Gordon Campbell | Parliament TV | Parliament Today | News Video | Crime | Employers | Housing | Immigration | Legal | Local Govt. | Maori | Welfare | Unions | Youth | Search

 

Government's Superannuation Policy Wrong

Data Flash (New Zealand)

The lack of debate on this issue has been disappointing

The Government is close to introducing legislation for the pre-funding of future state pensions. Under that policy it is intended to keep fiscal strategy over coming decades focused on the achievement of ongoing budget surpluses in order to build up a large superannuation fund. According to long-term projections, the fund could grow to around $75 billion by 2030.

The savings plan has been motivated by the adverse consequences future demographic changes could have for the fiscal accounts. With an aging population, future taxpayers will have to carry an increasing burden in supporting a growing share of superannuitants. It has been argued that, in the absence of a large savings pool, fiscal policy choices would include slower growth in superannuation payments, a significant rise in taxes or a budget blowout - or a mixture of the above.

We consider the plan to build up of a massive savings fund one of the most far-reaching fiscal policy decisions taken in many years. Given its significant implications for the future course of the economy, it has been surprising how little debate the proposal has generated. Unfortunately, the discussion that has taken place has mainly concentrated on a side issue: the pros and cons of using budget surpluses to build up a savings fund rather than concentrate on eliminating the remaining stock of government debt first. Given that the fund's ultimate dimension would far exceed the current level of debt (around $20 billion), this issue is of relevance only for the initial years of the savings scheme. We believe that the debate about the superannuation strategy should focus on much more fundamental issues.

Fiscal belt-tightening inconsistent with dynamic growth strategy New Zealand's ongoing downward slide on the international income and wealth scale has become of increasing concern. The economy's relatively poor positioning in terms of the transition to a modern knowledge economy underlines the need to focus on a clear vision and strategy for New Zealand's economic development within the global market place. It is imperative that key fiscal policy decisions are consistent with a strategy that is geared towards stronger trend growth and wealth creation. We believe that Dr Cullen's super fund proposal fails that test.

The savings fund strategy prescribes decades of belt tightening for the economy in order to achieve ongoing substantial fiscal surpluses. This fiscal policy approach implies, for example, that company taxes will remain significantly above levels that would make New Zealand an attractive location for international companies;

the potential for tax write-offs for R&D spending will be limited, which makes it less attractive for companies to engage in such activity in New Zealand; and there will be less room for increased spending on the urgently required upgrade of New Zealand's tertiary education system, which is crucial for providing a larger pool of high class graduates who can compete in the international knowledge economy.

Stating the trade-offs associated with the savings fund in such plain fashion demonstrates, in our view, that the scheme is not consistent with a dynamic growth strategy. In order to analyse the policy choices in more detail, it is helpful to look at the economics behind the superannuation issue.

The economics behind Dr Cullen's scheme The trend of an aging population means that, in a system based on social responsibility, an increasing share of goods and services produced by the working population needs to be made available to the retirees. The state's role is to ensure the associated transfer of purchasing power that is required.

Higher taxes are one option to achieve that transfer. However, the problem is the rising efficiency cost of an increasing tax burden, which would negatively impact on the future growth potential of the economy. That suggests that future tax increases should be limited and that the funding of superannuation payments should be supplemented with other means.

The potential for debt funding of extra spending on superannuation is also limited, as it would cause similar efficiency costs through pressure on capital markets and the crowding out of private investment. The liquidation of a savings pool as a means of supplementing superannuation payments is therefore seen as the key alternative.

The future problem associated with supplementing income with savings is the generation of a supply-demand imbalance: total demand will exceed domestic production. Without access to foreign goods to supplement domestic supply, such excess demand would generate inflation and erode the purchasing power of the combined income and savings pool.

`Access to foreign goods' in this context is to be interpreted as being able to fund the purchase of imports by selling foreign assets or having foreigners buy domestic assets without generating downward pressure on the NZ dollar. A weakening NZD would equally generate inflation and lead to erosion of purchasing power.

These considerations suggest that - in order for a savings strategy to be effective in dealing with the superannuation issue - it is crucial that the build-up of the savings pool is matched either by an improving external balance sheet of the economy or an increase in productive domestic assets that are attractive to international investors.

With New Zealand's net external liabilities already at a very high level by international comparison (around 85% of GDP), an improvement in the international balance sheet is supposed to play a significant part in the adjustment process. That would require a reduction in the current account deficit relative to the size of the economy.

In order to achieve a rise in national savings, the Government is proposing a strategy of holding back domestic demand growth through continued tight fiscal policy. We are sceptical about the merits of this approach for two reasons. International evidence suggests that there is likely to be some slippage as the private sector reduces its voluntary savings in response to forced savings through the government. More importantly, however, we would expect persistently tight fiscal policy to depress the trend growth rate of the economy, which would, in turn, hold back the generation of savings and slow the growth rate of the tax base.

