Michael Cullen's scheme is not prefunded super or even savings based super. It's two things. One, an attempt to set the rate of superannuation for a rolling 40- year horizon. Second, a scheme to smooth the effect on government expenditure of the baby boomers retiring.
The Fund
There is no long term fund. While it is planned the fund will reach $50 billion at its peak, as super is paid out the fund reduces to zero.
Treasury Advice
The Treasury advice is that the scheme will have no net effect on the nation's savings. Savings that individuals would have made will instead be made by the state.
The Good
The legislation will require Treasury to produce 40 year projections. In a way it is an extension of the Fiscal Responsibility Act, and as decisions such as the level of super have 40 year impacts, this aspect of the Bill has to be welcomed. Cynics say (Dr) Cullen wants this scheme to act as a brake on the spending proposals of the Alliance.
The Bad
A $50 billion fund controlled by politicians and politically selected bureaucrats is scary. The politicians won't be able to resist politicising the fund. It is a huge risk.
Some Thoughts
The Fiscal Responsibility Act has had some unintended consequences. As revenue is known but future expenditure decisions of governments are not, the Act has spawned the forecasting of optimistic projections of future surpluses which have never been met. Politicians can not resist spending these projected forecasts as if they were real. Winston Peters did it with his $5 billion expenditure programme. Michael Cullen believes the forecast of an average two per cent of GDP surpluses are real. They are not. As an aside, Al Gore and George W Bush are competing to spend projected surplus forecasts on social security as if the forecasts were real - a slight change in United States growth rates will see the surpluses disappear and the present US election debates will appear pointless. If we are going to have a $50 billion asset on the state's balance sheet, then parliament must insist that the future superannuation liability be recorded as a liability, so politicians do not spend the asset.
ACT's view: Is it a dream?
Two per cent of GDP is a very large sum. No country in the OECD has run two per cent surpluses for 30 years. Luxembourg has done it 14 times while 24 countries, including the United States, have never done it. New Zealand has achieved it just four times. While deficits are bad, so are surpluses, because it means the Government has over taxed. No government scheme is as secure as savings in people's own names. When the Government takes $2 billion a year in taxes and transfers it to a fund, it is not a surplus, it is a tax increase. The reality is that baby boomers are forced to pay twice, leaving them less money to save themselves. The ability of a nation to afford a retirement scheme depends on the wealth of the country. If the economy grows faster, a country can afford more. Will the Cullen scheme assist to grow the economy today or tomorrow?
Xenophobic Legislation?
A major rift is developing between Michael Cullen and Jim Anderton after the Alliance leader called for half of the proposed super fund to be invested in New Zealand. Winston Peters wants 70 per cent, while the Greens' Rod Donald wants 50 to 70. Cullen, in a bout of economic lucidity, has said there should be no restrictions on the fund's management. Research by ACT has shown that 10 of the top 12 super investment funds have progressively decreased their New Zealand share holdings. The two that haven't have performed the poorest. Cullen knows legislated investment restrictions could seriously compromise the forecast nine per cent returns.
Richard Prebble is the leader of the ACT Party.
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