Cullen: Security in retirement for New Zealanders
Hon Dr Michael Cullen
Deputy Prime Minister, Attorney-General, Minister of Finance, Minister in Charge of Treaty of Waitangi Negotiations, Leader of the House
April 2008 Speech Notes
Embargoed until 3:30pm, 16 April
Security in retirement for New Zealanders
Speech to Retirement Policy and Research Centre Symposium, University of Auckland
Good afternoon and thank you for the invitation to address your symposium.
You have invited me here today to do two things.
The first is to look back and reflect on the debate on retirement policy over the past decade and what we have achieved in recent years.
The second is to look ahead, and explain the Labour-led government’s vision for retirement in New Zealand into the future.
But to start my comments today, I want to add a third, and that is to remind all of us why we are here discussing retirement policy in the first place. I know that earlier today you have discussed historical policy development and the areas where New Zealand has been a policy leader.
But there are some basic questions we need to consider about the unique character of New Zealand’s ongoing national discussion on retirement.
Why does it matter so much and why do the issues of superannuation and retirement income still generate such significant debate?
Why has the Labour-led government in which I serve made investing in improving the living standards of retired New Zealanders one of our top priorities?
And why, in a time of rising life expectancy, longer working lives, and greatly improved health do so many New Zealanders still put so much importance into planning for their retired lives?
The best way to begin to answer these questions is with an acknowledgement. Many of us in this room who are engrossed in the specifics of retirement policy don’t step back often enough to consider these questions.
All of us here today can run through the specifics of retirement income policy and the debates of the last quarter century. We certainly are all familiar with the political mud pools on these issues, and almost everyday we see in the media advice for retirement planning and saving.
But we rarely, if ever, ask ourselves why these issues feature so prominently in our political discourse or why debates on these issues continue with such energy and with the semi-regular fever pitch.
The reason for this failure of perspective is in some ways a symptom of our success as a nation and as a society. For we were among the very first nations anywhere in the world to deliver true social security to our older citizens.
In 1938 during the first term of New Zealand’s First Labour Government, New Zealand became the first nation to deliver comprehensive social support for its people. As then Finance Minister Walter Nash said at that time:
“It needs no gift of prophecy to say that the Act now being written in the statute-book of this Dominion is not only to be a Social Security Act, but is also to be the first Social Security Act, on any proper definition of that term, ever written in any statute-book in the world ... There is more security in the proposals contained in this Bill than in any proposals that have been set out by any Government in any other country up to the present.”
Emerging from a great depression, where we realised just how vulnerable segments of our society, especially older New Zealanders were to the sharp edge of economic downturns, we acted together to improve the security of all our people.
New Zealanders accepted that we had a choice to move together as a society where we all contributed to the welfare and security of our families and neighbours or to allow vulnerability and poverty to remain inherent and acceptable risks in a modern economy.
We accepted that we had a choice to saddle young families with sole economic responsibility for their frail elderly and let the misfortune of one generation limit the opportunity of another, or to support close and strong multi-generational families while freeing our young people to pursue their own prosperity.
And in providing leadership for New Zealanders to choose security for all citizens, the young and the old, Michael Joseph Savage and the First Labour Government allowed New Zealanders themselves to be leaders for the rest of the world.
It is true that the United States was the first to pass a Social Security Act in 1935, but New Zealand was the first to accept the full challenge of true security in retirement through income support, health care, and housing.
And over the course of the nearly 70 years since we decided as a people to head towards greater security for older citizens, the majority of us in politics and in our communities have continued to raise the bar for what is and should be achievable. We find new challenges, seek to remove remaining barriers towards full inclusion and participation in our society for older people, and pursue greater equality and prosperity for retired New Zealanders.
The decision we made in 1938 to start on this journey is deep inside our national character. And it is for this reason that in New Zealand more so than many other nations that our debate and focus on issues of support for older New Zealanders is given such prominence.
But it is also true that this central element to our egalitarian and compassionate national character has been tested over the course of seven decades. And it is true that those tests and threats to the progress achieved or the further progress needed have been motivators of their own.
In just the past few decades we have seen the promise of the Third Labour Government’s compulsory superannuation scheme squandered by an opposition who warned of communism, but then went on to attack the New Zealand economy with a clumsy fist of state control and debt financed abandon.
