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Let's decide what we want

Retirement Commissioner Colin Blair says political parties need to clarify their superannuation objectives before they start making policy.

Friday, September 28th 2001, 3:50PM

Any sound debate on pension reform should not be represented or seen as an attack on pensioners. Open discussion and better information are essential in ensuring that agreed objectives relating to retirement income policy are met in ways that are both fiscally and politically sustainable.

Both major political parties and some of the minor parties have made it clear that they will not change New Zealand Superannuation in a way that would adversely impact on those currently in or near retirement. That is an important step towards creating an environment where retirement income issues can be discussed without political considerations and self-interest dictating the outcome.

The present coalition Government has gone further and indicated that its policy for the foreseeable future is to retain the existing "65 at 65" approach. That is, a pension for a couple equal to a minimum of 65% of average after-tax normal time wage payable from age 65. The equivalent percentage for a single person is around 40%. The Government has said that the partial pre-funding scheme is intended to help the ability of future governments to retain the "65 at 65" policy without the need for sudden and significant future tax increases.

It is clear however is that with the strength of some of the political opposition to the partial funding arrangement, the debate on long-term retirement income policy is far from over.

The quality of that debate is in our view extremely important. It will be unfortunate if it becomes a struggle between parties to win the votes of those for whom retirement income is of immediate or short-term concern. The welfare of that group is obviously important. But the most important objective must be that as a nation we produce sufficient goods and services to meet the reasonable needs of all generations. Our retirement income policies must be in tune with that overriding objective of increased national productivity.

An election-based debate on pension policy will be one on which most members of the public will find very difficult to adjudicate. Not because they lack the intelligence, but simply because it is one of those complex issues where there is no single right or wrong answer. In a recent paper prepared for the International Monetary Fund, Professor Nicholas Barr from the London School of Economics, having emphasised what he terms the "centrality of output to the macroeconomic viability of pensions," identified eight questions to be considered in the design of pension policy. He made the point that simple yes/no answers to just the eight questions could yield up to 256 possible combinations, "the answers to which will depend on economic variables and on a country's culture and history." The eight questions by no mean exhausted the list. For example, the role of tax incentives was not included.

Professor Barr argues that rational policy design starts by agreeing objectives. He says that the objectives of pension systems are threefold: poverty relief, consumption smoothing, and insurance (for example, against longevity risk). His eight questions relate to issues such as the size of and level of redistribution in the first tier to cover poverty relief; should there be a second tier to provide consumption smoothing between pre- and post-retirement years and, if so, should that tier be integrated with the first, should it be funded or PAYG, should it be defined benefit or defined contribution, and should it be managed publicly or privately; should people be able to opt out of a State second tier into a private scheme, and finally to what extent should the State assist with indexing pensions.

Professor Barr advocates that only when the policy issues are defined and agreed should the debate turn to the detail of the instruments for achieving the policy objectives.

We would be very surprised if New Zealanders are able to say what the policy objectives of the various political parties are relating to our state pension and retirement income polices. It is certainly not clear whether party differences over issues such as partial pre-funding and design features of New Zealand Superannuation arise because of different policy objectives or simply represent different approaches to achieving similar objectives.

We would urge any political parties which wish to seek public support for their policies to start by clearly articulating their policy objectives. We may be surprised at how much commonality there is between parties. On the other hand, if significant philosophical differences arise then the public will be better placed to understand the reasoning behind differences in approach.

We mention the above because one of our main functions is to assist New Zealanders, through education and information, to make decisions which assist them in meeting their retirement objectives. People cannot properly determine the action they should take without having a clear understanding of the role of the State in this area.

After a quarter century of ad hoc change most New Zealanders are looking to our political leaders to clearly enunciate a pension policy which is based on consideration of questions such as those raised by Professor Barr and which takes account of our economic position as well as our culture and history.

Whatever happens at political level the Office will continue to promote the benefits of private saving. We will do what we can to ensure that New Zealanders have access to good information and education relating to the effective management of their personal financial resources. That is the modest but important contribution we can make to the economic growth of New Zealand and to the financial security of New Zealanders.

by Colin Blair
Colin Blair is the Retirement Commissioner

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