John Key speech to Super Funds Summit
Speech by John Key
National Party Finance spokesman to Super Funds Summit
Thank you for the opportunity to participate in the Superfund Summit.
If there is one consistency in the area of superannuation – and savings in general – it is that this is a contentious area.
It doesn’t really matter whether you are discussing the appropriateness of New Zealand Super, the New Zealand Superfund, the merits of private provision, the benefits or otherwise of incentives, the merits of compulsion, or the most basic issue of whether New Zealand does in fact have a savings issue – there is a wide range of fiercely held beliefs.
One of the reasons for this is that these are very important issues. Another is that the facts of the matter are difficult to judge, for example – do we save enough?
We live in a world where not only are we likely to live longer but we will be much healthier, and therefore, by and large, we will have a greater demand on our savings to enjoy the balance of our retirement.
It’s also true that this is an area that people find difficult to accurately plan for. For a start, we don’t know how long we are going to live.
And, for those who later determine they have under-provided for their retirement years, it is becoming increasingly difficult to re-enter the workforce.
This morning I want to summarise the National Party’s perspective on as many of these issues as possible.
First, let me start by saying we fully support New Zealand Superannuation and the three broad parameters that underpin the scheme:
65 as the age of entitlement.
A payment that is directly linked to 65 percent of the average wage for a married couple, and
The fact that this is a universal entitlement, without surcharge or means test.
We support New Zealand Superannuation because, in our opinion, it is an elegant, easily understood and simple structure for the public provision of retirement income.
We also support it because, in our opinion, it is affordable.
Today, New Zealand Superannuation costs roughly 4 percent of GDP, and though we anticipate that at its height the cost will double, I am confident that with the benefit of some pre-saving from the Superfund that we can afford New Zealand Superannuation going forward. And we can take significant comfort from the fact that at the worst our liability will still be well below what many countries like Italy already face today.
To young New Zealanders, I repeat the comments made by my leader, Dr Brash, late last year when he said:
“You can be confident that New Zealand Superannuation will be available for your retirement; its value will be a good deal more than it is now; and your income over your working life, your wealth at retirement, and your life expectancy are all likely to be significantly higher than for your parents’ generation”.
For younger New Zealanders, the demographic pressures are manageable. Even if, in 20 or 30 years’ time, there is a need for some adjustment to the scheme, there is little doubt that, because of rising incomes, the value of your superannuation will still be much more generous than it is today.
It is this universal support of New Zealand Superannuation and the desire to see the issue no longer being used as a political football that encouraged us to support the Superfund.
Many of you will be aware that the decision to change our stance on the Superfund was confirmed in a letter the Party sent to the Minister of Finance in which we supported Parts 1 and 2 of the New Zealand Superannuation Act 2001. The first part cements our support for the calculation of the value of and the age of entitlement to New Zealand Superannuation – 65% of the average wage at age 65 for a married couple. The second part commits to the New Zealand Superannuation Fund.
New Zealanders of all ages should, I believe, feel a high degree of comfort that New Zealand Superannuation will be there when they retire.
So let me move on to some even more substantive issues.
Does New Zealand have a savings problem and, if we do, what further should we do about it?
I think it’s fair to say that, although the measurement of savings is fraught with difficulties, the data does suggest that the rate of private sector savings in New Zealand has been lower than in other OECD countries during the last few decades, although some studies have suggested that we cannot really make a strong statistical case for the proposition that we don’t save adequately.
Should we be worried about this? And if so, how much should we worry? Is this a first order, second order or third order issue?
Well, it may just be that our low rate of savings is due to transitional factors; most notably the deregulation of the financial markets in the mid 1980s which dramatically increased New Zealand’s access to credit.
Recent data suggests New Zealanders have a high preference for consumption over savings, spending around 99 percent of our income, which is in line with similar Western countries.
We can also see from the data that our desire to increase spending is directly correlated to an increase in house prices, with some bank estimates indicating that for every dollar of increase in house prices, private sector debt is rising by around 8 cents.
When you consider that house prices have gained around $90 billion during the past five years, it’s not hard to see why New Zealand has enjoyed a healthy period of private sector consumption in recent times.
But then, if wealth has increased so dramatically, it is difficult to argue that it is in some way irrational for people to lift their consumption.
Another concern some have is the consequence of low domestic savings on our external balance, and the risk premium that is thereby built into New Zealand interest rates.
Rising interest rates, of course, do provide a risk to house prices, especially in light of the surge in household indebtedness.
It is also true that savings do have an impact on business investment, and it’s this investment that ultimately is crucial to lifting our long-term growth rates.
The fact is that most of us have a preference to invest locally.
I know from my own perspective that for the 7 years that I lived overseas before my return to run for politics in 2002, the only investments I made in New Zealand related to land purchases for our home. But since I’ve been back the opposite is true – that is to say, I haven’t undertaken any significant investments offshore.
Knowledge is power, or at least it gives the impression of it, and the truth is that most of us feel more knowledgeable about local matters.
So, might there be a case for attempting to boost domestic savings, as a way of encouraging even more investment in New Zealand?
My personal view and indeed the core principles of the National Party are that people should be free to decide how to consume, where to consume and most importantly when to consume, and not be told how to do all these things by the Government.
For some, spending now for whatever reasons - be it education, recreation or investment - makes sense. This can depend enormously on age, likely future income and the demands currently on income, including previous commitments and family.
What is very important is that we educate people so they don’t unwittingly leave it too late.
Saving is one of those things that it is easy to put off till tomorrow. And, as I said earlier, if some people leave it too late and do not have adequate information, they risk locking themselves into a lifestyle that is less than favourable.
So, how best to get individuals to save?
There is, in my view, no doubt that the best way for most people to achieve this is to allow them to become wealthier.
Well-off people tend to save more, not because they are necessarily smarter than others, but because they can forgo current consumption for future without having to make significant or often even noticeable alterations to their current lifestyles.
That’s why National is totally focused on lifting New Zealand’s long-term productivity rates; why we believe that cutting taxes so all New Zealanders can keep more of what they earn is important; and why we have to swallow hard when we hear the Prime Minister and the Finance Minister waxing lyrically about an ownership society, while at the same time robbing workers of any chance to get ahead by over-taxing them and spending the proceeds in wasteful and unproductive ways.
I do want to touch on the issue of workplace savings.
Let me briefly reiterate that increasing savings is important. I am, though, a little sceptical that a compulsory opt-in scheme that anyone can opt out of with relative ease will prove to be successful.
I hope I am wrong, but international evidence from Ireland and the UK indicates a low level of patronage for funds established in this manner, despite the benefit of considerable tax advantages.
So would incentives fix this problem?
The answer is it would certainly lift the savings in the tax-preferred accounts. Whether the national quantum of savings would rise and the distribution of these savings across a range of income cohorts is a completely different issue.
On that I need more convincing.
Finally, let me say that I don’t support any moves to destabilise the existing workplace and private schemes. It seems utterly mad to me that we could risk undermining the existing accounts in our rush to establish a broader participation in workplace schemes. So if we are to proceed, it must be with caution.
Can I thank you for the opportunity to say a few words and I welcome questions.