There are a number of different options for a dedicated funding arrangement. These include a notional fund involving earmarked income tax, a central fund established for NZS managed either through the public sector or the private sector, separate funds for different age cohorts, and private individual accounts. The key distinctions between the approaches are whether the fund is individual or collective, and whether the fund is real or notional. However, all of these funding arrangements have in common that they create a visible link between the size of contributions to the fund and the cost of future retirement income obligations.
It can be argued that such an approach could make any attempt by government to change people's entitlements very transparent. In any such scheme, it may not be possible to alter entitlements without either creating a clear discontinuity between the promised benefit and the existing fund, or changing the rate of contribution to the fund.
In effect, a dedicated fund could force the government to reflect the costs of changes to the retirement income scheme in the present rather than in the future.
Some forms of dedicated funding could also create a sense of ownership of retirement income provision. This is particularly the case where cohort or individual funds are established.
If the public feels a sense of ownership of retirement income provisions, there is likely to be greater resistance to policy changes that decrease entitlements.
To be effective in contributing to stability, there must be a clear link between the dedicated funding arrangements and the level of benefits promised. This is essential if dedicated funding is to result in increased transparency. Any fund would need clear objectives and adequate monitoring against those objectives. Additionally, a dedicated fund is likely to require a substantial degree of public consensus about retirement income provision if it is to be effective.
Depending on the specific details, dedicated funding arrangements could have substantial effects other than on stability.
In particular, the accumulation of funds could leave the government with a significant involvement in New Zealand's financial sector. This effect could be limited if the fund were managed at 'double arm's length' whereby the government selects fund trustees who, in turn, appoint fund managers.
Individual accounts might have an impact on the form of assets in which individuals held their savings.
The potential economic impacts need to be taken into account when considering dedicated funding arrangements as a policy stability process. There are other issues that should also be considered.
There have been a number of attempts to establish dedicated funding arrangements for New Zealand's retirement income framework in the past. Until 1964 New Zealand had a notional dedicated fund that covered retirement income provision.
However, this fund was never actuarially based and in 1964 was absorbed into the Government's consolidated account.
In 1975 a fully funded system of individual accounts was introduced, but was abolished in 1976. Most recently another system that would have involved individual retirement income accounts was defeated in a referendum in 1997.
This article is an extract from a Victoria University, Institute of Policy Studies Paper, "Stability of Retirement Income Policy" commissioned by the Super 2000 Taskforce.
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