Stockmarket Not A Safe Place For Our Super Savings
'Stockmarket Not A Safe Place For Our Super
Green strategies to secure superannuation
Hamilton East Rotary Club
5.45pm, Wednesday 19 September 2001
Rod Donald MP
Green Party Co-Leader
This evening I would like to discuss the thorny issue of superannuation. This is an important topic in its own right and it also serves to highlight the independent stance the Green Party takes in parliament, despite the fact that we are committed to supporting the Labour-led Government on confidence and supply.
I concede at the outset that we have already lost the emotional argument on super, but we are determined to win the intellectual debate.
For the record, we support Part One of the NZ Superannuation Bill. This guarantees the universal provision of superannuation for everyone aged 65 and over, paid at not less than 65% of the average wage to couples and 60% of that amount to single people.
This is a commitment we stand by because we believe it is important to give all New Zealanders, especially those approaching retirement, the stability and security they seek and deserve.
On that issue there is almost unanimous agreement - only ACT refused to sign up universal public provision while New Zealand First claims we should pay 72.5%!
We believe every party which commits to guaranteed superannuation ought to be entitled to a seat at the table to debate how best to achieve that goal. Unfortunately the Labour-led Government have, for a variety of reasons decided to push through their own "silver bullet" solution to the challenge of an aging population.
The Greens oppose that solution. We strongly believe that building up a large fund and investing it on the overseas share and bond markets is not the best way to pay for future superannuation. In fact, it is not merely benign; it is the wrong approach. We will therefore vote against Part 2 of the bill.
Before offering our alternative solutions I would like to pose the question "is there a problem?"
We believe the current "pay as you go" system is sustainable and affordable. We are not alone, Retirement Commissioner Colin Blair says that New Zealand has one of the simplest and most efficient tax funded retirement pensions in the world.
As recently as 1997, Alliance Leader Jim Anderton said "our present superannuation scheme is a very good one. Not only is it affordable long term, it is by far the best of the available options".
So is there a problem, as Mr Anderton now claims? In 1997 former BNZ economist Len Bayliss was his main external adviser. As it happens, Bayliss is one of a number of people, along with Auckland University Lecturer Susan St John, who we sought independent advice from.
Bayliss is blunt. He says that for years population figures have been used by politicians to paint a "grim picture of a society unable to provide for its helpless elderly" in order to scare us. Interestingly, National admitted to doing that when they joined the Greens in opposing Dr Cullen's super fund.
The main rationale for this fund is that our aging population will lead to an increase in the cost of superannuation as a percentage of gross domestic product. We accept that superannuation payments are expected to rise from 4% of GDP to 9% by 2050 and we don't deny there is a demographic problem but we dispute that the impact will be anywhere near as large as the government makes out.
This is because the government uses the ratio "working age population" to "superannuitants" to justify, within New Zealand the establishment of the fund. However in its report with the OECD it uses the ratio of "employed" to "dependents". This ratio gives a quite different picture.
For example, the proportion of dependents in 1999 was 55% and is projected to actually fall to 52% by 2030. Compared with other Western countries, where the proportion of dependents is expected to rise to 57%, New Zealand is well placed to sustain our relatively low cost super scheme.
Not only do we dispute the scale of the superannuation problem, we also recognise a number of other problems of equal significance which, if not addressed, could undermine our ability to meet future superannuation needs but if tackled head on would create the solid foundation we need to secure the future.
One other point of information: at best the Cullen Fund would only meet 14c of every dollar of superannuation payments and eventually it will be run down to zero. In other words, general taxation will still have to provide 100% of super costs until 2020 and at least 86% thereafter.
If that doesn't leave you feeling uncomfortable, what about the fact that this year's budget revealed that over the next four years the Government is planning to increase net Crown debt by $3.8B at the same time as it wants to put $6.1B in the super fund.
In other words, the government intends to borrow money on the bond market to "invest" on the sharemarket.
