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Michael Cullen Speech to Grey Power

Speech To Auckland Grey Power Meeting

Hon Dr Michael Cullen, Minister of Finance

Embargoed to 1200

Sunday 14 July 2002

Mt Eden War Memorial Hall,

Dominion Road, Auckland

Thank you for the opportunity to address your meeting.

Over the years, I have had many stimulating discussions and debates at Grey Power meetings. While we have not seen eye to eye on some of the detailed questions regarding super policy and other issues affecting older New Zealanders, I believe that we share a belief that governments should mean what they say and say what they mean. Older New Zealanders have suffered in the past from unrealistic or insincere promises that were subsequently broken.

That is why in our first term we as a government set out to prove that it is possible to restore a mature relationship between the New Zealand people and the political system. We sought election on the basis of a number of specific, realistic pledges and in government we delivered on those pledges.

We promised to create jobs through sound economic management and the promotion of New Zealand industries, especially exporters and small business. Our efforts have borne fruit. The economy has recovered from its fragile state in 1999, and 100,000 new jobs have been created, the bulk of them full time.

We also promised to live within our means, without burdening New Zealanders with excessive taxes. To help pay for our policy commitments, we increased by 6 cents the top tax rate for those on incomes of $60,000 plus a year. But we promised that we would not raise income tax for those earning less than $60,000, and that we would not raise either GST or the company tax rate. We have been true to our word.

In education we promised to cut the cost to students of tertiary education, starting with a fairer loans scheme. Many of you will have grandchildren who are preparing for their careers. One of our first moves as a government was to stop charging interest on student loans while students were still studying. We want to invest in our young people; not saddle them with debts they cannot bear at a time when they are just starting out in new careers.

In the area of housing, we promised to restore income related rents for state housing so that low income tenants paid no more than 25 percent of their income in rent. Income related rents were restored in December 2000.

In law and order we said we would crack down on burglary and youth crime. Burglary has been a neglected crime in the policing strategies of the last decades, despite the fact that it leaves its victims feeling violated and fearful. The results have been promising. Youth arrests are up, and the number of recorded burglaries has dropped by a fifth since the Labour Alliance government took office. This means that we have prevented 272 burglaries a week on average.

In health, we promised to focus on patients not profit and to cut waiting times for surgery. We have been able to make real progress. The figures for the first quarter of this year show that 85 percent of new patients received a specialist assessment within the six-month standard the government has set – that’s a 15 percent improvement on last year.

We have put an extra $1.3 billion into health during this term of office, and are committed to a $2.4 billion increase for health spending over the next three years. This is the largest growth package for health in New Zealand history and will give the health boards a firm funding basis on which to plan.

I will not pretend that the problems of the health sector are solved. But they are primarily to do with a world-wide shortage of health professionals, which is not a problem that can be fixed by throwing money around indiscriminately.

A significant part of the health vote goes to provide health services to senior New Zealanders through the community services card for primary health care, District Health Boards for hospital services and a variety of providers for disability support services. In the area of disability support, we increased spending to just over $1.4 billion, which is a 5.5 percent increase on last year.

We are committed to policies which give the frail elderly the option of living in their own home for as long as possible.

During our next term of office, we intend to look at the pros and cons of splitting off from general taxes the tax-take required to fund the public health system. This would not be an additional tax; but rather would place a tag on a portion of the existing tax, so that we can have a more informed public debate about the level of public health services we can fund.

In superannuation, I am proud to say that we have delivered on our promises by putting in place a set of fair and sustainable policies – fair and sustainable for today’s retired people, and for today’s working generation who are beginning to plan for their retirement in ten or twenty years time.

National had reduced the benchmark for a married couple from 65 percent to 60 percent of the average, after tax, ordinary time weekly wage. We have taken it back to 65 percent, thereby raising the couple rate by $21 a week.

I want to send a strong message to you that Superannuation is not a done deal, and it is not a dead political issue this election.