Even in much more recent times we have seen attempts to erode the consensus on the levels of superannuation and the age of eligibility.
In other words, the debate is alive not just because of our continued ambition to improve living standards and reduce inequality in retirement, but because the threats to our progress to date are not distant memories, but real and living truths.
In the meantime, the other driver of the ongoing debate in this area is the weakness of New Zealand’s national savings rate and our relatively weak capital markets. As aspirations for retirement have risen as they should, savings for retirement have not kept pace and have actually moved in the wrong direction. This has set off a debate between those of us who believe in the importance of saving and investing, and those who deny the existence of a savings problem at all.
For our part, the Labour-led government has restored the place of retirement income support at the top of governmental priorities.
Among our first acts in office was the restoration of the floor of New Zealand Superannuation to 65 per cent of the average wage.
Early in our first term in office, we delivered on our election promise to create the New Zealand Superannuation Fund. The idea behind the fund was to use the favourable demographics of today and our associated fiscal strength, to secure the place of the universal pension at 65 into the future.
There was opposition to the Fund, but its success – with its total value as at 29 February standing at $13.5 billion, despite recent global sharemarket falls – has silenced most of its critics. There appears to be a durable political consensus that will protect the fund going forward. New Zealanders have in essence decided that ensuring basic security for older New Zealanders into the future was worth forgoing considerable consumption today.
Defending major investments in the Super Fund instead of prematurely cutting personal taxes has not always been politically easy for me as Finance Minister, but with the consensus now in place about the benefit of doing so, New Zealanders have taken another step forward in emphasising the value we place on providing for support in retirement for all our people.
Last July, we took another step forward, with the rollout of KiwiSaver. The idea behind KiwiSaver was two fold. First, we wanted to greatly expand the numbers of New Zealanders who are actively saving and planning for their retirement while helping younger KiwiSavers save for a deposit for their first home.
The obvious truth is that much of the inequality in retirement income is driven by the decisions and ability of some people to save throughout their lives and to build financial assets to support themselves over and above New Zealand Superannuation. While a voluntary KiwiSaver scheme cannot eliminate these inequalities, it can and I believe already is greatly reducing them. KiwiSaver is making it easier than ever before for people to save for the retirements they deserve.
The second goal was macroeconomic as we sought to improve our national savings rate. While there is disagreement on what indicators we should use when quantifying our savings problem, I have no doubt that the problem is real and very significant. By one measure, our national savings rate ranks 108 out of 130 nations while evidence from Statistics New Zealand is clear that we spend more than we earn.
The effect of all this is that our current account deficit is very high and businesses lack a significant base of domestic capital to draw from for investment. Experience in Australia suggests that in addition to the mineral boom that has driven much of their expansion, the Australian superannuation system itself can explain a significant part of the expansion in Australian wealth over recent years.
The Labour-led government saw an opportunity then to advance New Zealand’s long-standing commitment to greater living standards and equality in retirement while addressing significant imbalances in our economy.
Again, the opposition was not insignificant and the current National Party Leader fought the last election to stop the “terribly designed system” in its tracks. In the end Labour won the 2005 election, we enhanced the scheme significantly in last year’s Budget, and over the past eight months, New Zealanders have made KiwiSaver their own.
I announced on Sunday that there are now over 540,000 New Zealanders enrolled in KiwiSaver. This compares to an initial forecast of around a quarter million after the first full year.
It is clear that the expectation among officials, perhaps reasonably, is that it is a big ask for workers to forego 4 per cent of their income and to think beyond next week’s pay packet. They perhaps expected that at least in the beginning, only people with existing schemes to transfer into KiwiSaver would take advantage of the government’s subsidies. They expected the vast majority of low and middle income workers who were starting new jobs to make the easy decision to opt-out of the scheme.
But they were wrong. More and more new KiwiSavers – who number over 2,000 a day so far in April – have been automatically enrolled in the scheme rather than swapping their existing savings.
This is a vital point for anyone with an interest in understanding the make up of KiwiSaver members. We know that people who have not changed jobs and who made an active choice to enrol in KiwiSaver are much more likely to be those with pre-existing managed funds and thus be from higher income groups.
In the first two months after KiwiSaver’s launch last year, when 115,000 people joined the scheme, 85 per cent of members made this active choice to get into KiwiSaver. If that trend had continued, we would have some cause for concern.
