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Michael Littlewood's take on Prebble's speech

Another in an occasional series in which Michael Littlewood analyses speeches by our political leaders (and others) on superannuation issues.

Thursday, November 1st 2001, 8:08AM

The problem with super is clear. Too many political parties are making irresponsible promises about superannuation, in order to buy votes. Or else, there is a very unhealthy silence on important things that we should be talking about. They see the future financing of their promises as someone else's problem.

Broken promises in superannuation undermine confidence in the democratic process and in the sustainability of future income provision to the retired.

The Cullen superannuation fund is yet another reckless scheme to buy votes. To borrow $6 billion over the next four years to invest in the world sharemarket is very risky.

If the Cullen scheme was in place on 11 September and had the $6 billion in it, more than $2 billion dollars would have been lost. This begs some important questions about investment strategy and also ignores the gains that might have accrued during the build-up period before September 11.

If the Cullen scheme works, then no one else needs to. You could save for your retirement by borrowing on your credit card. Dr Cullen set up his scheme on a simple mistake. Since the passing of the Fiscal Responsibility Act, Treasury has been working to create a Crown balance sheet. The first balance sheet was published last December - a month after Dr Cullen announced his scheme.

Prior to the publication of the balance sheet it was impossible to separate out income from capital. Dr Cullen thought that the next four years would see huge surpluses in the Crown account, that he would then put aside for a super fund. After the publication of the Crown accounts we realised those surpluses are capital, and the Crown's income is in the red.

Dr Cullen would never have announced: "I have this great idea, let's borrow money and gamble it all on the sharemarket." In a free vote in parliament, the Cullen scheme would be voted out tomorrow. It's reckless. It's a gamble. It is not the answer and it will not last. Agreed

The National Bank's Opinion of 31 October 2001 states:

"The proposed scheme has little to offer on economic grounds…. The scheme adds to the plethora of policies that will negatively impact on savings, investment and potential growth, the keys to wealth creation and sustainable superannuation policy…. Costs are being imposed on the economy for a scheme that offers little."

Superannuation is a problem throughout the western world. Tax-based schemes like ours have been financed by the happy fact that there have been many more taxpayers than retired. More accurately, it has been the growing working (producing) population relative to the reducing proportion of the non-producing old. But falling birth rates and longer life span are turning the population around. Many retired, too few workers.

New Zealand is now spending 6% [gross - it's actually less than a net 5%] of GDP on super compared to just 3% in Australia. New Zealand's scheme is less targeted and more generous than the Aussie scheme. International comparisons are fraught with difficulty and should be made with much more care than this. The Australian income and asset tests aside, the 1997 Periodic Report Group found little real difference in the overall government-financed help to the old between the two countries. In such a comparison, it isn't possible to ignore subsidised services (such as the Pensioner Card). Also, you can't ignore the huge cost of tax-favoured retirement savings which probably amount to about half of the cost of the age pension itself. However, that is probably a significant contributor to Australia's being able to spend as little as it does on direct income payments. It's part of the inter-generational financial "glue".

In 1995, a New Zealander aged 55 [65?] on an average or modest income, could expect to retire on 61% of existing earnings. This is actually for a married couple, rather than for "a New Zealander". This is up 32% since 1961. I don't have the comparison for a married couple to hand but the equivalent figures for a single person are 1995: 42.1% of the national average wage; 1965: 30.8%; Increase 37%. So the general point is well-made.

For Australia, the comparable figures are 40.9% and 19% respectively. But what about the increased cost of the tax incentives that have ballooned since the introduction of compulsory superannuation in 1986? What about the income and asset tests that reduce these for those with even quite modest means?

With unchanged benefits, the cost of superannuation escalates rapidly as population ages.

As it's estimated every dollar of tax spent costs the taxpayer $1.50, this is a huge burden. Having said that, we must be careful not to overstate the problem.

New Zealand superannuation arrangements are basically sound and with a few changes, well-signalled, the issues can be managed.

One of the policy problems in this area is that people on fixed incomes can't change their circumstances - by definition.

If you are 30 and the government changes the tax regime, you may be hurt financially but you can adjust. You can take a second job, change jobs, save more, all manner of things.

But if you are retired and your income is the state pension, you have to bear the cost of the change. This makes the elderly vulnerable and able to be manipulated by reckless promises and fear-mongering.

So Act says we should try to get a consensus on superannuation. Agreed I don't pretend my party has the only wisdom. On behalf of Act, I'm willing to try to reach a lasting consensus.

Certainty is better than perfection. Agreed

It's useless to say, as Dr Cullen and Jim Anderton do: "We will agree to consensus but only if you agree with us." Agreed

No, let's sit down and agree to negotiate sincerely and be prepared to compromise. That should be the objective but we can't start meaningful "negotiations" until we have much better information than we have now. New Zealanders also need to understand much more about the issues than they do at the moment.

