Alliance plan for Superannuation: Jim Anderton
Jim Anderton MP
Leader of the Alliance & spokesperson on superannuation
Association of Superannuation Funds
The Auckland Club, Shortland St, Auckland
Embargo: 7.30AM Wednesday, 7 July 1999
Thank you for the opportunity to speak to you this morning. I value the opportunity to talk to you about our plans for superannuation and to hear your comments.
Political parties have a responsibility to be open with representatives of the public and to keep you fully informed about our intentions. Nowhere is this more important than in the field of superannuation, where the public has become highly cynical about a trail of broken promises. Yet people desperately need certainty in retirement incomes, because once you have retired you cannot change your circumstances. Retirement-planning is an activity which takes decades, not the three years of an election cycle.
It was precisely because of the need for certainty in retirement planning that the Superannuation Accord was signed, and I am convinced that New Zealanders will yet regret very deeply the cavalier way it was jettisoned by National during coalition talks with NZ First.
In my comments this morning, I want to cover three areas.
THE PRESENT superannuation scheme and the question of its sustainability;
THE ALLIANCE’S intention for NZ Superannuation and the likely range of alternatives on offer;
AND THIRD, I would like to discuss some ideas around for the development of superannuation in future.
The NZ Super scheme
I would like to start out by saying that the New Zealand Superannuation scheme is the best in the world. It is cheaper and fairer than retirement income schemes in any other developed country.
Since the introduction of the New Zealand Superannuation scheme (originally as the National Superannuation scheme), there has been a constant refrain that it costs too much.
The Superannuation Funds industry has been one of frequent source of comment about this. I want to emphatically refute it.
NZ SUPER IS FINANCIALLY SOUNDLY-BASED. It is funded from general government revenue (all revenue, not just personal income tax) and, until this year, it was adjusted on the basis of a general movement in earnings, so that increases in NZ Super are matched by increases in tax paid by wage and salary earners. So NZ Super remains a fairly stable proportion of government revenue.
NZ SUPER IS NOT ENDANGERED BY THE AGEING POPULATION. We don’t have an ageing problem - we only have a growth problem. If the economy grows by as little as 1-5% in real terms (inflation adjusted) then it will grow fast enough to provide for New Zealand Superannuation for the foreseeable future and it will easily outweigh growth in the aged population of about 1% a year.
THE DEPENDENCY RATIO IS HARDLY CHANGING. This means that as the population ages, the proportion of younger people falls. A younger population requires more to be spent on education, training, health care for young mothers and infants, and even prisons and accident costs. The elderly require more spending on health care, pensions and some other welfare costs. They also pay tax on incomes of their own and many keep working to provide valuable services to the community, often voluntarily. So while the costs to the Government’s budget of the elderly population will rise, the budgetary costs of young people will fall. The dependency ratio (the ratio of workers to non-workers) will fall for the next fifteen years and then it starts to rise again, but doesn’t reach the levels of the 1960s until about 2050.
THE OVERALL COSTS OF NZ SUPERANNUATION ARE FALLING AS PROPORTION OF GDP AND OF GOVT REVENUE. In 1980, NZ Superannuation (which was then set at a base rate of 80% of average, weekly ordinary-time earnings) amounted to 20.3% of Government revenue, and about 6.4% of New Zealand’s GDP. In 1997-98, NZ Super was worth 66.8% of average weekly ordinary-time earnings. It consumed just 14.7% of the Government’s budget, and 5.3% of GDP - even though there had been a growth in the number of retired of more than ten per cent (from 401,422 to 447, 495). New Zealand Super now amounts to just 62.8% or average weekly ordinary time earnings.
The average of public pension expenditure in developed countries, not including tax incentives for life policy contributions and the like, was 10% of GDP. In other words, other countries are spending proportionately far more on their retirement income schemes than we are.
The parties that signed the Accord in 1993 (Alliance, Labour and National, later joined by United) recognised that NZ Superannuation was entirely sustainable. In fact, with the retirement age being pushed out to 65 under the Accord, NZ Superannuation was more affordable in 1998, when it was dumped by National, than it was in 1993 when the Accord was signed.