Labour’s view on super is clear. A decent, universal, tax funded age related pension is the least that the citizens of a modern developed economy should expect. It is also the most that they should expect: the state should not try to replicate in retirement the incomes people earned during working life.

There has been a lot of talk about how much is decent. The formula we have now has evolved over a long period of time, and is about right. This government restored the basic “65 at 65” formula, at a cost of $684 million over this term of office.

New Zealand First has a policy of moving the floor of New Zealand Superannuation up to 75 percent of the average wage, but does not define the time frame for achieving that target. I do not think it is sensible to pretend that that is in any way realistic. It represents a 15 percent increase on the current floor. In dollar terms this is equal to four times the cost of the increase we applied at the start of this term.

We must not start a bidding war between the generations. The future of New Zealand Superannuation depends absolutely on a broad, cross-generational consensus on what is fair and affordable.

This government has moved aggressively to put more money into health and education. If we start to divert too much away from those areas, we risk losing the acceptance that has coalesced around the current NZS formula.

It is also important to look to the future and to note that we have set up a fund to allow us to maintain the NZS level after the baby boomers retire and the numbers over 65 double. This election is make or break for that fund.

National, Act and the Greens want to abolish it.

At the time of the election there will be around $700 million in the fund. If the fund is not dissolved, at the time of the next election there will be nearer $7,000 million in the fund. At that point, it is a very tangible expression of confidence that the pension will be there for the next generation, and political parties tinker with it at their peril.

I want to talk about some of the false and negative comments that have been made against the fund.

Act’s position is clear. They say you don’t need the fund because they won’t be paying the pension at anywhere near current levels. They would raise the age of eligibility and convert New Zealand Superannuation into a safety net. In my book, a means tested pension would be a disaster.

The strength of the current formula is its universality. It stays because it is there for all of us, and we all have an interest in defending it.

With a safety net approach, people who save, and don’t qualify for a pension as a result, will resent those who have not. The pressure will be on to reduce the level of the safety net. That poses a huge threat to people who have not been able to save enough, who face retirement with fear and foreboding.

The Greens oppose the fund because they say it isn’t necessary. This denial is dangerous. As far as I understand their strange logic, they argue that the flip side of a population with more old people in it is a population with fewer young people in it. What we pay in super we save in spending on youth.

This is not only dangerous, it is wrong. It is wrong for two very simple reasons. One is that in the future, we are going to have to spend a lot more per head on young people if we are going to have the skill set that allows our economy to generate the incomes we are capable of. But more significantly, as far as government money is concerned, one less young person does not equal one more old person.

Senior New Zealanders depend very substantially on public revenue for their day to day living costs. There are huge variations obviously but as an average, something like two-thirds of the living costs of the over 65s come from New Zealand Superannuation. With children, the bulk of their living costs are met by parents. From a strictly fiscal point of view, the government spends close to four dollars on an over 65 for every one dollar it spends on an under 16 year old.

If the Greens continue in denial mode, we will hit a super crunch in the coming decades.

The other curious aspect of Green criticism is an allegation that all of the money is being invested overseas. For a start, that is again wrong. The money will be invested on a sound commercial basis. Decisions on what is sound will be made by an independent committee with a strong background in financial management. The committee will itself rely on expert opinion. It will publish its investment principles and policies and be accountable to Parliament not only for the policies, but for how the investments have performed relative to those policies.

Seeing that the committee is not yet in place, it is a bit hard to know what they will do with the money. As a general rule, it is likely that they will balance their portfolio: not put all the eggs in one basket as the saying goes. That will probably mean some in New Zealand bonds – fixed interest securities issued by central and local government, SOEs and large companies – some in shares in New Zealand companies, some in offshore bonds and some in offshore shares.

This is where I really do have trouble with the consistency of the Greens approach. The Greens oppose foreign investment in New Zealand on the grounds that foreigners get the benefit from our economic activity in the form of dividends paid abroad. How can they also oppose our investing abroad so that we can get the benefit from foreign economic activity in the form of dividends sent back here? It simply makes no sense.

