether this change is "bad", "unusual", or a trend and it also ignores the impact of that increased foreign investment on growth, wages and taxes. It might be nice to isolate these various elements. The point is a populist one and not necessarily helpful.
The result is that national income - the total value of output accruing to New Zealand nationals - only grew by 1.4 percent a year. And just how is the BCF likely to help improve this dismal record?
When population growth is taken into account, national income per head grew by 0.2 percent a year. And this, ultimately, is what drives living standards - the amount of output per person that New Zealanders can lay claim to. And how is the BCF going to help with this?
The latest Monetary Policy Review put out by the Reserve Bank last week projects a government operating balance 2 percent of GDP in the 2002 March year, and 2.5% percent in the year after that. By contrast, the household savings rate is a negative 3% of household disposable income in those years.
Superannuation policy has to be seen as a part of the solution to raising the savings rate. By transferring a good part of the emerging structural surplus I'm suspicious. Just what is a "structural surplus" - is that real money? into the Superannuation Fund, the government translates short term fiscal surplus into long term national savings. This is simplistic stuff - for example, it ignores the, probably, negative effect that the BCF will have on individuals' saving decisions. It ignores risk. It ignores the fact that maintaining any debt while investing in share markets is the same as borrowing to invest. It assumes that the future amount required to support NZS will inevitably increase (no discussion on possible benefit changes). In fact, it skips past nearly all the important immediate issues before sweeping on to the grand fallacy.
Equally, there is little point in lifting the public sector savings rate if that is immediately offset by a fall in the private savings rate. In my view this is not happening. Evidence? Does the "in my view" mean that there is no evidence? It would only happen if people increased borrowings in a way that they would not have if the money put into the fund was paid out as tax cuts instead. Tax cuts are not the only alternative - reducing debt is another, cutting future entitlements to NZS is a third. Where is the information and debate on alternative strategies? Which strategy is more likely to promote growth while at the same time ensure intergenerational equity and also fairness between the different groups of taxpayers today and in the future?
Our experience with tax cuts in the 1990s was that they seemed to have an almost invisible effect on private savings. Evidence?
This does, though, raise the issue of improving private savings. Or improving the quality of private investment? If this is, in fact, the more important issue, what does the government intend to do about it?
I have said it time and time again, but
it still bears repeating, that the government does not see the
New Zealand Superannuation Fund as the solution to the problem
of promoting national saving and improving income in retirement.
That's a relief. In
fact, economists say that there is not a lot that governments'
policies can do directly to "improve" national saving,
except with regard to governments' own activities. However, this
plays with words. The Minister has said that the BCF is the answer
to questions about the future sustainability of NZS. It most
certainly is not that, whatever else it might be.
It is a vital part of the solution but it
is still only part of the solution.
The second core justification of the Super
Scheme is that contributes to enhanced social security. Which may explain the risk of reduced
private provision in the presence of the BCF.
The need to restore confidence among people that a decent pension
will be there for them has increased in direct proportion to both
the level of interference and instability in the provision of
public pensions in recent decades, and the scaremongering that
has gone on that the pension cannot be sustained when the baby-boomers
retire. When did we
have an informed debate about this? What are the alternatives?
Just what notice has this and the last government taken of the
alternative strategies presented by the 1997 Periodic Report group
on this key issue? That's a rhetorical question. In case the
Minister hadn't noticed, the answer is "none".
I have a strong philosophical commitment
to the view that security in retirement is the least that citizens
should expect from their governments in a civilised, developed
country. It is also the most they should expect. "Security" doesn't necessarily mean a
high (or "high enough", however that may be defined)
pension. It could mean certainty of outcomes, low inflation,
high and sustained growth, net real rates of return, lower income
taxes, fairness between generations and across groups of taxpayers.
What does the Minister mean by "security in retirement"?
Unless this key issue is defined and agreed on, we are all talking
past each other.
t is not the function of the government
to maintain in retirement the incomes that people earned during
working life. That is the responsibility of the individual. Again, when did we have that debate?
This is what leads me at the personal Meaning?
level to reject compulsory individualised, earnings-based savings:
the government is intruding too far into what ought to be personal
decisions about how to spread consumption over the life cycle.
But the Minister is
quite happy to take a view on that for taxpayers as a whole.
Having said that, while NZS will provide enough to enable participation in life Evidence? What, again, are the alternatives?, it is not designed to do more than that. When was that decision made? What measures does the government use to assess that test and whether or not NZS does/is likely to meet it?
Just as there is need to increase public savings from a social security Pardon? and economic stability perspective, the imperatives of security in retirement coincide with the imperatives of raising private savings from a economic stabilisation point of view. Evidence? Growth is more important to sustainability than "savings". The Minister implies that "savings" causes growth (which can be future pensioners' only real security) when economists seem to conclude that growth produces "savings" and not the other way around.