The election choice
When the National Party cut the rate of NZ Super last December it removed the floor beneath which the base rate of NZ Super was not allowed to fall. The married rate which was set at 65% of average ordinary-time weekly earnings is to be allowed to fall to 60%, which is worth around $10 a week for every superannuitant.
If NZ Super is sustainable, why would they do that? The real intention of the cut was not to address sustainability at all. Instead, the National Party has worked out that it can cut taxes for high income earners if NZ Superannuation is reduced, or if it is abolished altogether.
In the absence of the Super Accord, that is the direction in which I am sure National and Act will take Superannuation if they get re-elected this year. If they are prepared to slash superannuitants’ incomes in an election year, imagine what they will be prepared to do in the year after an election?
I predict that a National-Act Government will abolish NZ Superannuation. It will be replaced by a means-tested, abated benefit set at a very low level, probably the level of the dole. It will only be available to anyone who has no other income or assets, such as a house, or income from a superannuation fund.
The idea is that eligibility will be set low enough to provide an incentive to entice people to save for themselves.
The problem with the National-Act plan is that, as we saw during the referendum on the compulsory superannuation scheme, the vast majority of people do not have the ability to save for themselves sufficiently to produce an adequate retirement income. Todd Taskforce research showed 75% of men and 90% of women won’t save enough during their lifetime to provide for themselves with an income at the level of New Zealand Super. If they save anything, it will merely be abated away.
I’m always amused at how it is supposed to be an incentive for most people to have their incomes cut, but the rich always need the incentive of a higher income.
Imagine the effective marginal tax rates that would apply to people who tried to save for their retirement income through a private scheme. The first hundred thousand dollars or so of savings would go entirely towards reducing the publicly-provided contribution, instead of towards making individuals better off in their retirement.
That is why so-called safety-net retirement schemes don’t work. The best, cheapest and fairest scheme is to ensure that everyone receives a publicly-provided level of superannuation. It is a particularly good scheme for women who earn less and live longer than men.
The Alliance will fully support the NZ Superannuation scheme. We want the base rate restored to 65% of average ordinary-time earnings.
Can the country afford it? Consider this. This weekend the National Party will announce another round of tax cuts for high income earners.
Either it will reduce the top rate of tax or it will push out the threshold at which the top marginal rate of income tax applies. Both options will cost at least several hundred million dollars and the cash will be seen only by people who earn more than $38,000 a year. That’s just 15% of all income earners.
The 85% of people who earn less than $38,000 will receive nothing.
If the Government has several hundred million to give away in tax cuts to the highest income earners, then it could equally give that money to the people who have received virtually nothing in tax cuts.
In two previous rounds of tax cuts,
superannuitants have got just 29 cents a week.
It would cost $143 million to restore superannuation to the relative value it was at before it was cut on 1 April this year and that would make a difference of a little over $5 a week each.
So if Mr English has three hundred million dollars to give away in tax cuts for high income earners, then we could equally give at least a double-figure increase to the 450,000 superannuitants who get nothing but cuts from National.
Why do they need it? Superannuitants are paying more for their power bills, thanks to Max Bradford’s energy policies. If they’re living in a state house, they are paying market rents which are so steep they are actually driving up the market. They are paying more for health care as the health system falls apart. And in the future they’ll pay even more to see the doctor or the dentist as young students try to make a sufficient income to pay back student loans as high as a hundred thousand dollars.
So the Alliance will make NZ Superannuation available from age 65, and we’ll boost the cash value of it.
During the 1993 Accord talks it became clear that there was no sound empirical basis on which to judge whether the 65-72.5% income band was sufficient to allow superannuitants to participate in and belong to their communities. In recognition of this the Accord included a provision requiring the Retirement Commissioner to conduct a survey of the living standards of superannuitants. The survey was never carried out.
That survey is now badly overdue. Its findings should form the yardstick by which we judge the future value of Superannuation.
Before National walked out of the Accord, the Alliance proposed changes to the way it ran. A new Office of Parliament, called the Superannuation Commission, would take over all of the functions of the Retirement Commissioner and would appoint a secretariat which administered Accord policies. If retirement policies are to achieve true certainty, then I think it will be crucial to establish a Commission of this type, reporting directly to Parliament and resourced to do all the necessary research.
