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The government proposes making all individuals pay higher income taxes (about 20% or $3.5 bn more than is needed) to put money aside for future superannuation payments. Is this a good idea?
The short answer is "no" – it’s a simple, politically appealing idea but it’s also a simplistic response to a number of complex issues.
Labour says that the proposed Fund resolves the future sustainability of New Zealand Superannuation. It doesn’t. Neither does it guarantee the future level of New Zealand Superannuation.
Here is what’s wrong with Labour's proposal with the issues ranked in approximate order of importance:
First, New Zealand’s ability to create wealth is the key to the living standards of present and future retirees. We can continue to support an increasing elderly population at current income levels only by growing faster than we are. The proposed Fund won’t help us grow in the way we need to. Partly that’s because most of it should be invested overseas. I’ll say more about that in a moment. It will also be because the managers will focus on large, established and "safe" investments. Creating wealth is the single most important issue that we need to discuss. Only a successful economy can achieve Labour’s objectives.
The Fund is a fiscal sideshow. We need next to agree on the long-term shape of New Zealand Superannuation. In all the last 25 years of constant change, we have never had that debate. Without a clear idea of our target, we don’t really know what problem needs solving and whether the Fund might help.
Thirdly, the transfer to the Fund of more tax revenue than is needed to pay for current New Zealand Superannuation, assuming no change in tax or spending, leaves the government's overall operating surplus unchanged. Peter is robbed to pay Paul. A surplus in the Fund cannot be built up without an equal reduction in the surplus on other government activities unless we have tax increases or spending reductions. This is fiscal and economic window dressing at its worst.
Next, a change from the present "pay as you go" (PAYG) approach to a partially funded basis requires us all (including the currently retired) to pay twice during the transition. We all need to agree that this is a good idea. If we don’t, it simply won’t last, even if it might help.
Fifthly, Labour's proposal is essentially the present PAYG scheme with higher total payments today, extra administration costs and a lower surplus than otherwise. There are no compelling grounds for partly funding New Zealand Superannuation or similar public programmes (like health spending) that are presently funded on a PAYG basis.
Sixthly, New Zealand's constitutional arrangements can’t prevent a future government from using the Fund for purposes other than the payment of New Zealand Superannuation. Even if there were such restrictions, they need have no practical effect. The government of the day will simply re-order its spending by taking more New Zealand Superannuation payments from the Fund’s cookie jar and less from the general tax jar. More smoke and mirrors but this time from tomorrow’s governments.
Seventhly, most, if not all of the money will need to be invested overseas. New Zealand’s markets aren’t large enough (or diversified enough) to absorb such huge amounts. Putting more money into the New Zealand market will increase share prices without adding a dollar to the profits of companies. That won’t improve the economic value of the companies (or New Zealand) but will line the pockets of wealthy New Zealanders. The Fund will grow to more than $100 bn in today’s money. Having the Fund will raise the government's (and the country's) risk profile. It will do terrible things to our balance of payments (and the dollar) in the short term. In the long run, the investment risk on that huge pool of capital will remain with the government. Just when tomorrow’s governments will start drawing down on the Fund, retiring baby boomers from all over the world will be cashing in their investments. Some commentators think that will be the start of a slide in asset values. It’s also very difficult to see how such a political honey pot will be free from political interference.
Lastly, the proposed Fund is another kind of compulsory savings scheme. Labour, and 92% of voters, were hotly opposed to Winston Peters’ Compulsory Retirement Savings Scheme in1997. At least that Scheme had the virtue of savers’ choosing which fund to put their money in. Not so with this new proposal. The government seemingly knows best where we should be putting our money.
Labour's proposal is therefore fundamentally flawed. It’s risky, expensive, answers questions that didn’t need asking and fails to address issues that we need to discuss. We need political and community consensus on tomorrow’s retirement income policies. If Labour is struggling to get the voting numbers in Parliament today, what hope do we have that this flawed proposal can survive?
The New Zealand Superannuation Fund is just a bad idea.
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