The alternative approach: focus on growth The preferable alternative to Dr Cullen's savings scheme would be to ease the fiscal constraint on growth. That does not mean old-fashioned fiscal pump priming, but a structural shift from a contactionary to a neutral fiscal stance, which would allow the pursuit of economic policies that increase the international competitiveness of the business sector. Such policies include, for example, reductions in the company tax rate, tax deductibility of R&D spending, and the improvement of the tertiary education system. Compared to the Government's strategy, this approach would provide a stronger economy in the future and thereby increase average incomes at a faster rate.

Promoting stronger growth is an alternative way of dealing with the problem of rising superannuation costs in the future. A broader tax base increases tax income available for redistribution without the need to raise tax rates. For example, if the New Zealand economy grew by, on average, 3.5% per year instead of 3%, it would be 16% larger in real terms in 30 years. Under the 3% growth scenario average tax rates would have to be raised by around 5% in order to raise the same tax revenue as in the 3.5% growth scenario.

A further advantage of a stronger growth scenario is that improved levels of living standards would enable policy-makers to gradually reduce the relativity between wages and pensions and still leave pensioners better off than they would have been under the slow growth scenario.

Unfortunately, the Labour/Alliance Government has significantly exacerbated the future superannuation problem by recently re-raising the floor for the relativity between wages and pensions to 65%. Dr Cullen's argument that the economy cannot grow itself out of the superannuation problem only applies because of the inflexibility his Government has recently re-introduced to the system. Unfortunately, the National Party has decided to support that policy.

The issue of proportionality between wages and pensions demonstrates that the solution to the superannuation problem is associated with a clear trade-off between equity and efficiency. The stronger growth route implies reduced equality. Maintaining a higher degree of equality, on the other hand, requires pre-funding of future pension through a savings scheme - at the cost of leaving the economy as a whole worse off in the future.

Conclusion: solution to superannuation problem has to be consistent with growth strategy

Our analysis has argued that a more even income distribution in the future would come at the expense of a lower average living standard for New Zealanders. Given that the New Zealand economy is in desperate need of a credible growth strategy, we do not believe that this is time to give equity considerations priority. Fiscal strategy should be focused on measures that, over time, provide the best aggregate return to the economy in terms of growth and wealth creation. Thirty years of fiscal belt tightening does not appear to be the right policy to achieve that.

Ulf Schoefisch, Chief Economist, New Zealand (64) 9 351 1375

This, along with an extensive range of other publications, is available on our web site http://research.gm.db.com

In order to read our research you will require the Adobe Acrobat Reader which can be obtained from their website http://www.adobe.com for free.

For answers to your EMU questions, check Deutsche Bank's EMU web site http://www.db.com/emu or email our helpline business.emu@db.com.


© Scoop Media

 
 
 
Parliament Headlines | Politics Headlines | Regional Headlines

Werewolf: What Does Winston Peters Want His Legacy To Be?

A lot of people in New Zealand seem to resent Winston Peters and the power that he appears to have. “Appears” being the operative word. In reality, Peters will have power only up to the point that he uses it.

By next week, he’ll have become just another junior player in an MMP governing arrangement, battling to hold onto the gains he was promised. More>>

 

Rising Toll: Road Safety Needs To Be A Higher Priority

Official advice released to the Green Party under the Official Information Act shows that the previous National Government dismissed an option to make road safety its most important transport priority after being told the road toll was rising. More>>

ALSO:

Wellington.Scoop: Arrests At Blockade Of "Weapons Expo"

“We encourage people in Wellington to get down to the Westpac Stadium now for a day of awesome peace action. There will be plenty of food, music and activities to keep us sustained through the day.” More>>

ALSO:

Rorschach Restructuring: PSA Taking Inland Revenue To Court Over Psychometrics

The Public Service Association will be seeing Inland Revenue in Employment Court over its intention to psychometrically test employees reapplying for their roles at the department as part of its controversial Business Transformation restructuring plan. More>>

ALSO:

Nuclear Disarmament: Nobel Peace Prize 2017 Awarded To ICAN

Congratulations from iCAN Aotearoa New Zealand to international iCAN, the other iCAN national campaigns and partner organisations, and the countless organisations and individuals who have worked so hard for a nuclear weapons-free world since 1945. More>>

ALSO:

Expenses: Waikato DHB CEO Resigns

An independent inquiry has identified that Dr Murray had spent more than the agreed $25K allocated for relocation costs, and other unauthorized expenses involving potential financial breaches of the chief executive’s obligations. More>>

ALSO:

Wellington.Scoop: Sad About The Trolley Buses?

The Regional Council’s MetLink is today spending money to tell us that it really loves Wellington’s trolley buses, even though they’re all being taken off our roads by the end of this month. More>>

ALSO:

Post-Election: Preliminary Coalition Talks Begin

New Zealand First will hold post-election preliminary discussions in Wellington with the National Party tomorrow morning and the Labour Party tomorrow afternoon. More>>

 
 
 
 
 

LATEST HEADLINES

  • PARLIAMENT
  • POLITICS
  • REGIONAL
 
 

Featured InfoPages

Opening the Election