Government has made a huge decision with no-one noticing

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National's super spokesman Bill English says the Government's number one budget item for the next 40 years will be super if prefunding is put in place.

Friday, November 17th 2000, 10:59PM

by Bill English

Self interest is a marvellous thing. One day as english-on-line sat through another discussion about the tidal wave of aged people set to engulf the country, a light went on. These aged people of the future that everyone is worried about are already here - they're "us". The problem isn't today's older people. It starts with the baby boomers, a generation with demographic attention deficit disorder, but the cost really bites when retirement gets to "us", the under 40's.

Superannuation debate regularly stands in the swamp of a history most people have forgotten or detail they don't care about. So the Government's superfund sounds simple.

The proposition is that the government puts $2.0 billion per year from its surpluses into a government fund, so the government can guarantee a pension at 65% of the average wage to everyone for the next 60 to 80 years. This means everyone has certainty and security.

It's an elegant proposition, but is it realistic? Let's go back to some basics. Nicholas Barr is a longstanding commentator on pension issues:

Given the deficiencies of storing current production, the only way forward is through claims on future production. What matters, therefore is the level of output after I have retired. The point is central: pensioners are not interested in money (i.e. coloured bits of paper with portraits of national heroes on them), but in consumption - food, clothing, heating, medical services, seats at football matches, and so on. Money is irrelevant unless the production is there for pensioners to buy. [Ref: IMF Working Paper, Reforming Pensions: Myths, Truths and Policy Choices - Nicholas Barr]

Bad things can happen to money, like inflation. Or the assets bought with savings lose their value because everyone is selling at the same time to finance their pension.

Susan St John, writing in the Independent asks the right questions about the superfund.

Will it create more resources for an ageing population? If not, will it matter a jot that we take the dollars out of the pot called "the fund" instead of the pot called "taxes"? Are we in danger of being seduced by a crude cargo cult mentality?

The scheme smoothes out the rise in costs and superannuation - no more or less. It doesn't reduce the cost, or provide more resources. Dr Cullen calls it a tax smoothing scheme. The costs of paying everyone over 65 at current rates will still rise from about 4% of GDP now to about 9% in 2050. The superfund means the costs to the taxpayer start rising sooner, and therefore at a slower rate. The planned contributions are about $2 billion a year in the next decade, paid in from surpluses.

The Cullen Scheme represents the single most significant fiscal choice for government in New Zealand for the next generation. We need to know what it is we are trading away.

Treasury put it like this in the Cabinet paper written for Dr Cullen.

In making the contribution to retirement income policy more certain, prefunding 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. I see this as an essential element of establishing the appropriate priority of a long-term and stable retirement income policy relative to other spending policies. [Ref: Prefunding New Zealand Superannuation: Funding Arrangements - Hon Dr Michael Cullen, Minister of Finance]

So the Government has made a huge decision with no-one noticing - the top priority for spending for the next 40 years is the superfund, even to the point where there will be less education say, if the returns on our investment in the US share market are lower than Treasury's guess.

English-on-line is bemused that the people who used to be so interested in where taxpayers' money went seem to have vacated the debate totally. If the money goes on super it can't go on other things like the widows' benefit, schools or hospitals, or alleviating poverty.

The last issue in particular is of interest. The 90's saw a burst of advocates for the powerless, voices for the voiceless, prophets of social justice. As minister, english-on-line met a good few of them, and was often convinced of their sincerity and integrity.

Now one of their consistent themes was poverty. Income related rents mean that about one in five beneficiaries are a bit better off if they happen to find themselves in a state owned house. Four out of five of New Zealand's poorest people still wear National's benefit cuts in 1991. In fact higher food and petrol prices this year are pushing them to the foodbanks in record numbers as Christmas approaches, much to the discomfort of "Soup Kitchen Steve" Maharey.

Those cuts could be restored for a lot less than the $2 billion Labour proposes to put into the superfund. Labour's policy is to lock in Ruth Richardson's benefit cuts, and put their spare money into a fund for pensions in 30 years' time. Poverty now apparently has the full support of mainline churches, unions and beneficiary groups, because it's less important than getting Labour re-elected. Any sightings of comment on injustice and poverty from such should be reported, lest these aspersions are cast undeservedly.

It looks like the principled articulate left has packed it in, but english-on-line believes we can rely on the nurses and teachers to make sure the priorities are debated.

In any case a lot will change in the next 40 years. The experience of ageing will be more positive, not only because so many people will be sharing the experience but also because older people will be needed. English-on-line was struck by a discussion with a 65 year old man he met cleaning hotel rooms in Queenstown. He starts when he likes, takes his time and meets a lot of people. It looks good. Len Bayliss, no longer a spring chicken himself, says there will be a lot of this, and he has advocated a system where the pension payable depends on when you retire. Actuaries tell me that every year of delayed eligibility could push a pension up by 4 or 5%.

Bill English is the deputy leader of National and the party's spokesman on finance and superannuation.

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