I have given two speeches in recent months
on this topic: one to the annual meeting of Grey Power, and one
to the annual meeting of the Association of Superannuation Funds
of New Zealand, and there is not a lot more that I can add to
this topic at this stage.
Instead, I am going to comment on three
of the core criticisms that have been made of the super fund scheme.
The first is that it is not necessary: that
the increase in the proportion of the elderly in the population
will be offset by a reduction of those of younger age, so that
the overall dependency ratio will not change much.
Secondly, that it is unfair as between the
Thirdly that we should wait until there
is a consensus in Parliament before introducing the scheme.
On the matter of the dependency ratio, the
question for me, as Minister of Finance, is not what share of
total economic production goes to each age group within the population.
It is what share of the consumption needs
of each group has to be paid for by the government.
In this respect, young people (generally),
need much less by way of payments from the government than do
the retired. Basic costs of support (housing, clothes, food, phone,
power, insurance, transport) are essentially "private"
for the young (parents support them), and "public" for
the retired (the government pays NZS which is the primary income
out of which those things are paid for).
fewer young person does not equal one
more retired person as far as the government's financial obligations
A rough calculation done by Treasury concludes
that each person under 16 costs the government $4,603 each year,
and each over 65 year old costs it $16,866. It would be nice to see the full analysis as a contribution
to understanding this issue. Generally, we would have to agree
with the Minister's point though, for a "rough calculation",
the results seem remarkably precise.
The older age cohorts in the dependent population
are nearly four times as expensive, per head, fiscally, as the
I do not buy the argument that less will
be spent on education. It is sensible to plan on the basis that
in the future, we will need to spend much more per pupil than
we do now in order to remain competitive in the modern world (smaller
class sizes, more computer and technical supports and so on).
Even if we do spend less at that point,
I imagine that we will spend more on health treatments if the
proportion of the elderly in the population increases.
If demographic change "frees up"
tax money I am sure there are many other good uses that people
can see it being put to.
The dollar freed up cannot fund both NZS
and health costs. By partially pre-funding NZS I am creating more
capacity for future governments to respond to pressures for more
health and other spending. By
making sure that governments of today have less flexibility.
I have a great deal of difficulty understanding
the National Party's argument on intergenerational fairness.
As I understand the sort of compromise they are floating, they would guarantee New Zealand Superannuation to those who are already retired or near retirement - say those over 45 or 50 - but make no such commitment to the next generation. I can't speak for National but I understand them to be saying that we need, as a country to resolve how to treat the superannuation expectations of younger New Zealanders and that we can't do that without proper information, a national debate and consensus on the way forward. The government will have none of this. As I understand it, the reason for the "promise" to older workers is that politicians have eliminated any further change to the expectations for these people by the constant changes of the last 25 years.
Later generations would have to rely on a fairly vague promise of tax cuts and possibly tax incentives to save for a much larger share of their retirement income.
I cannot think of a scheme that is less
fair to the coming generations. They will have paid to keep their
parents and grandparents up to current NZS formula levels only
to see it evaporating before their very eyes as they move into
their sixties. Political
On present plans, we will pay net into the
fund for the next 20 or 25 years If we can afford it. and
draw net out of the fund after that. That means that people who
are now between 40 or 45 and 65 will pay extra, but never have
their taxes subsidised by fund earnings. That can't be right, remembering that when they
reach retirement, they will still be taxpayers and still be helping
to pay for their own NZS. To the extent that the BCF's subsidy
to future payments of NZS include fund earnings, then their taxes
will be subsidised.
Those under 40 or 45 will at least benefit
from some of the tax modification that the fund allows.
The sandwich generation is in fact the baby
boom generation, but I would argue that they are best placed to
absorb the cost. This
begs the huge question of what it is that any generation of workers
might be expected to pay for. When did we discuss or resolve
They have come through the era of free education,
near full employment and affordable home ownership, and many came
through the era of more extensive employment-based superannuation.
This is simplistic
stuff. Where is the evidence that the baby boom generation is
(or is likely to be able) to better cope with paying twice than
any other generation?
The next generation has the student debt, is more likely to experience at least intermittent periods of unemployment or low earnings, and has a harder job getting a start with owning a home. Again, simplistic stuff. Let's look at the evidence.