The future of NZ Super
I’ve made the point that in principle NZ Superannuation is a very fair and cheap scheme.
Even though the Alliance intends to boost the cash value of NZ Super, no one would describe the scheme as generous, whatever its others merit. The existence of your Superannuation Funds industry is evidence that many New Zealanders would wish for a higher standard of living than can be paid for simply from New Zealand Superannuation.
At the moment there is no incentive to make your own savings to supplement your New Zealand Super.
You have asked me to addres the issue of employer schemes. Changes in the pattern of working lives mean that the days when a person stayed with a single employer for their lifetime have gone. Few employees now expect to work for employers long enough to build up an adequate pension entitlement. The Employment Contracts Act, along with other policies, have contributed to steep increases in casualisation of the workforce. Occupational pensions cannot be relied on to provide a retirement income. There is no sense in forcing employers into providing retirement schemes and there are insurmountable issues of portability.
That is not to say that there is no role for employer-based schemes. If employees and employers are able to negotiate agreements provding for a retirement component, then that’s fine. But there is only a small proportion of the workforce, let alone of the overall population, which will ever be covered by occupation-based schemes. Therefore, they can’t form the basis of overall retirement policies.
NZ Super was based on the idea that it would be paid at a level sufficient to enable superannuitants to ‘participate and belong to their communities’, supplemented by voluntary private savings. It assumed that people owned their own home by the time they retired.
The issue that I believe we may now want to look at in the future is that some people may well want to save sufficient money to enable them to enjoy more than the ‘participating and belonging’ level of income.
At the moment, any savings they make towards that end are made from their tax-paid income.
There are sound reasons for that principle, including consistency across the tax system. Savings incentives can be used simply to divert savings which would be made anyway from other sources into the superannuation savings scheme.
But there is another issue to consider. I’ve already said that the best way to ensure NZ Super remains viable is to ensure that the economy grows faster than the increase in the number of elderly. But that begs the question of how to ensure that the economy grows.
One of the biggest flaws in our economy is the lack of New Zealand development capital. There is a real problem for innovative businesses in getting access to venture capital, especially in those businesses we urgently need, such as those in high-tech industries, particularly in regional areas.
The free market has not provided the development capital and diversification of our economic base at anything like the rate we need it. The way to get it is partnership between Government and the private sector.
There are many examples of the way partnership could work. In a couple of weeks we are going to release a major background paper looking at the sorts of economic development investment which is needed and some of the ways we could go about providing it.
One of the issues which needs much further debate is how the Government can assist with capital formation - particularly for capital investment in the interests of the long term economic development of New Zealand.
It is possible that the government could provide limited assistance to superannuation funds if those funds were to be invested in New Zealand’s economic development
What happens when the Government provides tax cuts for high income earners? They go out and spend their tax cuts, and the Reserve Bank tightens interest rates because of the inflationary effect. Much of the tax cut gets spent on imported products and the balance of payments worsens, which also pushes up interest rates. It doesn’t make sense.
Instead, you could give a tax incentive to, say, low and middle income earners who are struggling just to pay the bills, let alone to save for their retirement, provided the savings were directed into a fund which was contributing to New Zealand’s economic development.
That is one area where superannuation policy could develop in future. Quite a bit of work would be needed, because the potential pitfalls need to be navigated. For example, the policy would need to be carefully tailored to ensure it wasn’t abused by people simply redirecting their savings from elsewhere for tax gains.
Nor would I want to see any scheme develop that weakened the integrity of New Zealand Superannuation. The issue of providing economic development and at the same time boosting people’s voluntary savings must not be allowed to undemrine the fundamental importance of ensuring that the base rate of New Zealand Super is sufficient to enable people to belong to and participate in their communities.
Having said that, I doubt that we will have the revenue to afford incentives for voluntary savings in the first few years of a new Government. The priority has to be to ensure that the current NZ Superannuation scheme provides an adequate income to enable superannuitants to participate in and belong to their communities, and to provide everyone with certainty in planning for their retirement.