But it has not. In fact, the demographic makeup of new KiwiSavers has already changed fundamentally. In the first two months of this year, when 91,000 people joined the scheme 58 per cent of them were automatically enrolled. These automatic enrolees are those that are far more likely to be joining from a diverse range of income and ethnic groups.
An initial evaluation showed that the mean annual income of automatically enrolled KiwiSavers was $25,878.
Survey data, which should be treated with a not insubstantial grain of salt due to small sample sizes, does show us that we need to do more to bring in Maori and Pacific KiwiSavers. After the first six months, Maori and Pacific workers accounted for ten and five per cent of total KiwiSavers. I believe that we need to do more in Maori and Pacific communities and workplaces to encourage higher awareness of the scheme and Inland Revenue is doing just that.
But overall, I believe we should be encouraged by the take up among Maori and Pacific workers. I would like to see enrolment in KiwiSaver among these communities to be broadly in line with the makeup of the broader workforce. We are not there yet, but initial data suggests that the task will not be an insurmountable one – if the survey data is on the right track, then we are much closer than many people would have expected us to be.
We also know that the majority of KiwiSavers are women and that an astonishing number are young workers. Over 130,000 KiwiSavers are under 25 years old – a level of youth enrolment I never thought we would see in the first couple years, let alone in the scheme’s earliest months. The vast majority of these are young workers, aged between 17-24 who are entering the workforce and starting a savings habit straight away.
KiwiSaver is then, not just a surprising success in terms of sheer numbers, but also in terms of diversity of membership.
But perhaps this success should not have been a surprise. If, as I have said today, that New Zealanders as a people take the issue of a good quality of life in retirement seriously, perhaps we should not have expected so many to be sceptical about the joining KiwiSaver. Regardless, a new generation of New Zealanders have responded to the scheme and in so doing have made it the most successful voluntary workplace savings programme in the world.
In addition to the three major moves of KiwiSaver, the New Zealand Superannuation Fund, and raising the floor of New Zealand Superannuation, the Labour-led government has advanced a wide agenda for improving the lives of older people in our country.
From the positive ageing strategy, to the Rates Rebate Scheme, to the largest ever investment in the health of older people through rest home and home based care, to cheaper doctor’s visits and prescriptions, we have delivered a higher quality of life for all older New Zealanders. We are proud of our progress.
But it is progress we are proud of – we know there is more to do. We know there are too many New Zealanders in retirement who are not able to participate in their communities or able to live the lives they had hoped for. We know health services, while greatly improved, can be better still. We know that unacceptable inequalities across income and ethnicity remain past the age of 65.
But this takes me to one of the questions I was asked to address today. That is, what confidence can we have that a political accord on retirement income and support can be achieved.
The reality is there has been no genuine consensus on superannuation and retirement income policy since 1974 and the subsequent cancelling of the Third Labour Government’s compulsory savings scheme.
We know from that experience that politicians can indeed undermine consensus on these issues. But it would be a mistake to assume that this power of destruction comes packaged with an opposite power of consensus building.
In the end, politicians do not create a consensus on anything – the voters do. And an accord between politicians to take an issue off the political agenda is only more than a gimmick if a genuine consensus sits underneath it.
As a political leader I can work to persuade voters to support my view of the centrality of the universal pension and the significant benefits of greater support for private savings.
But it is New Zealanders who through their actions and through their discussions with their families and neighbours who get to be the arbiters on my views. They get to decide if a consensus is possible and only they can force their politicians to come together on an issue.
This is not to say that an accord or genuine consensus is impossible. In fact, the public responsibility for consensus is for me a reason for optimism that such a consensus is possible.
There is hope for consensus in the fact that New Zealanders themselves accept that even if they work well past the age of 65 that there must be a pension there to support those who cannot.
There is hope in the fact that New Zealanders themselves understand the importance of universality in the basic pension in protecting support for all who need it.
There is hope in the fact that even with political disagreement, a quarter of our workforce has already signed up for KiwiSaver and started saving for a better retirement.
I believe that in 20 years time, even with an ageing population and significant fiscal challenges, retired life in this country will be healthier, fuller, and far more comfortable than it is today. We will have substantially dealt with our superannuation affordability problems and we will have revitalised our savings culture.
That is the goal of this government and I believe of most New Zealanders.