The latest Budget and Economical Fiscal Update paints an even bleaker picture. At the same time as the fund is being built up the Government will be borrowing an extra $7.6B for capital projects. No matter how much the Minister of Finance tries to claim the different lots of money live in separate pots on his mantelpiece you can't help but draw the conclusion that without the Fund borrowing would be only $1.5B over the four year period.
But wait, there's more bad news. AON Consulting recently reported that, on average, fund managers lost 9.4% on their overseas share investment in the year to March. In other words, if the government had put half of the $600 million they have just set aside into overseas equities, as they intended, it would now be worth $28 million less than before they risked it on the casino economy!
I am not just talking about throwing money at the dotcom roulette wheel. The NZ Post Pension Fund recently dropped in value by $7m to $70m over the year to March because of "heavy losses on overseas equity markets". Their report went on to say "we invested in a whole range of off-shore blue chip companies. we weren't into the cowboy dotcom stocks". It's worth noting that the Fund has six trustees and is chaired by Ross Armstrong. With trustees of that calibre you have to ask where the Government is going to find Guardians and fund the managers with the midas touch, capable of generating the rate of return it is demanding?
The Mercer New Zealand managed fund survey for the period to June reinforces the AON figures. The median return for eleven big name funds was 1.3% for the year, with Armstrong Jones and Westpac Trust both showing negative rates of return. The top performing fund, Tower Assett Management, only delivered a 6.6% rate of return, less than the cost of Government borrowing.
Recent and horrific events in the United States make the share market an even riskier place to invest your retirement savings. But every indication points to last week's tragedy only making a bad prognosis even worse. When the Reserve Governor released his Monetary Policy Statement in August he said "the flow of economic indicators from the United States, Japan, non Japan Asia and Europe makes a deeper and more prolonged slow down seem quite likely. Almost every day brings new reports of major corporations laying of thousands of staff and anouncing sharp reductions in earnings." A graph in the Statement shows the US (NASDAQ) Equity market loosing almost 60% of its value since the 2000 peak with Japan down 40%, and Hong Kong and Germany down 30%.
Under the headline "Bears rip world market" the Christchurch Press reported in early September that world share markets have been spooked as the slow down in the US and Asian economies begin to hit company fortunes. At that point the Australian market had slipped 9.9%, Wall Street had slumped 12.5% in the previous 16 weeks, Tokyo was approaching the level of Wall Street after soaring for more than a decade and London's FTSE100 Index fell to a three year low.
Even without the US crisis the long term prognosis does not look good. According to investment strategist Harry Dent (Sunday Star Times 9/9/01) baby boomers are beginning to sell down their share portfolios which some say could send the stockmarket into a decade long bear market. It is predicted that from 2015 to 2025 there will be a net outflow of funds from the stock market. Couple this with baby boomers' spending peaking around 2009 and you have a double whammy. Consumer spending helps drive corporate profits, corporate profits drive the stockmarket. A spending slow down could pull the stockmarket back as well as boomers selling down their holdings.
The situation facing the Government is analogous to the financial decisions facing a family or a business. Take a family with a mortgage on their house and a couple of teenage children. If you are lucky enough to have some discretionary income, is it wiser to pay off your mortgage faster, educate your kids and keep the family healthy; or do you give the extra cash to your accountant to play the share market?
Maintaining a large mortgage and scrimping on health and education in order to build up an investment fund makes no sense. Your priority must be to make sure your family is relatively debt free, healthy, educated and able to earn a decent income so that they can meet the challenges of the future. As individuals learnt in the eighties, you certainly wouldn't borrow money to gamble on the sharemarket!
The commercial parallel, recently described by Deutsche Bank Ulf Schoefich, is just as compelling. If your company is profitable now, but looking ahead you can see a range of factors impacting on your bottom line do you invest your profits in other businesses with the intention of using the expected earnings to subsidise your future lack of profitability? Or do you use your profit now to meet the challenges of the future head on by investing in research and development, staff training, marketing, etc. in your own business?
We obviously don't believe locking up so called budget surpluses in a superfund will build our economy or strengthen our society. Quite the opposite. Setting up the fund means we will not be able to tackle as determinedly all the health, education, employment or environmental challenges facing us. Bayliss puts it thus "the best future safeguard for New Zealand super is that it would be far better to spend on education and training and 'active aging' policies than prefunding." We agree.