We must be clear. Unless we can restart history, we cannot have a state pension regime that is absolutely fair as between the generations. But unless we have a proper discussion (that this government is assiduously avoiding) we cannot count on tomorrow's generations of taxpayers having the same view on all this as today's. If we don't have the full debate, backed by proper research, we are condemned to repeat the mistakes of the last 25 years and future change will be inevitable. That's mainly because tomorrow's generations of taxpayers won't know the basis. Intergenerational fairness is partly about limiting change through much better information about relative affordability. The task is to allocate any inter-generational burdens to the generation that is most able to shoulder them. No it's not. It may be the Minister's task but that's not what "fairness" means. My super scheme does that. Economic hyperbole even if we forget that the BCF will, at its peak, contribute less than one fifth or any year's cost.
Finally, I want to talk a bit about the
consensus argument. This is a sham.
It is an excuse for ducking the hard decision
on the fund. See how
the Minister automatically assumes that "consensus"
is about not agreeing with him. I realise that consensus is a
hard concept for politicians to accept because, among other things,
it means that not just the current government will be making the
"hard decision" - that other people might have a different
opinion and might actually be able to contribute to the debate
and the required decisions. Those who
say that we must wait for consensus are in effecting rejecting
the super fund An imposed
"solution" but do not have
the courage to front and say that. There is no hope for consensus because the Minister
has re-defined it and the unilaterally dismissed it. That's one
way of avoiding the idea. After the experience of the last 25
years, this is an unsurprising result. The Minister has one more
opportunity to make his mark in the superannuation debate (remember
his "Guaranteed Retirement Income" and the "Retirement
Income Tax"? You don't?) and, by golly, no-one is going
to get in his way. "Consensus" and the BCF are like
oil and water. In fact, the BCF itself is a metaphor for the
way things tend to get done in Wellington today.
I have been Labour's spokesperson on superannuation
for nearly 15 years now, and in all that time consensus has been
the catch-cry No it
hasn't. My first introduction to the concept was the 1992 Task
Force's report. That's something less than 9 years ago., and the more it has been talked up the more likely
it was that people calling for it were trying to avoid consensus.
Not so. But, given
the Minister's present strategy, we must expect him to denigrate
There was too much political advantage in
having a different position on super. I think that actually a bit harsh. In my experience,
the differences in the various political stands on superannuation
have been mainly the result of ignorance rather than political
advantage though the one leads quite naturally to the other.
My view is that the great and enduring consensuses
on superannuation policy , like those in the USA and in Australia
Australia does have
consensus but it's stretching things to say it's "great and
enduring". It actually happened by accident and as the result
of political opportunism. At best, it's only had a nine year
life, have followed rather than led
new schemes. Not true
They have followed by the law of political
gravity. As the funds have grown The Minister doesn't understand how the US Social
Security system works - the Social Security "fund" is
an economic hall of mirrors., and as
they have been seen by the population as a whole to be a clear
indication of where their pensions are going to come from, they
have become too strong a force to try and deny. So, that must explain why Australia's household
saving rate (as deficient as that measure is) is nearly as bad
as New Zealand's. I wonder if it also explains why the Australian
Reserve Bank thinks it will be at least 10 years before any conclusions
can be drawn on the success or otherwise of Australia's compulsory
saving regime. The Minister should provide better examples than
So it will be with this fund. Because the BCF will be a monument to one man's view of the world (and might slide through Parliament by 61 votes to 59), it will be a continuing focus of attention. And that's because we haven't talked about the things that really matter. Like, not ever talked about the things that really matter. Just to take one small example, when did we agree that the State pension age should be 65 for ever?
I am going to end this presentation by reflecting on one area that is perhaps more of concern to the fund managers that would seek to do business with the Guardians of the Fund.
This is the question of ethical investment, sustainable investment, socially responsible investment or other variations on that general theme.
The debate on this starts at one level of
Any attempt to fetter fund managers with non-commercial - such as ethical - constraints is seen to lower the long-run returns achievable. Agreed - tobacco companies' shares and the shares of companies that cut down native forests or manufacture armaments could well be very good investments for the BCF (if it ever gets off the ground).
You can have ethical investment, but at
a cost because it limits the full range of choices a fund manger
has. The subsidiary argument is that giving fund managers dual
objectives always gives them an excuse: if returns are low it
was because they were pursuing ethical investments; if they invest
in controversial companies it was because they were seeking better
The jury is out on this.
There is certainly a lot of evidence around
that socially responsible funds do not produce weaker financial
results than conventional ones We
should see that evidence, but the counter-claim
is that there has not been the time horizon or the scale of funds
under management to make valid comparisons.
At the next level, the argument is that
investment that is not sustainable would not be selected by fund
managers. Sustainable investment is best practice.
Also, socially irresponsible investment
will eventually attract sanctions in one form or another: government
regulation, consumer boycotts and the like. Evidence? Hence prudent
fund managers would build into their calculations the risks of
reducing returns from socially irresponsible entities. This is
a bit too simple. Agreed
There are profitable investment outlets,
particularly short term outlets, that do generate good returns
from bad labour and environmental practices.
