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Rankin: Retirement Support: What's in a Name?

Keith Rankin's Thursday Column
Retirement Support: What's in a Name?

24 February 2000

On 27 January, the Government announced that New Zealand Superannuation will be raised to 67% of the average weekly wage. In doing so, it missed its opportunity to reintroduce a clawback mechanism for those persons over 65 with significant private incomes. We now have an unusually generous system of public income provision for our retired capitalists.

In raising NZ Superannuation, the Government increased rather than decreased our concern that our public pension will not be sustainable in the medium-long run. This concern is exacerbated by an excruciating advertising campaign - funded through the public office of the retirement commissioner - that seeks to reinforce the view that 30- and 40- somethings will have to provide for themselves in retirement through private savings.

It is much more necessary to have a clawback mechanism now than in 1985 when the "super surtax" was imposed by the Douglas-Lange Government. Sir Robert Muldoon designed his pension scheme with steeply progressive taxes in mind. In 1985, superannuitants with significant other income paid 66% tax on their National Superannuation. In 1999 persons in the same situation paid only 33% tax on their "super". Further today, the national accounts show that a much greater portion of the nation's income is paid out in interest, rents and dividends than in 1985. Capitalists - the owners of capital who receive interest, rents and dividends - do not retire. Their investments do not turn to custard when they turn 65. New Zealand Superannuation is intended to compensate for lost wages and salaries; it is not intended as an income supplement for elderly capitalists.

There are political difficulties in reinstating the super surtax. Not the least would be the creation of a platform for Winston Peters to once again reach the commanding heights of New Zealand politics. Equally there are political obstacles to paying public pensions on a non-means-tested basis. One obstacle is Ruth Richardson's 1994 Fiscal Responsibility Act, which obliges governments to balance their annual budgets. Another obstacle is the difficulty in getting support for higher tax rates.

We need some lateral thinking.

How about replacing New Zealand Superannuation with a Retirement Loans Scheme? WINZ would relabel existing super payments as "loans", and would manage them exactly as it manages student loans.

Student loans come in two parts: fees' loans and living allowances. Retirement loans, at 65% of the average ordinary time weekly wage, could be paid by WINZ in exactly the same way as student loan living allowances are paid.

Retirement loans would be "repaid" in the same way as fees loans to part-time students are repaid; ie as an immediate tax surcharge. Persons earning say $30,000 per annum and studying part-time will qualify for a fees loan at enrolment in February, and will start repaying the loan in April. They will repay by means of a 10% tax surcharge on taxable income in excess of $15,000.

So, under the an RLS, all persons over 65 would qualify for a "Retirement Loan Living Allowance" (RLLA), set at approximately the new level of New Zealand Superannuation. Recipients receiving more than $15,000 per annum of private income would be subjected to a "Retirement Loan Tax Surcharge" (RLTS). The RLTS could be set at 10% as for students, or at a higher rate.

The idea of retirement loans might seem bizarre. But the scheme that I have suggested is virtually identical to the Guaranteed Retirement Income (GRI) of the late 1980s and to the NZ Super of the mid-nineties.

Further the scheme is virtually identical to the student loan scheme. The only difference is that a greater proportion of retirement loans would be written off at the death of the "debtor". This difference is one of degree, not substance. With more people spending their later middle-age years (age 45-64) as students - a kind of early retirement for many - the student loan scheme is already able to operate as a kind of retirement support. Further, as a form of pre-retirement retirement income, the student loan scheme is both cheaper and less conditional than any targeted pre-retirement benefit.

So why call it a Retirement Loan Scheme in preference to, say, a Guaranteed Retirement Income? The label does in fact make a difference. People are more reluctant to apply for a "loan" than for a benefit. Many affluent retired persons might choose to not apply for a "loan" that they don't need. Further, "debt" seems worse to many people than "tax liabilities", even where the two are in practice identical. A universal support programme is less expensive if people who don't need it volunteer to not partake in it.

A final advantage of calling New Zealand Superannuation a loan scheme is that it, like the Student Loan Scheme, can circumvent the Fiscal Responsibility Act. By calling living allowances "loans", we can increase support payments in a recession while still balancing the official budget. Both student loans and retirement loans have the potential to act as powerful automatic stabilisers, boosting aggregate demand in a recession while tempering the growth of demand during an economic upturn.

There is a huge downside risk of an economic recession in 2001 and 2002. The combined effects of a trigger-happy Don Brash, New Zealand's out of control current account deficit, and an end to the Clinton economic boom in the United States could create a problem for us similar to that faced in 1975 by the 3rd Labour Government (or similar to that faced by Thailand in 1997). In 1975, the Government kept the economy going through a huge budget deficit. Constrained by the FRA, a similar problem of insufficient demand may only be able to be resolved in say 2002 by making extensive "loans" to the swelling numbers of students and retired people.

© 2000 Keith Rankin

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