Bill English has some fundamental questions for Michael Cullen

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The future of superannuation is a huge issue for New Zealand. But is Michael Cullen’s pre-funding scheme the best solution? National's finance spokesman Bill English asks a number of key questions.

Wednesday, October 18th 2000, 12:00AM

by Philip Macalister

The facts

• To cope with the bulge in superannuation as the baby-boomers retire, the Government proposes to put away money in advance.

• Governments would set aside about 1.8% of GDP – about $2 billion in today's terms – until 2010, and declining amounts after that.

• The value of the fund would peak at about $100 billion – or half the size of the entire economy – sometime between 2023 and 2029.

• Then it would be used to help pay for superannuation to everyone over 65, at 65% of the average wage.
• Over time its value would decline to zero.

Since 1970, New Zealand has produced surpluses big enough to support this scheme only twice – both during the 1990s. And National took a lot of hits at the time for being "mean" on spending in order to deliver those surpluses.

A straitjacket for future governments
With one decision, the fund is committing a huge percentage of any government’s future spending power. There simply won’t be money to spend on other community priorities.

There won't be anything like enough money left over to boost education, or pump up our universities and our research capacity, or other policies that we need to get the economy up and running. It also means there will be no room for tax incentives or lower taxes. For instance, it would be almost impossible to drop the company tax rate to match Australia.

What Cullen told Cabinet
Michael Cullen hasn’t been very keen to talk about the extent to which his proposal will dominate government spending and choke off other plans. But he was pretty explicit in the report he put up to the Cabinet policy committee.

"In making the contribution to retirement income policy more certain, pre-funding would shift fiscal risks onto other spending policies. This would mean that other policies would bear both a greater proportion of the risk of variability in tax revenue and fiscal demands due to economic shocks, and the residual risk arising from the variability in investment returns on the fund …

"While affordable in the longer term, when the Budget Policy Statement was prepared in March we considered that this initial requirement [of $2 billion a year] could potentially be too much to impose all at once without compromising other short-term fiscal objectives for debt and spending."

Which, in plain English, means that when you’re committing $2 billion a year to the fund, something else has to give.

Where to invest the fund?
There’s trouble brewing on where this massive fund should be invested. If the Government opts for a truly global fund, only about 0.2 percent would stay in New Zealand. That would give the best returns, but it would see a lot of New Zealand capital leaving our shores.

Already the Alliance is talking about a much higher level of new Zealand investment. The return for taxpayers would not be nearly so attractive.

And the Greens want to insist on social, environmental and ethical investing priorities. Where would that leave the returns for taxpayers?

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