NZ superannuation: building for the future
Hon Dr Michael Cullen
Deputy Prime Minister, Attorney-General, Minister of Finance, Minister for Tertiary Education, Leader of the House
10 October 2006 Speech Notes
Embargoed until: 8.30am Tuesday 10 October
New Zealand superannuation: building for the future
Speech to the National Conference of the Association of Superannuation Funds of New Zealand, Sky City Convention Centre, Auckland
Delivered on behalf of Dr Cullen by Hon Clayton Cosgrove, Associate Minister of Finance
It is a pleasure to be here this morning. I convey greetings from Dr Cullen who apologises for not being able to speak to you on account of a busy schedule back in Wellington. Politics, as you know, is an unpredictable business. I suppose it is a bit like your industry – we are all planning for the future, but just as your days can be easily upset by the vagaries of the sharemarket, Cabinet Ministers must deal with the unpredictable machinations of government.
However, Dr Cullen's door is always open to the association and I know you have met recently. He is certainly keen to convey his thoughts on superannuation today as it has been an issue close to his heart for the seven years he has been Finance Minister. In fact, he has actually been the Labour spokesman on superannuation since the late 1980s.
This year in particular marks significant progress in helping New Zealanders to embrace a savings culture. The passing into law of the KiwiSaver Bill in late August is the final plank in our strategy of building a framework to provide greater financial security for all New Zealanders.
It is an issue that has been a high priority for the Labour-led government. Indeed your industry is often peppered with discussion around savings vehicles. If you will allow me a little licence, can I say this government has engineered a stylish savings vehicle with enough grunt under the bonnet to make a real difference to the journey during the bumpy decades ahead as a greater proportion of our population reaches retirement age.
The first move on the super sedan assembly line in 2000 was to reverse National's cuts and restore the floor to National Super to 65 per cent of the average ordinary time weekly wage. In line with our support agreement with New Zealand First this has risen to 66 per cent. I like to think of this as the robust chassis of the savings sedan.
Building on that, we established the New Zealand Superannuation Fund to pre-fund the future cost of National Super – a fine piece of engineering, the solid suspension if you like that will help cushion future governments from the potholes ahead.
The State Sector Retirement Savings Scheme with its employer subsidy is perhaps one of the beautifully upholstered passenger seats – much admired by those outside the state sector as the kind of comfort they would like to travel in.
Finally, there is KiwiSaver – shall we say this is the shiny exterior whose elegant styling we hope will lure many working New Zealanders to start making down payments next year so their travels in their retirement years can be as comfortable as possible.
And of course I like to think of the addition of a tax exemption for employer contributions to KiwiSaver as a kind of fifth gear, giving the savings machine a little more pep.
Dr Cullen has just returned from three weeks overseas, including several days in London and wants to share some of his experiences with you this morning. The UK is a few years behind New Zealand, but a White Paper was released earlier this year on a proposed savings scheme not dissimilar to KiwiSaver. While in London, he met with representatives from a range of relevant pensions agencies to discuss and was struck by two differences in approach:
- First, the proposed scheme has a contribution rate of 8 per cent, including a 3 per cent compulsory employer contribution – a sixth gear, if you will. Interestingly, there hasn’t been the outcry by UK businesses that I’m sure would have ensued had we proposed something similar in New Zealand. So when we talk about developing a savings culture that probably applies to employers as well as employees, but without the element of compulsion.
- And second, there is discussion about whether the scheme would be provided by any savings provider, as in KiwiSaver, or by a single monopoly provider. On this point, we think we’ve got it right: New Zealand has a number of good savings providers, many of whom are present here today and there seems little reason to construct a bypass round the healthy existing market.
The last few weeks have certainly given us plenty of reminders about the critical importance of fostering a savings culture.
The Reserve Bank's recent research paper entitled "Household Savings and Wealth in New Zealand" was a sobering insight into the problem. It found that the household savings rate has declined sharply in the last thirty years. Savings as a percentage of household income has fallen from 3.6 per cent in the 1970s to minus 14.8 per cent in 2005. Consuming more than you earn is of course no recipe for long term financial security.
While undoubtedly there are problems in measuring savings and household income, the Reserve Bank found evidence that the sharp rise in household net worth in recent years triggered largely by the housing boom may be aggravating the problem.