I said earlier that the terms socially responsible,
ethical and sustainable tend to be used interchangeably, when
there are some subtle but important differences between them.
There are also differences in approach to this type of investment.
Since the Superannuation Bill was introduced,
a number of investment organisations have been making presentations
- not just to the government - about how the ethical dimension
might be incorporated into fund management decisions.
There are a number of models.
The first is the prohibitionist model.
Certain types of investment are simply declared
to be off limits: arms manufacturers and tobacco companies are
two examples. There are two problems with this model.
Firstly, it only narrows the range of potential
investments marginally, and can be seen to be tokenist.
Secondly, the prohibited product groups
can be produced by corporates with other legitimate products,
and companies that profit from the products need not be the companies
themselves. Banks, for example, make money from tobacco when they
lend money to tobacco companies. It is very hard to fully screen
a prohibition list.
The second model is the investor values
model. Here the investor decides what sorts of values it wants
reflected in its portfolio and the fund manager selects accordingly.
That seems to be viable when the value system
of the investor is tightly defined: say a religious organisation
with funds to invest.
It is harder to define the values of the
investor when the ultimate investor is the people of New Zealand,
or even the government of New Zealand. Values are diverse and
at times conflicting within the body politic.
Thirdly, there is what is known as the best
of sector approach. The best of sector recognises that there are
sectors that will have an inherent disadvantage when it comes
to some aspects of social or environmental performance.
A computer software company will always
generate less environmental damage that a mining or chemical company.
However, a modern economy does need minerals, fuels and chemicals,
so screening some sectors is simply hypocritcal.
The best of sector ranks companies within
sectors against standards of (say) social, labour and environmental
performance. It then limits investment to companies in the (again,
say) top 30% in the sector.
It chooses from among those that make the
grade according to conventional financial performance indicators.
The approach does limit choice to the companies
that have gone through the ranking process. It is also of limited
use when investments in intermediary organisations like banks
are being considered.
The final model I want to talk about is
the active partner model. Under this model, there are some prohibitions,
but apart from that organisations that the fund invests in are
encouraged to work with agents of the fund manager to improve
That involves a mix of improving reporting
on the triple bottom line: financial, social and environmental,
and improving performance in each of these categories, but especially
the last two.
The incentive for companies to engage with
the agents is that if they do not, the fund manager will not invest
I am not sure that this intimate level of
active engagement can be maintained with a fund of the size that
the NZSF is expected to grow to, but that will be something that
the Guardians will have to look at.
I don't think that the best way forward
is to select a model in advance and prescribe it in legislation.
The whole field is evolving too rapidly for that.
My preference is to stay with the emphasis
on process that is outlined in the Bill. That process might be
fine-tuned, but it operates through a number of re-inforcing procedures.
It starts with a high level value statement.
The Guardians must invest the fund on a prudent commercial basis,
but must also "avoid prejudice to New Zealand's reputation
as a responsible member of the world community". This is virtually impossible to define
and implement. Any nod in this direction will almost be tokenist,
to use the Minister's expression.
That could imply a prohibition screen, but
the Guardians do have scope to develop other methods to avoid
irresponsible investing prejudicing New Zealand's reputation.
The Guardians must then establish investment
policies, standards and procedures and review them annually. These
are published in a statement, and the statement has to cover a
wider range of factors that include ethical investment.
This is important. There has to be an annual
statement that covers all three dimensions of ethical investment:
policies on ethical investment, standards on ethical investment
and procedures relating to ethical investment.
Each year, the Guardians must publish a
report that includes a statement certifying whether or not the
investment policies, standards and procedures have been complied
There is adequate scope for Parliamentary
and public scrutiny of whether the policies on ethical - and of
course other dimensions of - investment are appropriate, whether
standards are adequate, and whether standards have been met.
To round things out, at least every five
years there has to be an independent review of how efficiently
and effectively the Guardians are performing their functions.
That includes whether the policies et al on ethical investment
are appropriate and whether they have been complied with.
This package is sufficiently specific, sufficiently
flexible, sufficiently transparent yet sufficiently accountable
to allow us to move forward with some confidence on this new investment
frontier without compromising the financial imperatives of the
There are other key issues that the Guardians
will need to grapple with about the investment performance of
the fund, but there is no time for these today.
The programme you have in front of you is
varied, and allows for a very stimulating discussion of all aspects
of superannuation policy.
I noted that I saw superannuation as crucial
from the point of view of macroeconomic performance and personal
I am sure your deliberations will allow further insights to be gained into how superannuation policy can contribute to both.
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