Cunliffe Speech: Retirement income adequacy
David Cunliffe Speech: Retirement income adequacy – current and future policies: address to ASFONZ National Conference.
Let me begin by outlining Labour's key message on superannuation. It is important as everything in this speech is derived from these two sentences.
Labour is committed to providing security and certainty for all New Zealanders. We will maintain the current superannuation rate and eligibility criteria, continue to contribute to the New Zealand Superannuation Fund and encourage a more savings friendly environment.
For this government the first sentence of that statement is the key: Security and Certainty for all New Zealanders. It fits well within the theme of this session "Retirement income adequacy – current and future policies".
It is our view that current and future polices should provide certainty.
It is certainty that allows New Zealanders to plan for their retirement, to ensure they have a retirement income that is adequate for their needs and expectations.
That is why National's very public in-fighting over the future of the New Zealand Superannuation Fund is unhelpful for Kiwis who just want certainty so they can plan for their futures. That is why Act's threat to cut superannuation by 10 per cent is unhelpful for Kiwis who just want certainty so they can plan for their futures.
Underlying in our approach is that if we provide some certainty that there will be a basic liveable entitlement, people can plan for the future. New Zealand Superannuation (NZS) offers a universal entitlement to those aged 65 years and over, who are ordinarily resident in New Zealand. And unlike similar payments in other comparable jurisdictions around the world, it is neither income, nor asset tested.
We have legislated to ensure that the married couple rate of NZS is set at not less than 65 per cent of the average ordinary time weekly wage, and is adjusted annually to reflect increases in the Consumers Price Index. At this stage, the 65 per cent floor is expected to be triggered by 1 April, 2005, after which time NZS rates will effectively be indexed to wage growth. Our aim has been to put in place a system that allows all New Zealanders to enjoy a basic but adequate standard of living in retirement in a way that is fiscally sustainable.
The demographic challenges have been well traversed. In 2003/04 we spent $5.9 billion on New Zealand Superannuation payments. By 2050 the proportion of our population aged 65 years and over is expected to double to around 25 per cent.
This Government has been the first to front up to the seriousness of the issue by establishing the New Zealand Superannuation Fund. Over the next two decades we will be contributing the equivalent of approximately 1.5 per cent of GDP to the New Zealand Superannuation Fund. From that point on, it is anticipated that the Fund, including accumulated earnings, will be drawn on to part finance up to 36 per cent of the future mounting cost of New Zealand Superannuation. Partially pre-funding in this way gives the working aged population some assurance they will have access to a basic level of superannuation when they reach 65 years.
The fund is close to reaching a point of no return where no future government can dismantle it because it offers that extra degree of confidence about income security in retirement. It is already at $3.95 billion and is exceeding its current growth targets.
The speakers who follow may want to re-litigate the issue of the fund but as my senior colleague whose name is synonymous with the fund has said, "it is time to move on". That is not to say we are being 'Polly-Anna-ish' about the fund. It is not a complete solution to the population aging problem. But it is an important part of a multi-pronged strategy for dealing with retirement income.
The other prongs in the strategy fall into two categories. First is promoting economic growth. The second is promoting savings.
This speech is not the place to focus on the growth issue but to demonstrate a major difference between this government and our opponents in that we believe an active, strategic approach is essential to lifting our economic performance.
Since 2001 the government has worked actively with the Growth and Innovation Framework focus sectors, has invested heavily in our research and development capability, and worked with all regions to identify and accelerate growth opportunities. The results speak for themselves: Four years of GDP growth above the OECD average. 193,000 more New Zealanders are in paid employment since 1999 and unemployment down to 4 per cent for the first time in two decades. Employment and output growth has also been widely spread. Maori unemployment has fallen below 9 per cent for the first time in decades and last year all regions showed positive growth. This year's budget is showing the fruits of this growth. It is allowing us to rebuild long neglected infrastructure, provide greater assistance to families. Gross debt to GDP and government expenditure as a percentage of GDP are tracking down so the net crown debt will fall to zero by 2008 as the assets of the fund grow. Notwithstanding these investments, forecast growth allows us to sustain forecast OBERAC surpluses of around $5 billion per annum and longer term enhanced growth performance will further assist us to fund the requirements of New Zealand superannuation. However, we are pragmatic and understand that more tools will be needed in the toolkit besides fiscal prudence and enhanced growth performance.
I want to move to the savings side of the equation. The question of what is an adequate retirement income can really only be answered individually. We consider New Zealand Superannuation adequate for day-to-day living but for those wanting more, having savings to draw on is crucial.
This is where the government has been focusing its efforts.
Previous governments have taken the view their role was to ensure that there was a level playing field, with the Office of the Retirement Commission playing an awareness and educative role. I should say that the ORC has been doing a great job, and the government supports its efforts.
