Dr Cullen's Casebook - July 2001: The New Zealand Superannuation Bill

The New Zealand Superannuation Bill should be passed through all its stages soon.

Part 1 of the Bill enshrines existing entitlements to provide universal superannuation from 65 years of age at 65% of the average weekly wage for a married couple.

Part 2 of the Bill deals with financing arrangements for the Fund which will build up for around the next 25 years in order to smooth over the cost of superannuation in the future. It will finally give superannuitants some certainty about what the government will be able to provide for them and will allow us to maintain a universal pension that guarantees a basic minimum standard of living.

By requiring the government to set aside funds, it will ensure that these long term cost pressures are taken into account in annual fiscal decisions.

Both National and the Greens have promised to retain the existing pension but without saying how they will pay for it. That is irresponsible and utterly lacking in credibility.

Labour and the Alliance believe that in order to secure New Zealand Super during the transition to an older population structure, without placing an unfair burden on the workers of the future, we have to begin putting money aside now.

Today the net cost of NZ Super is 4 percent of GDP. By 2050, it will be 9 percent. We cannot afford to ignore the reality of this problem.

A window of opportunity
The baby-boom generation (people born between World War II and 1965) are now in their 40s and 50s and are at the peak of their earning power. This is the time to start putting money away for their retirement.

New Zealand is now in a pattern of rising structural fiscal surpluses. This means we are in the black, with spending being relatively low compared to the tax take. This gives us a window of opportunity to start saving now to help pay for the baby-boomers when they retire.

In recent decades New Zealand has not been able to run large surpluses. This is mainly because past National governments ate into any surpluses as they emerged with things like Think Big projects, SMPs and tax cuts.

How will the Fund work?

Right now we have a "pay as you go system", where NZS is paid out of the government's current tax receipts.

The proposed Super Fund is similar to schemes used in Ireland and Canada and is known as "smoothed pay as you go".

It is about creating an investment fund that will accumulate and invest funds. These funds will be drawn on to add to the "pay as you go" system to help pay NZS in the future.

Contributions to the Fund will be paid from general taxes. The amount put aside each year will vary but will be sufficient to meet current NZS payments and to make provision for future increases in NZS costs.

Between 2005 and 2010, it is estimated that the portion of the required contribution rate associated with pre-funding costs will be 1.7- 1.8% of GDP and surpluses are estimated to be greater than this.

The Fund's assets are projected to peak at around 50% of GDP sometime between 2023 and 2029. The Fund balance would then fall gradually and approach zero sometime late in the 21st Century.

Why not just pay off debt?
There are two reasons. One is that a diversified fund will, over the timescale we are talking about, earn more than the government will save by paying off debt. The second is that a dedicated fund is both more demanding on contributions and easier to defend. Under the scheme we have in front of Parliament, there is a formal calculation made about what needs to be paid in each year to meet the costs of NZS over the next forty years. If the government does not put that money in, it has to do two things: explain why, and explain how it is going to get back on track.

Isn't this borrowing to save?
No. The Fund is built up from transfers out of operating surpluses. Capital financing is driven by a range of other, unrelated considerations. For example; the Crown takes on hospital borrowing rather than having our hospitals borrow directly from the market, the defence acquisition programme and the need to build new prisons.

The real question is whether the government is meeting its target of bringing net crown debt to below 20% of GDP.

We are within that target with crown net debt at around 18 % and projected to remain around that level in future years.

Why not just cut taxes and let Kiwis look after themselves in retirement?
Tax cuts have not stimulated the economy in the past. Nor have tax cuts encouraged New Zealanders to save for their own retirement. Instead tax cuts have made New Zealanders more confident about taking on new debt, pushing up private borrowing and the balance of payments deficit.

The Fund, on the other hand, will be available as a potential source of investment in the productive sector through the New Zealand stock market. It will also invest overseas and so the profits from those investments will be returned to New Zealand. This will take pressure off the balance of payments.

What is National offering?

National promised the people of New Zealand a policy on superannuation if they were not going to back the government's scheme.

Instead, all they have managed to deliver is yet another committee.

National wants to set up a 10 member NZ Superannuation Authority to be responsible for overseeing the delivery of New Zealand Super.

This proposal is a cop-out to hide National's lack of a credible alternative to the government's partial pre-payment scheme.

As well it exposes National's real agenda as the authority's primary task would be to review all pension entitlements at least once every six years to ensure the continuing medium-term sustainability and affordability of New Zealand Superannuation.

This is fancy language for cuts to the pension.

What's the alternative to a Super Fund?
Like other developed countries, New Zealand faces an ageing population. In the future there will be fewer working age people for each retired person. More people than today will be receiving NZS, which will lead to a significant increase in the costs, associated with the pension.

Who will look after the Super Fund?
We are now in the process of appointing the nominating committee that will be responsible for short-listing candidates for appointment to the Board of Guardians who will, in turn, appoint the CEO and the fund managers.

The Board will be responsible for determining the investment strategy of the Fund, allocating portfolios to fund managers to invest and monitoring the performance of these portfolios.

If the Board makes investments that are not in the best interest of the Fund or if members behave inappropriately with the Fund's assets, the Governor General will be able to dismiss members of the Board.

Does the Super Fund mean that I do not need to save for my retirement?
It is important that all New Zealanders save as much as they can for their own comfort in retirement. New Zealand Superannuation is not meant to replace personal savings. We will continue to consider policies on other aspects of retirement provision, such as private saving, once the Bill has been passed. The more you have saved yourself, the easier your retirement will be.

How can we trust future governments not to raid the Fund?
Similar schemes in the USA and Australia work and are protected by the 'law of political gravity'. This means that as the funds grow, people can clearly see where their pension for their old age will be coming from. This expectation, along with the fund itself, becomes too strong a force to deny or remove. In other words, no political party will be able to tamper with it once it begins to build because it would be political suicide.

	News and happenings from the Office of Hon Dr Michael Cullen	July 2001