For one, households may see this increase in wealth as a given so reduce savings even though we know house prices can fall. The wealth effect has also encouraged households to borrow more. The bank estimates this draw down in household equity may have totalled about $7 billion over the past four years. A significant proportion of this has most likely been spent. In a nutshell the report finds New Zealanders rely too heavily on capital appreciation to accumulate wealth. That's why this government through its savings policies has been trying to encourage a more diversified strategy.
The recent current account figures certainly underscore the problem. We are spending well beyond our means with the annual deficit now totalling $15.2 billion or an estimated 9.7 per cent of GDP. Rising interest rates and a slowing economy should hopefully put the brakes on the big increase in overseas borrowing that has financed the housing boom and other consumption. Indeed, a slight slowdown in consumption in the latest GDP figures and the prospect of exports picking up on the back of a lower dollar provide some scope for the deficit to narrow in the year ahead.
I note Standard & Poor's points out yet again that the government's strong fiscal position continues to mitigate against any damage to our credit rating from the deficit blow-out. The government has certainly tried to lead by example. We are one of just seven nations in the OECD to be a net saver thanks to our commitment to prudent fiscal management and the build-up of assets in the New Zealand Superannuation Fund.
New Zealand is now recognised as one of the best prepared to deal with the fiscal challenges of an ageing population. That will increasingly become a source of competitive advantage for us as some of the world’s large economies struggle with the economic, social and political consequences of demographic change.
The New Zealand
Superannuation Fund has had another outstanding year.
For the June financial year the fund earned a return of 19.2 per cent with funds under management climbing to $10.1 billion – it's a result many of you have no doubt noted.
The fund's expectation is to exceed the risk free rate of return (the return on Treasury bills) by at least 2.5 per cent over the long term. The risk free rate of return is currently 6.77 per cent so the result is excellent.
Indeed, the fund has performed extremely well since inception in 2003 with annual returns averaging 14.9 per cent. This is pleasing, as good returns will ease pressure on future governments to fund New Zealand Superannuation though I am mindful equity markets will not always treat the fund so kindly.
It is also heartening
that over 33,000 civil servants are now members of the State
Sector Retirement Savings Scheme, an increase of 17 per cent
for the June year.
I firmly believe the message is getting through that all of us - government, workers and employers - must do more to secure our futures.
I am hoping that KiwiSaver which is set to take flight from July next year will be just the catalyst for a significant change in savings habits.
The KiwiSaver Bill was reported back to Parliament with a number of improvements. These include:
- allowing the 4 per cent minimum contribution to be made up of both an employee’s and their employer’s contribution;
- lengthening the time allowed for opting out from 2-6 weeks to 2-8 weeks, with deductions starting immediately; and
- exempting employer contributions to KiwiSaver schemes from tax (that is, the specified superannuation contribution withholding tax), subject to a cap of the lesser of the employee’s contribution or 4 per cent of their gross salary or wages.
There will also be a mortgage diversion option, whereby part of a person’s KiwiSaver contribution can go towards paying off the mortgage on their home. The rest of the contribution goes into their KiwiSaver account.
This would be on top of the provisions in the legislation under which the government would provide up to $5000 for each KiwiSaver wanting to buy their first home.
We are recognising the reality that most New Zealanders see saving for their retirement as having two elements: the purchase of a freehold home and the building up of financial assets. KiwiSaver helps them do both.
The other changes reflect our desire to create a scheme that can be easily supported by employers. The changes and new measures will ease the transition to KiwiSaver and ensure costs and compliance are kept to a minimum.
I am very hopeful employers will now see KiwiSaver as a valuable way of contributing to the long term financial well being of their workers. By making employer contributions tax free, we are making it even more attractive for workers to save, as their balances will grow much quicker with an employer subsidy. We are giving employers more choices when it comes to remunerating their workers. By allowing an employer contribution to count towards the minimum contribution we are also making it easier for workers, who may struggle to contribute 4 per cent, to join KiwiSaver.
Employers who embrace this opportunity, I believe, will see greater job satisfaction, loyalty and retention. I am heartened that some of our toughest critics in the business world have applauded the changes to the scheme as a win win for workers and employers. Indeed, one of the country's biggest employers, Fletcher Building, announced before the latest changes that it would be introducing a KiwiSaver scheme for many of its workers, chipping in a 2 per cent contribution.
