Gordon Copeland Speech - Super Funds of NZ
SPEECH BY GORDON COPELAND MP
Association of Superannuation Funds of NZ
THURSDAY 21 JULY 2005
Kia Ora and thank you for the opportunity this morning to give you a run down on United Future's policy in relation to superannuation heading into this year's elections.
I'll stick to the brief given by the organisers and deal with United Future's policy under the headings given.
1. Public Provision To Date
Our policy is to ensure that all New Zealanders over the age of 65, with ten years or more residence in New Zealand, receive New Zealand Super.
We support the formula for the determination of this amount annually by reference to movements in the cost of living and average ordinary time weekly earnings, after tax and ACC premiums.
However, United Future proposes to change the application of the formula. The annual adjustment, which is undertaken by Order in Council as at 1 April each year, is effectively retrospective since it is based on movements up to and including the quarter which ends with the immediately preceding 31 December. In practice, this means that, far from representing no less than 65% of the average ordinary time wage after tax during the year in which the super is actually received, super always, on average, lags 7 ½ months behind.
United Future believes that is wrong and will, as at 1 April next year, base calculations on the prospective rather than the retrospective position. In other words we will undertake a forward estimate of the movement in the CPI and in the average ordinary time wage and adjust the super accordingly. This will of course increase National Super and create a fairer outcome for superannuitants.
In addition, the NZ Super entitlement will be influenced by United Future's tax policy which is to exempt entirely the first $3,000 earned each year from income tax. Taken together these two changes will increase the after tax amount of superannuation as follows:
Married couple rate $21.34 per week or $1,110 per annum Single living alone $13.88 per week or $721.76 per annum Single sharing with others $12.80 per week or $665.60 per annum
In all cases this represents an increase of 5.4%. The annual all up cost is $265 million.
United Future also supports the New Zealand Superannuation Fund as a practical way of pre-funding some of the Government's enormous future superannuation liability which arises from 2010 onwards as the first of the baby boomers reach 65 years of age.
In my speech to your conference last year I covered, in some detail, the policy analysis which underlies our decision to support the so-called Cullen Fund.
In simple terms, the nation's future liability for NZ Super entitlements at the current level, coupled with the concurrent increase cost of health as our population ages, is unsustainable. I, for one, do not want to bequeath that enormous financial burden to my children and grandchildren. In our view it would be a dereliction of government's essential responsibility to its citizens were it not to set in place a positive mechanism to address that reality.
Paying down debt will not achieve an equivalent result. I have done the sums and it simply doesn't work.
Some have suggested that the personalisation of the Super Fund coupled with some kind of annuity arrangement might lead to more sustainable outcomes. Frankly, I'm not in a position to be sure about that without undertaking a side by side modelling of the two situations over the next 35 years or so and for that, I think you need to be in government. My gut feeling is that the compliance costs measured against the benefits probably rule out personalisation - we have to calculate how much of the $2.3 billion per annum paid into the fund belongs to each taxpayer - but nevertheless we will undertake a review of the advantages, disadvantages, costs and benefits of converting the NZ Super Fund to personal accounts.
In similar vein we are happy to keep under review items such as the present relationship between the married couple rate and the single person rate.
However, we have no plans to revisit the universal nature of these benefits by introducing income or asset testing.
2. The Kiwisaver Scheme
In general terms United Future supports the Kiwisaver Scheme. We believe it's a useful step forward.
When the Workplace Savings Scheme report came out last year we immediately recommended to government that provision be made for funds saved to be withdrawn to purchase a first house. We are pleased therefore that the government has not only adopted that suggestion but gone further by providing quite generous bonuses. I have no doubt that this will be an important step in assisting first home buyers thus contributing to an ownership society.
However, United Future would like to go further by also allowing first time buyers to capitalise part of their family support entitlements for first home purchase. We see home ownership as having enormous, strategic advantage in relation to retirement income since, it is quite clear, that those who enter retirement with a free hold home are much better off than those paying rent. The design of the scheme should certainly however enable employees to utilise amounts paid into the scheme (but not the government sweeteners) to service a mortgage. That's vitally important since paying down a mortgage is obviously the best way to save for retirement once taxation considerations etc are taken into account. Without that attribute I doubt whether take up of Kiwisaver would be significant, but with it you would be a fool not to participate given the $1,000 upfront contribution by government.
3. The Role of Private Provision
United Future strongly supports all efforts to encourage private provision for retirement. State provided super is intended only to cover basic living costs and then only if you own your own home. Accordingly, efforts to encourage private superannuation savings have been a priority for us during the term of this Parliament and, due to our confidence and supply agreement with government, these have met with a considerable degree of success.
Firstly, in the 2003 Budget government reduced the withholding tax amount on employers' contributions to super funds from the old flat rate of 33% to 21% for employees earning under $38,000 and 15% for employees earning under $9,500.
Secondly, and in direct response to the United Future bid outlined in my speech to you last year, this year's budget addressed two further issues, namely:
(a) earnings on superannuation funds - including the Kiwisaver Workplace Scheme - will now be taxed at the marginal rate of the saver rather than the current flat rate of 33% which currently overtaxes around 45% of all savers, and
(b) the abolition of capital gains tax on domestic share investments through managed funds.
Together these three measures remove major disincentives for retirement savings and give me a measure of personal satisfaction since I have worked on them unstintingly since being elected to Parliament in 2002.
United Future would also like to see the return of employer subsidised super schemes as the norm for all New Zealand businesses. However I don't believe employees should necessarily be tied to their employers own scheme but allowed to join schemes which are fully portable.
Finally, United Future would introduce a voluntary long-term savings programme, beginning from birth - with a sweetener from government and support from parents and grandparents. This would be able to be used for tertiary education (thus reducing the need for student debt), the purchase of a home or the commencement of a business and, finally, convert to a retirement plan.
All of this should be voluntary - we do not support compulsion.
4. The Future
We support the role of the Retirement Commission and its work.
We favour an independent group being established with a clear brief to regularly review super provision based on the common good of our society and its citizens. Such a group should, where necessary, challenge present policy settings and suggest workable alternatives.
We strongly support an accord embracing political parties but including also employees, employers and the self-employed.
United Future is committed to the long-term continuation of the present State provision, pre-funded in part by the New Zealand Super Fund, but supplemented by policies that strongly encourage private provision.