The political parties are not as far apart as we pretend. Agreed Let me set out some things that even Jim Anderton and I agree on.

First, we should guarantee the present income of those who have already retired. The government is promising to increase their incomes, so they must agree that, in real terms, the income of the already retired must not decrease. This is the political reality.

Second, any changes should fall on those who have not yet retired, or who are too close to retirement to be able to make a real difference This group should not be affected - so those under, say, 55 years old should be our focus (?).

Third, any changes should be phased in over a long period.

Fourth, there must always be a safety net retirement scheme that is paid for on a PAYGO basis out of current tax.

I believe all parties can agree on these four minimum principles for superannuation. It is then a relatively easy problem to solve. Not easy but easier.

There are two steps that will make superannuation affordable. First, index superannuation to inflation, not to incomes - just like the invalid's benefit. That's fair. "Fair" perhaps but ultimately not sustainable politically as the UK will find out relatively shortly as its "Basic Sate Pension" is expected to fall from its present 15% of the national wage to 8% over the coming years.

Second, over time, lift the age of entitlement to super to 68. Why 68? This might be a good idea but we shouldn't pick age 68 just on the grounds of cost. The state pension age is too important an economic and social design element to be chosen on these grounds alone. In some countries, it's 70 Name them. If we phased in a lift in the age over 10 years, starting in 10 years time - a total of 20 years - that would only fully affect people who are now under the age of 45. We should certainly discuss the state pension age. What is the magic of paying New Zealand Superannuation from age 65? Shouldn't we be discussing ways of encouraging people to stay in the work force rather than encouraging them to leave and become state dependants? The state pension age is probably the most distortionary factor in the "work/retirement" decision. Since the age was first set (in 1898), we have had significant improvements in health and longevity. We should be thinking of increasing the age as is the US (going from 65 to 67 between 2002 and 2027). Denmark, Iceland and Norway already have age 67.

Then super is affordable. It's nothing like as tough an issue as healthcare.

Act says we should then turn our attention to the real answer to a prosperous retirement - savings-based superannuation. Is this code for compulsory private provision? The biggest reason why working New Zealanders don't save enough for retirement, is the high level of taxation. Where is the evidence that New Zealanders don't save enough? Do we have widespread dissatisfaction among the retired about their incomes?

The state takes 40% of everything the country produces. And the state takes 50% of the income of the average household. Evidence?

Tax makes saving unaffordable. A low flat tax rate would see the country's savings rate improve, investment increase, more jobs, more growth and a secure, prosperous retirement. There is much discussion among economists about this seemingly virtuous trail. It must be also said, however, that increased saving does not automatically produce increased investment; and that increased investment does not automatically produce increased growth. There is no doubt, however, that a more prosperous economy makes everything, including New Zealand Superannuation, more affordable. That will allow tomorrow's larger generation of pensioners to exchange tomorrow's pensions for things that allow them to survive (like food and shelter). In the absence of growth, the increasing proportion of New Zealanders who aren't producing (the retired) will make larger proportionate claims on tomorrow's economy and so must reduce the living standards of the producers (from what they might otherwise have been). The only alternatives are for everyone's standards to fall or for pensioners' standards to fall more than the producers'. No-one ends up happy then.

That's ACT's policy.

Congratulations to ACT for raising some of the politically difficult issues. However, some of the observations I have made emphasise why New Zealanders should not now leave this issue to the politicians to hammer out some form of compromise. Otherwise, we will end up with something that looks like the 1993 Accord without the public understanding and information that is required to support it long term. We need a researched debate on the key elements of New Zealand Superannuation. For example:

  • the state pension age - why 65? Why not earlier, later or flexible?
  • the dollar amount paid - why 65% Why not more, or less?
  • the inflation linkage - why the national average wage?
  • the qualifications for payment - why not more, or less than 10 years' residence? Why not an income and asset test or an income test on its own?
  • the relationship between the married and the two different single rates - why 60% or 65%? Why not more, or less?

That covers everything.

Then we need finally to dispose of the myths that:

  • forcing New Zealanders to behave in similar ways (saving in superannuation schemes) will help New Zealand with the changing make-up of our population. Where is the evidence that this has worked in other countries?
  • tax incentives will either increase savings or help New Zealand to grow in ways that will help us cope with the increasing numbers of non-producers (if that's what we end up with). Where is the evidence that this has worked in other countries?

So, it's a promising start from ACT.

Richard Prebble is the leader of the Act party. This is a speech he gave to AMP Superannuation Consultants, annotated on 1 November 2001 by Michael Littlewood

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