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On The Left - It's just Super!

On The Left - It's just Super!

Monday March 13, 2000.

In the early 1970's, the Labour Party, in the interests of improving the status of retired New Zealanders, developed a policy of a pre-funded superannuation scheme. Set up by the Kirk Government, it was the first major attempt to improve pensioners' living standards in a secure way since the original introduction of old-age pensions decades earlier. It applied to all people aged over 65 who had been in the workforce, and was basically a compulsory contributory superannuation scheme.

Then Rob Muldoon won the 1975 election, and among all his other stuff-ups he abandoned the New Zealand Superannuation Scheme and replaced it with a non-contributory (ie tax funded) universal (rather than just to people who had paid for it) super scheme which would be paid to all people aged over sixty. It was extremely generous - paying married couples 80% of the average ordinary time weekly wage - and it increased the number of people entitled to super by over 30% (Oxford History of New Zealand).

"National" Superannuation also, unfortunately, set up the current problem faced - one where a tax funded scheme set at overly generous levels would prove unsustainable in the face of emerging demographic pressures. While it was a genuinely progressive move in terms of providing a new level of retirement income and in being strongly redistributive when combined with high marginal tax rates and an equal entitlement for women, its Achilles heel was the lack of a sustainable funding mechanism.

Through the 1980's and 1990's governments have tried to deal with the problem caused by National's (and Muldoon's) folly in roughly similar ways: by cutting the level of the pension, by clawing it back either through abatements or surcharges, or by raising the age of retirement and cutting eligibility for it. And it has followed that these changes to superannuation have generated enormous political damage to all Governments which have attempted to cut entitlements. The surcharge nearly cost National the 1993 election, and various botched attempts by the previous Labour government to control the spending on super also generated enormous backlashes amongst older people. Labour's 1999 promise to reverse National's 1998 cuts to the rate of superannuation generated a sizeable political dividend for us - something the party is well aware of.

So we come to the current situation, where to the best of my knowledge the rate of superannuation for married couples is 68% or so of the average ordinary time weekly wage. The age of entitlement is on the way from 65 to 67 where it will remain. And the political battlefield sees a well thought through system to secure the future of a universal, adequate superannuation system fighting it out with a mishmash of other ideas ranging from privatisation to compulsory, individualised savings.

It's the political instability that has surrounded superannuation as a topic that needs to be addressed. When you look closer at the issues underlying this debate, there are a couple of areas which need to be discussed quite thoroughly. Those are, firstly, whether to pre-fund or not to pre-fund the system, and secondly, the universal versus targeted issue. I am arguing from the standpoint that it is essential to make super sustainable without cutting rates, without raising the retirement age any further and without massively increasing taxation at some point in the future.

A basic issue of inter-generational fairness enters the equation when talking about pre-funding superannuation. Those who say that super should not be pre-funded want a free ride on the backs of future workers. Those who argue that at least some provision should be made now understand that relying solely on future workers paying taxes to support a vastly expanded population of superannuitants isn't the most intelligent idea for public policy to follow. I am in the second camp. While it is true that the total call on the economy's productive ability is the same whether you pre-fund superannuation or not, this argument (which has been raised by others as a justification for continuing with pay-as-you-go) doesn't bear much scrutiny.

If baby-boomers contribute now to their retirement, then however it is done it is a form of saving. Increased saving, public or private, means more investment, either here or overseas. And that increases the productive capacity of our economy, if it's made here, or helps the invisibles section of the balance of payments current account deficit if invested overseas (by the fact that profits would return here, mitigating the outflow of profits earned by overseas companies operating here.).

Pre-funding is a simple ethical issue too. There is no moral justification for saying that those who are working now should enjoy tax cuts, for example, and then have their pensions funded out of general taxes in twenty years or so. A policy doing that would be a collective example of mass free-rider behaviour, and politicians must resist it at all costs. Keeping in mind the desire to keep entitlements as they are now, the choice is a stark one: either engage in some pre-funding of superannuation now, or raise taxes very significantly in the future. I think there's no contest - pre-funding is essential to secure the future of superannuation.

The second issue, whether super should be universal or targeted, is a plain philosophical divide that I think will make total political agreement between National and Labour on super impossible. Put simply, Labour believes in the common-sense provision of some collective services, and superannuation is one of them. National in its current ideological mode cannot even allow itself to consider that anything other than cutting pensions and giving the rich tax cuts to "encourage them to save" might actually work.

There are numerous arguments for universal provision - it removes the disincentive to saving that a surcharge presents, it ensures that all benefit from the system and therefore shores up popular support for the scheme, it reduces transaction costs in the superannuation area by means of basic efficiencies of scale (something a contestable private scheme like Winston Peters' could not achieve) and it avoids any stigmatisation that might be associated with a means-tested scheme. Arguing that it is expensive (the old "why should we give a millionaire a pension" argument) is something that is addressed by the pre-funding argument, and is also rebutted by the fact that the amount saved by the surcharge (about $350m-$400m a year) is only 1% of government revenue - a noticeable but not really significant sum.

Pre-funding and universal provision are two aspects of super policy that the new Government supports in a big way. Details of the scheme that Dr. Cullen is planning are still sketchy, but the preservation of those two core ideas will I think generate very strong public support. If Cullen can manage the process so that there is very clearly no possibility of political interference in the way accumulated funds are used, then the Opposition's lack of any viable alternative policy will ensure that, no matter how much they object now, they will eventually buy into the scheme. Perhaps now, 25 years after the last scheme was aborted, common sense will prevail again in superannuation.

Till next week,

Jordan Carter carters@ihug.co.nz

-- Jordan Carter Auckland, New Zealand

Freedom, Justice and Solidarity


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