But is raising awareness by itself sufficient? I doubt it.
In recent years economic thinking has introduced some of psychology’s understanding of how people make choices that involve up-front costs and distant benefits. They help to explain why people often procrastinate in making decisions, and why people’s short-term preferences often win out over their long-term preferences.
The market provides some such mechanisms to counter this effect, though only to a limited extent. But on the whole the savings market hasn't addressed this problem. Participation in workplace-based long-term saving plans is significantly lower than it used to be.
Workplace-based saving is perhaps the area where the new lines of thinking have most obvious application. Appropriately structured, workplace-based savings plans can help people initiate, and remain committed to, a long-term saving plan.
This thinking was reflected in the Periodic Report Group report on saving for retirement, issued late last year.
Work-based savings and the Savings Product Working Group
Work-based savings schemes are an important means of facilitating private provision for retirement. Such schemes provide deduction at source, economies of scale and have the potential to reach a high proportion of the working age population. However, research sponsored by the Retirement Commission indicates that only 16 per cent of those in paid employment think they have access to an employer-based superannuation scheme.
There are several reasons why work-based savings schemes have not penetrated the New Zealand workplace more deeply. New Zealand has a large number of small firms. For most employers, the costs of providing and promoting work-based savings outweigh the direct benefits. There has been a shift away from pay plus non-wage benefits to a total remuneration environment. Certain work-based schemes are not sufficiently flexible to cater to those with broken employment patterns and a limited ability to make sizable contributions. Meanwhile, the retail sector is coming up with increasingly competitive products and a growing customer base, so surely we can use the workplace to link people to savings options. The government has established a special Savings Product Working Group to advise on design and implementation issues associated with delivering generic work based savings products. The Group will report in the near future.
Our view is that generic products that every employee can access and is encouraged to maintain membership of will lead to increased savings for retirement. Our interpretation of 'work-based' is that employers would provide a direct deduction facility for contributions as well as education on retirement savings through the workplace, rather than actually managing a superannuation scheme.
The Savings Product Working Group has been asked to build into their proposals features of automatic enrolment, lock-in of contributions until retirement and portability of contributions between approved products. It has also been asked to take into account the needs of low-to-middle income employees and ways to minimise the compliance costs for employers and employees.
Recognising the government's responsibility for getting the policy settings right, the Group may also identify areas where the current tax system discourages participation in work-based savings products.
The State Sector Retirement Savings Scheme
Further to the work being undertaken by the Savings Product Working Group we have taken the lead in our own capacity as an employer by establishing the new State Sector Retirement Savings Scheme, which came into force on 1 July of this year. The scheme is voluntary for employees. Employees are able to choose their level of contributions above a minimum of 1.5 per cent of gross salary, paid direct from their salary. Employers will match this up to 1.5 per cent of gross salary in year one, and 3 per cent in year two. The employer contribution cannot be “cashed up” as remuneration, and the employer and employee’s contributions are both locked in until the member reaches retirement - subject to some provisions such as hardship or transfers to an alternative scheme. Individuals may continue their membership to the scheme even if they move to a private sector employer. In short, the State Sector Retirement Savings Scheme gives its members every incentive to put aside funds for the future and retain those funds until retirement.
Taxation is another area where there are gains to be made in improving our savings performance. Current tax rules penalise participants in actively managed funds, potentially making New Zealanders hesitant about saving through these vehicles.
Does our tax system support investment that will lift economic productivity? Or does it reinforce existing trends towards 'passive' investment in real estate and other non-productive assets? Recent moves announced by the Minister of Finance to re-examine depreciation regimes pick up on this theme.
Another disincentive arises through the over taxation of low to middle income savers participating in superannuation funds. The Government has tackled the issue of taxing employer contributions at the employee’s marginal rate, but the issue of over taxation on accumulated earnings remains. A working group, chaired by Craig Stobo has been appointed to co-ordinate consultation on issues related to taxation of investment income. This group will be reporting back to Dr Cullen by the end of October.
Views on what constitutes an adequate retirement income vary. What is clear is this government’s commitment to ensuring that retirees, present and future, have a guaranteed basic income and every opportunity to build on it.
A hands-off approach is not the answer. We have provided direction through the NZ Superannuation fund, the work of the Retirement Commission and the state sector workplace retirement scheme. The task is not over, as shown by the PRG report and no doubt also the Savings Products Working Group.
Something else they show is that the answer to the looming Retirement Bill does not rest solely with the government. It is also up to individuals to take responsibly for their future and it is up to you, the industry, to help facilitate that.
A solution that is
both equitable and affordable relies on the state sector
providing certainty and direction and the private sector
providing the extra drive that will be so