What can we expect on Superannuation
Jim Anderton MP Mon Aug 30 1999
What can we expect on superannuation from the next Government
Jim Anderton MP
Leader of the Alliance & spokesperson on superannuation
1999 Superannuation Funds & Funds Management Conference
Waipuna International Hotel, Auckland
Embargo: 9.00AM Monday, 31 August 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. I want to emphatically refute that statement.
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 increases in NZ Super are matched by increases in tax paid by wage and salary earners. In this way it 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. Your programme for this conference reveals that you have scheduled sessions on 'demographic bulge'. I hope that one fundamental point is made clear to you: 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.
Why did they do that, when their own research and their own participation in the Super Accord had proved that NZ Super is sustainable?
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 the entitlement to 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 sickness benefit. It will only be available to anyone who has no other income, such as from a superannuation fund.
The idea is that eligibility will be set low enough to provide an incentive to force people to save for themselves.
That is why the Alliance is not participating in the Super 200 Taskforce fiasco. The Taskforce is completely politically compromised. It's members have largely been put in place because of their notorious compatibility with the National Party's ideology. It has been set up to provide political cover for the National's Party's plans to abolish universal superannuation. It is now coming out with utterly false and discredited claims about the sustainability of NZ Super.
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.
It would cost approximately $200 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 around $10 a week for each superannuitant.
The National Party claims we don't have the money for that. But then it insists that there is $400 million available to give a ten dollar a week tax cut to people on incomes over $40,000 - it's planned next round of tax cuts.
Who needs ten dollars a week the most - People earning over $40,000 a year? Or superannuitants?
So the Alliance will make NZ Superannuation available from age 65, and we'll boost the cash value of it.
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 other 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.
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. The Alliance has published a major policy setting out how this can be achieved. It's called Partnership 2000, and a copy is available from my office.
One of the issues the policy deals with is the potential for the Government to assist in capital formation in the interests of the long term economic development of New Zealand. One option that the Alliance contemplates is 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.
And I must stress that any scheme would not be allowed to develop in a way 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 undermine 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. It is our aim to achieve both goals, together.