Muriel Newman: No Gold Left For Golden Years
Muriel Newman MP
The Column 21st May
No Gold Left For Golden Years
This week the Column looks at the problems with New Zealand’s current super scheme, and considers alternatives to allow Kiwis to retire comfortably without struggle.
In Western countries people have historically looked to the government to deliver national prosperity and security in old age. Of course, if a nation is prosperous, then more people can afford to save for their retirement – sadly, that is not the case in New Zealand today.
The problem we face is that, for decades, successive governments have failed to deliver on both of these responsibilities: our prosperity has been waning since the 1950s and ’60s, when we enjoyed one of the world’s highest standards of living, and pensions – presently set at 65 percent of the average wage for a couple, and 40 percent for a single person – can hardly be called generous.
New Zealand is, essentially, now a poor country because of governments’ increasing greed. Fifty years, ago the government collected only 20 percent of the nation’s wealth in taxes. Today it has doubled. In that low tax environment, families with children paid almost no tax and, by working hard, were able to get ahead.
Today, Government policies of ‘tax and spend’ – to be epitomised in Labour’s welfare Budget next week – are crippling working families, strangling the economy, and driving down living standards. All of these factors make it increasingly difficult for families to save for their own retirement.
The problem is bad now but, without a real commitment to improving our economic growth and fundamentally changing the way we fund pensions, our situation will approach a crisis within the next two decades.
As a result of longer life expectancies, better healthcare and a falling birth rate, the number of retirees is expected to more than double from 450,000 today to 1.1 million people – or 25 percent of the population – by the year 2040. That would mean that the government of the day, with only two people in the workforce to tax to fund each retired person, would be forced to cut the pension rate and lift the age of entitlement … that is, unless we look at alternative ways to fund superannuation.
The hardest hit by our chronically low living standards and unsustainable pension scheme are the disadvantaged. When such families find the daily struggle to feed the kids and pay the bills so difficult, it is impossible to expect them to be able to save for retirement. That means that large numbers of people, who have spent most of their working lives in a battle for existence, can look forward to nothing better in retirement. With no assets or savings, and few choices, they are extremely vulnerable – and, if adversity strikes, will be forced to rely on the State and its waiting lists for their very survival.
Surely, in a civilised nation, an essential social responsibility should be to provide dignity in old age. Is it too much to ask that we establish a system that would create a level of well being, and a quality of life that would enable comfort and enjoyment in retirement? I believe it is not. Other countries, like Singapore, have made some bold moves – as a result, what was a Third World nation is now among the richest in the world. Meanwhile, we have slid the other way!
That is why it is essential that we seriously consider the introduction of personalised superannuation savings accounts – based on the experiences of the Singaporean scheme, of that introduced in Chile, Hong Kong and a growing number of other countries – to avert the future funding crisis that our present pension scheme faces.
New Zealand governments have looked at alternative funding arrangements in the past. In the mid-70s, a work-based super scheme was introduced. The scheme required workers to initially contribute one percent of their total taxable income into the scheme, growing to four percent over time. That was to be matched by an employer's contribution. While the scheme had only a short life – being abolished by the Muldoon Government 22 months later – calculations by Ord Minnett Securities in 1991 examined what the benefits could have been:
On the basis that savings were invested in 40 percent government stock, 30 percent domestic shares, and 30 percent of world shares, the fund would have had a capital base of just below $40 billion at the end of 1991. That is almost two times the size of the government's overseas debt, more than two times its domestic debt, or more than two times the current sharemarket capitalisation. New Zealand would have no current account deficit, would have had much lower inflation throughout the eighties, and a significantly better performance. That would have given the fund a much better performance. It is not unlikely that the current size of the fund would have been large enough to finance the current pension out of its income stream.
Individualised superannuation schemes – in which everyone 18 years and over contributes a portion of their taxes into a personal account, which earns compound interest for 47 years, and converts to a generous annuity in retirement – would provide a level of savings unprecedented in this country. In changing over to such a scheme, transitional provisions would be needed to protect the present rate of pension for those who are already retired, and those close to retirement, as well as to provide opt-out arrangements for those who have no need of a State pension system.
Such a scheme would be of particular benefit to women, who live so much longer than men, and Maori. Because of their low life expectancies, Maori can contribute taxes all their working life but, if they die early, gain no benefit at all from retirement. Personalised retirement schemes, however, can at least be passed on as an inheritance to the family in the event of untimely death.
The prospect of turning New Zealand into a stakeholder society to truly help the disadvantaged to get ahead, and to ensure that our elderly are financially secure and able to enjoy their retirement years – instead of being forced to struggle – is, in my mind, a goal worth fighting for.