This brings me to National. National has to come clean. It is hiding behind a promise to preserve New Zealand Superannuation for the currently retired and those nearing retirement. It does not say when, how and by how much it will cut retirements for those not yet nearing retirement. We all know that a two-tier super is not sustainable. No government will get away with one level of super for those born before a certain date and another for those born after it. There is no principled justification for this. It is appealing to self-interest when the essence of the superannuation scheme is community of interest.

In the meantime it intends to dismantle the fund. It uses three arguments. The first is that the fund is borrowed money. It isn’t. It is funded out of transfers from the operating surpluses we are running. But National cannot have it both ways. It has constructed its entire economic policy around using the money it will save by disbanding the fund to finance tax cuts and extra spending.

If the fund is borrowed money, at least we will have a matching asset if the fund is in place. If the fund is borrowed money and it goes on tax cuts and other spending, all we have is rising government debt.

National’s second argument is that if it cuts taxes, the economy will grow and there will be enough money to pay the rising cost of New Zealand super. I have constantly challenged opposition parties to produce evidence, not assertion, that tax cuts produce economic growth. They cannot produce that evidence. But even if tax cuts did stimulate the economy that would not solve the problem of making New Zealand Superannuation affordable.

Historically, there has been a close link between economic growth and average wages. As the economy grows, so do living standards. Our formula for NZS links super to the average wage so that the retired can share in any growing national prosperity. A growing economy will lift the real value of super. It will not reduce the numbers getting super and will not reduce its relative cost. The only way that growth can cover the future cost of super is if National cuts the link between super and the average wage. In other words if National preserves the purchasing power of super but shuts the retired out of a share of any rising national prosperity. That was the essence of the equivalent British scheme and it could not survive.

Finally, National claims that the fund will not cover much of the cost of future superannuation so it isn’t worth the effort. Of course both now and in the future the major portion of the cost of NZS will be met from taxes collected in the year the super is paid out. Labour has never claimed that our scheme fully funds superannuation.

In its calculations, National ignores the tax collected from the earnings of the fund. If we take the tax revenue generated and the payments made from the fund, we find that it will pay for up to 25 percent of the annual costs of NZS. When the numbers increase, NZS will cost over $9 billion a year. A quarter of that equals $2,250 million a year. If National thinks that is trivial, and is pushing ahead with a tax cuts agenda, there is absolutely no way that it can maintain NZS entitlements into the future.

The message is simple. This is the election that both entitlements and the future financing of New Zealand Superannuation need to be locked in. It is only a vote for Labour that will lock them in.

I will end by making a few comments on an issue that is of concern to Grey Power; that of residential care.

Surveys in the USA show that people want to stay in their own homes for as long as possible. Indeed, as they grow older the proportion wanting to stay actually increases. This implies that as the reality of residential care approaches, the desire to avoid it increases.

In New Zealand, the number of private hospital long-stay beds has increased by about 23 percent in the last five years.

The danger is that as the needs for care become more diverse, the options for care narrow – older people enter residential care because there is no other choice.

This is why the government developed a Health of Older People Strategy. The strategy focuses on healthy living, positive attitudes to ageing and community-level health care and support so that people can continue to live in their homes and communities as they get older.

If they do enter residential care they face variable standards. The government’s response to this was to negotiate with aged residential care providers to develop consistent contracts around service quality requirements and more effective administration.

Last election, Labour undertook to introduce legislation during this term of office to remove asset testing on those in long term care. It is important not to overstate what we promised then.

The current asset testing of those in residential care was introduced by National in 1993. Labour recognised that it was desirable to remove asset testing, but that the we had to get the sequence right in attending to issues that impacted on the wellbeing of seniors.

The early election meant that it was not feasible to get legislation into the House before it rose. Legislation will now be introduced this term to phase out asset testing consistent with resourcing other priority programmes for seniors and meeting our commitments to the economy, education, health and law and order.

We have done what we said we would do. We now seek a mandate from New Zealanders to take the next steps in building a strong economy, and a fair and just society in an environmentally sensitive and sustainable way. I am sure that you will give us that mandate.


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