Instead of putting all our eggs, including Dr Cullen's borrowed ones, in one superannuation basket, we would allocate the eggs we own to a number of key areas: debt repayment, education and training, employment creation, positive aging, health and housing, making the economy environmentally sustainable, strategic asset investment and adapting to climate change. I will elaborate on each one so that you won't fall in the trap of some political pundits who claim that the Greens' don't have an alternative to the Cullen fund. Here it is:
Debt repayment New Zealand's current net crown debt is around $20 Billion. At the current cost of debt of 7.0% these borrowings are costing us $1.43B per year in interest and consuming 1.3% of GDP. As I have already said, the current Government intends to increase the debt level. We would pay it off instead. Reducing offers the best guaranteed return on investment because you know exactly how much interest you are saving. In New Zealand's case, if we committed to paying back $1B of debt every year for the next 20 years we would save over $14.7B in interest alone.
Education and training The last four OECD reports on New Zealand repeatedly emphasised that low standards of education and training are the prime causes of New Zealand's low labour productivity. At the same time the OECD recently reiterated its conviction that human capital is the core element in economic growth, a contention that is now virtually universally accepted. We may accept it in our heads but Government and business have been slow too act on that understanding.
This is surely a case for a return to taxpayer funded tertiary education?
Employment Creation On today's figures, if we could reduce the current level of unemployment from 5.4% or 104,000 people to 1% the Government would be $1.6 Billion better off. This is made up from a saving in benefit payments of $675 million to the 84,000 people who are now in a job plus another $587 million in taxation received from those workers now earning the average wage. Together this represents 1.15% of GDP.
Positive Aging Giving older people the choice to continue working if they so wish is vital As the OECD says: "encouraging people to work longer would raise economic growth, increase the tax base and reduce the number of dependent older persons. A triple gain". Positive aging not only strengthens economic growth, improves the dependency ratio and therefore the fiscal position, it also increases the incomes, self worth and quality of life of superannuitants.
Health and Housing Health costs are expected to rise even more dramatically than superannuation expenditure, from 8% to 10% of GDP by 2050. We say now is the time to invest in preventing illness - improving our diet, encouraging exercise, fixing unhealthy housing, and tackling environmental threats to our health. We believe a strategy focussing on primary health and preventing illness would achieve health savings of up to 2% of GDP in the long term.
Environmentally sustainable economy Now is the time to green the economy by creating the infrastructure for solar and wind generation, energy conservation, public transport, organic farming and a whole host of other green initiatives which reduce government and citizens' costs and/or increase revenue.
Strategic asset investment Considerable revenue is already generated from existing State Owned Enterprises. There is every reason why the Government should reinvest in strategic assets such as Contact Energy, Trans Rail or Air New Zealand, especially in the current situation, providing they contribute to strengthening the economy, our social fabric and environmental sustainability.
Adapting to climate change No attempt is being made to quantify the cost of climate change but the negative impacts can be summarised as follows: less water in many water stressed regions, more disease and heat shock for stock and plants, greater risk of vector-and water-borne diseases to humans, increased risk from flooding and storm events, more energy demand for cooling and less hydro power in drought areas, increased risk of forest fire, less tourism through reduced snowfall and retreating glaciers.
Conclusion The Government's proposed super fund is appealing at first glance but we believe a stronger, more confident, more sustainable nation will be more able to afford future costs than one shackled by a fund which is largely invested in the economies of other countries.
We have not taken the easy route on superannuation. Ours is a prudent, principled decision, not one based on political expediency. As a party that always looks to the future, we know this decision is about much more than funding superannuation expenditure. It is about deciding what to invest in now to put New Zealand on a secure footing for this century and beyond. We believe our policies would set New Zealand on course for a just sustainable future.
You have to decide what will be better for our children - pre funding superannuation, as promoted by Michael Cullen, Jim Anderton and Winston Peters, or the green vision of an eco nation.