Even the DominionPost, no fan of this government, said the souped up scheme "delivers what the country needs".
Of course I am mindful that your association, while supporters of KiwiSaver in principle, have some concerns about the application of the SSCWT exemption. You believe there is a real risk some employer-subsidised schemes will be forced to wind up as members switch to KiwiSaver schemes.
I have asked officials to undertake further work on the consequences of extending SSCWT to other workplace-based schemes. Clearly, any extension will have a significant cost. That will have to be balanced against competing demands on the fiscal purse and the impact an extension would have in encouraging greater savings.
Any decision to extend the exemption would most likely be on the condition that those schemes meet the same criteria as KiwiSaver schemes, notably portability, full vesting and lock-in until retirement.
Aligned to KiwiSaver have been the changes to the tax treatment of investment income, an issue that sadly rarely seems to be out of the media spotlight. We had hoped the new fair dividend rate method proposed by Dr Cullen and Revenue Minister Peter Dunne that has been suggested to the finance and expenditure select committee would be a circuit breaker to the problem.
Our intention all along has been to ensure individuals who invest through managed funds are not disadvantaged compared to direct investors who have been able to be taxed at their marginal rate of income tax and who can exploit tax advantages in grey list countries.
What we are only requiring is that all investors pay their fair share of tax and that their investment decisions are driven by returns, not tax advantages. This is especially important if we are to encourage more hard working New Zealanders, particularly those on lower incomes, to put aside something each week for their futures by investing in KiwiSaver schemes.
However, I acknowledge, as you do too, that the fair dividend rate method is complex for managed funds. Some in the industry claim this will disadvantage funds compared to individuals who will have the advantage of a variable rate and pay no tax in years they make a loss. We are certainly aware of your concerns and the select committee is working on this. My colleague Peter Dunne will expand on the basis for our decisions on this later today and as this is Peter's bill I would be grateful if you could save any questions on this for him.
Getting the balance right in all of these decisions is never easy. Of course I note the National Party while critical of our moves, offers very few of its own solutions to these complex problems. It voted against KiwiSaver and only belatedly endorsed the New Zealand Superannuation Fund. Tax cuts seem to be its only real policy.
National exists in a dream world where multi-billion dollar tax cuts are the panacea for all our problems from economic growth to savings while painting this government as a tax grabbing ogre. However, I note that National on Friday appeared to be softening its position on tax and now talks about incremental tax reform, not big bang tax cuts. Dr Brash vaguely talks about not sacrificing "valuable public services" which sounds much like our policies. I am flattered.
Compared to National we have a rather more sophisticated suite of policies aimed at transforming this economy and of course we are not opposed to reducing the tax burden on individuals and businesses. Budget 2005 provided for over a billion dollars in tax cuts for businesses. Further, the investment tax changes amount to a $140 million annual tax cut and we are introducing significant tax cuts for employers under KiwiSaver – some $160 million a year when fully implemented. Why National voted against that cut is baffling when John Key has expressed admiration for the Singapore savings scheme which also has tax breaks.
We are determined to transform the economy by fostering a business environment that encourages greater investment in innovation and exporting. To that end the current review of business tax rules is likely to produce an attractive mix of a lower corporate tax rate and tax credits, particularly helping those businesses focused on tackling overseas markets. This may also have implications for personal tax rates.
However, everything comes with a price tag and a risk. Standard and Poor's constantly reminds us that any weakening in the government's fiscal position could endanger our credit rating. National's election bribe, big bang, tax cuts would have done just that. No wonder it has flip-flopped on this.
We must also balance significant claims on the fiscal purse from hospitals, schools and other sectors while also having to make major investments in transport and other infrastructure. Indeed, it is very difficult to get through the first section of the Herald without reading several new claims for more government spending before turning to the business section and getting hit with demands for more tax cuts.
As members of the savings industry you will appreciate the Labour-led government's determination to be careful managers of the Crown's bank balance.
We have got our finances in order so we can meet the challenges of an ageing population. We are putting aside considerable funds each year to take the pressure off future governments to fund national superannuation and we have put in place a structure through KiwiSaver to encourage the development of a long term savings culture.
We believe we have got the balance right by maintaining a stable fiscal platform to allow us to weather long term pressures while also putting in place economic policies today that ensure we can enjoy greater prosperity in the future.