Economic Growth Key To Caring For Elderly
Economic Growth Key To Caring For Elderly
Monday 30 Aug 2004
Rodney Hide - Speeches - Superannuation
Speech to ASFONZ National Conference; Sheraton Hotel; Auckland; Monday August 30, 2004.
Thank you ladies and gentlemen. I have eight minutes to address key questions that conference organisers have put to the political parties.
To care for our elderly now and in the future, we need to be clear about the issues.
The Best Policy For Looking After The Retired? Growth!
First the good news. The best policy for caring for our elderly is strong and consistent growth. The more prosperous we are as a nation, the better we will be able to look after our elderly and indeed every New Zealander.
Averaging five percent growth a year instead of two would make us four times richer in 50 years. Being four times richer would leave us easily able to look after the retired. We can care for our elderly - even the growing number of them - if we have good, strong growth.
Super policy in New Zealand has overwhelmingly focussed on the percentage of the average wage government is paying retired people. But some or other fraction of the average wage doesn't ensure an adequate standard of living. Our concern should be the standard of living that retired people actually enjoy.
For example, if wages are low then pensioners won't be well off. Sixty-five percent of the average wage, say in Fiji, would drop the pension to a fifth of what it is. Sixty-five percent USA average wage would see the pension here doubled. The focus shouldn't be on the percentage, but how well we are actually looking after our elderly.
I would rather have a pension 50 percent of the USA's average wage than one 65 percent of the New Zealand average wage, or indeed one 100 percent of the Fijian average wage. Growth matters.
The best solution to the problem of providing for our retired is prosperity and the best super policy is to promote prosperity. That means low taxes, a free economy and a minimum of red tape.
Politicians & Arithmetic
Now the bad news. When it comes to superannuation, politicians have an appalling track record. The reason for this is quite simple. They make promises in the here and now for votes but they are never around when the growing number of elderly overwhelms their promises.
The famous example is Sir Robert Muldoon. He promised in 1975 that everyone could retire at aged sixty with a pension of 80 percent of the average wage. He declared it sustainable. Well, it wasn't. The number of over sixties has almost doubled and the value of the pension entitlement has been almost halved. It was halved by shifting the age out to 65 and by dropping the pension to 65 percent for a married couple.
And notice this: no politician is now promising to return the pension to what it was in 1975. Why? Because it would blow any government's budget.
Now note this: The number of over sixty-fives is set to more than double over the next 40 years. The workforce is projected to grow by only 10 percent.
There are five workers per retiree now. The projection is for there to be only two workers per retiree in 2050.
That means the cost of providing for super at the present rate is going to more than double. Providing for the pension now costs four percent of everything we produce. That is the net cost. That cost is projected to rise to nine percent in by 2050.
What we don't see politicians promising to increase income tax by 25 percent. But that's the arithmetic of the number of elderly more than doubling.
It doesn't matter what politicians promise: they can't beat arithmetic.
The Cullen Fund Is Only A Cost-smoothing Exercise
Oh, but what about the Cullen Fund? Well, Cullen's fund only smoothes the cost of providing the pension. It doesn't change it.
It puts some $42 billion of taxpayers' money into a big state-run fund over the next 20 years and then pays it out plus interest to cover some of the future cost of super.
Instead of the cost of super going from four to nine percent of GDP the Fund bumps it up to six percent now to knock it down to eight percent in the future.
The Fund itself peaks at 40 percent of GDP - 20 percent larger than the market capitalisation of the entire New Zealand share market. That's a big fund - and it represents a considerable financial and political risk.
Already politicians want to invest it in their pet projects and the government's balance sheet is going to get knocked around as the Fund's value fluctuates.
The Fund sucks in two percent of GDP and does nothing to address the real problem: the need for strong, consistent growth. The Fund does nothing to grow the economy - indeed, in sucking an extra two percent of GDP up through the tax system, it's a negative for growth. We would boost the economy if we killed the Fund and dropped taxes accordingly.
What's Special About 2025?
Conference organisers suggest that we divide pension policy from today versus tomorrow and suggest that tomorrow starts in the year 2025. I don't think that's particularly smart. There is nothing magical about the year 2025. The numbers of elderly climbs steadily and proper pension policy should be looking out 50 years rather than just a few years ahead.
Politicians like to promise today and not worry about tomorrow. But it's that political expediency that has seen our elderly hoaxed with unsustainable super promises. That's what causes so much grief and upset.
The best guide to the future is our history. The number of over 60s doubled since 1975.
Since then the pension entitlement has been halved through a combination of shifting out the age of retirement and dropping the pension.
It seems to me it doesn't matter who is in power over the coming years, we are in for a repeat of recent history. The age of the pension will be shifted out to 67 or 68 and it is inevitable that the pension's value as a percentage of the average wage will be dropped, just like it has been in the past.
The pension is indexed to the average wage, not inflation. It makes a big difference over time. The pension is thus determined to keep pace with wages, not with what the pension can actually buy.
It would be a courageous government that would unhook the linkage given the number of voters who are retired or soon to retire.
But there should be no doubt that over time the value of the pension as a percentage of the average wage will drift downwards. The trend of the past 30 years will continue. It's not fair on our elderly or those now if the workforce to declare otherwise.
Income & Asset Testing
Income testing and asset testing has been hotly debated in New Zealand. There is now no testing. So MPs passed their 65^th birthday can pick up their wages, accumulate cash in the MPs' pension fund, and pick up national super from hard working taxpayers. Likewise multi-millionaires can retire in the lap of luxury and again be entitled to a pension at the expense of all taxpayers.
It seems to me we need to consider whether that is fair.
How Paid For? - The Mechanics
The taxpayer always pays for the pension. The mechanics of how it is paid makes no impact on the cost overall. The Cullen Fund gives a false sense of security and only smoothes the costs a little.
Workplace Saving Schemes
The ideal undoubtedly is working people taking more responsibility for their own pension. The difficulty is they have little incentive or opportunity to do so. The first difficulty is the compliance cost of running work place savings schemes has just become too large in New Zealand. We should be working hard to lower these compliance costs. That would make it much easier for employers to run work place savings schemes. That would be a big boost.
The best tax incentive that we can give to people saving is to lower taxes. The more money that working people have in their pockets the more ability they have to save, especially if work place savings schemes are affordable for employers.
It's not smart to give particular tax incentives to saving. People know best how to spend and invest their own money without being shunted down a particular chute by government. The best tax system is a low flat broad based tax system.
Dropping taxes also boosts incentive to work and to invest making for a more prosperous future.
Just forcing people to save doesn't solve the problem of the number of elderly doubling. For example, we could force people to save the equivalent value of the pension for when they retire. That wouldn't in any way change the cost of the pension: all it would do is bring it forward.
Moreover, the forced savings would depress growth - and the incentive to work and to invest - as taxpayers would lose an additional, say, seven percent out of their pay packet each week.
The best thing to spur growth is lower taxes and people able to keep more of what they earn. Forced savings actually leaves them with less.
Looked at objectively the review process in terms of pensions has been a failure. The Retirement Commission, the Periodic Report Group and the Accord have all been political devices to take the heat off politicians and to shift it somewhere else. They have not served to stabilise pension policy and while the information generated has been high quality, it hasn't translated into sound policy for pensions.
The best approach would be to require politicians to explain how they propose funding their pension promises over the next 50 years. Hand in hand with the promise to increase the pension to 65 percent should be the recognition that it is also a promise to increase income tax by 25 percent.
It may be useful to include in the Fiscal Responsibility Act a longer time horizon to take account of the pension promises that politicians make in the here and now. We need better to discipline politicians so that they don't make promises that can't be sustained. The review processes set in place have not disciplined politicians. Far from it, they have allowed politicians to duck accountability.
If we care about the elderly, now and in the future, we need to force accountability on politicians in the here and now for the future cost of their promises.
I have been asked to come up with a singular expression that sums up ACT's position on retirement income. The number one policy priority is prosperity and the policies that will generate strong and consistent economic growth. The number two expression is that it is time for some truth in super and the realisation that politics can't beat arithmetic.