[pf] Funding our dependents: children and the aged. By Keith Rankin.

     Keith Rankin's Thursday Column
   Super Solution. What's the Problem?
     11 October 2000

· Contains:

  "I would rather live in the world as it is, for all its inelegance and
uncertainty."
   and:
  ".. the classical emphasis on savings is bunkum. Rather, historical
growth has depended on knowledge, ideas, innovation and the social
willingness to allow creativity to flourish. Future growth - under the
auspices of the global knowledge economy - is even more likely to be a
function of cerebral interaction rather than capital accumulation. We /may/
need more savings to build more factories. But we do /not/ need more
savings to build /better/ factories. The United States' economy in the
1990s completely defies classical notions about savings. It grew rapidly
despite (maybe because of) a very low national savings rate." [D.M.'s
emphasis.]

· Glossary.
 - "Superannuation" and Super": Payments to _all_ those 65 and older in New
Zealand, at a rate of 65% (maybe up to 72%) of the average annual wage.
 - "We", "our" etc.: New Zealanders (though I'm posting it for those in
other parts of the world because the reasoning is general).
 - "Michael Cullen", "Cullen": the Minister of Finance (and a fairly bright
fellow).
 - "Cullen Super" (not law yet; for one thing, The Greens haven't supported
it.): Budget surpluses are to be put into this privately-managed national
fund which, together with its earnings, pays the publicly-funded part of
everyone's retirement income. Payouts starting at least a decade into the
future, I believe.

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http://www.scoop.co.nz/stories/HL0010/S00065.htm
  is (after a small amount of editing):

 Michael Cullen's public superannuation scheme is a bit of a worry. Like
the self-regulating free-market economy it's an elegant, indeed clever,
solution. One problem, though, is that an elegant solution imposed upon an
inelegant world becomes a straightjacket. Makers of elegant policy (as
distinct from elegant policymakers) are apt to try to engineer worlds that
conform with the premises of their solutions. I would rather live in the
world as it is, for all its inelegance and uncertainty.
 ...
 An economic critique of such a scheme must go past the politics, and ask
two questions: (i) will it achieve its aims?, and (ii) will it cause harm?
A final judgement must go one step further: is its purpose sound; is
retirement income really a problem that needs a final solution?[-#0-]
 New Zealand already has an elegant and robust system of publicly-sourced
retirement income; a system that, despite tinkering around the margins, has
lasted 25 years through governments of every shade of blue. I have heard
nothing that comes close to a coherent argument for replacing New Zealand
Superannuation (NZ Super).

 The Cullen scheme is, it is claimed, one of prefunding (think of squirrels
saving acorns) whereas NZ Super is 'pay-as-you-go'. Pay-as-you-go implies
an intergenerational contract which works as follows: generations of
working age collectively support their parents and their children, in the
process creating a future obligation for children to collectively support
their children and then to collectively support their parents

 In reality all retirement income schemes are pay-as-you-go. Retirement
income in 2030 represents claims on a share of production in the 2030 year,
and not acorns or bully-beef put aside from 2001 to 2029.

 Whatever system is in place, the total amount of retirement income
(publicly and privately sourced) in say 2030 will be determined by two
macroeconomic parameters. The first [-#1-] is the size of the annual
'economic cake', otherwise known as 'real GNP'. The second [-#2-] is the
fraction of real GNP that is distributed in the form of public and private
retirement income. (The 'Cullen fund' will become the public subset of the
annual 'retirement income fund'.)

 There is a third crucial parameter;[-#3-] the degree of equity with which
the retirement income fund is distributed.

 We must assess the merits of Cullen Super vis-à-vis NZ Super on each of
these three parameters.

-#1-
 The size of the 2030 economic cake will be determined by the average rate
of GNP growth over the next 30 years. (There is an important difference
between GNP and GDP growth. Over the last 25 years, New Zealand's GNP
growth has been much slower than its slow GDP growth. GNP represents income
accruing to New Zealanders rather than production in New Zealand.)

 Will Cullen Super cause the GNP growth rate to be higher than under a
continuance of NZ Super? Many economists, most of whom can see through the
prefunding concept, nevertheless support any policy that leads to an
increase in a nation's rate of saving. This is because classical economics
postulates that the rate of savings is the critical determinant of
investment (in plant, machinery, infrastructure and education) which in
turn determines the rate of economic growth.

 New Growth Theory, however, suggests that that classical emphasis on
savings is bunkum. Rather, historical growth has depended on knowledge,
ideas, innovation and the social willingness to allow creativity to
flourish. Future growth - under the auspices of the global knowledge
economy - is even more likely to be a function of cerebral interaction
rather than capital accumulation. We may need more savings to build more
factories. But we do not need more savings to build better factories. The
United States' economy in the 1990s completely defies classical notions
about savings. It grew rapidly despite (maybe because of) a very low
national savings rate.

 Social capital theory also gives a persuasive account of what really
determines a society's gross product. It's all about reciprocity and trust,
and not at all about being exclusive and miserly.

 Well before the new growth and social capital theories, Keynesian
economists suggested that the classical economists were putting the cart
before the horse. At least in the short run, the Keynesians said, it is
investment that determines savings. Increased savings, per se, generate
recessions, not expansions. (As economists say, an increased propensity to
save leads to a reduction in aggregate demand.) Further, Keynes said "in
the long run we are all dead", meaning that the long run never actually
happens; it's just a succession of short runs. It is a nonsense to claim
that a rise in the savings rate is raising the long run growth rate while
simultaneously reducing the short-run growth rate.

 All the indications that I, as an economic historian, can see suggest that
Cullen Super will reduce the average rate of GNP growth. The cake in 2030
will be smaller than it would otherwise be on account of the loss of the
spending that the accumulation of the fund prohibits.

-#2-
 What about the second parameter? Will the Cullen fund ensure that a
greater proportion of 2030 GNP is distributed as retirement income? The
answer (assuming that the fund grows as envisaged) is a qualified "yes" for
the baby-boom generation, and a resounding "yes" for the following
generation. (Has Dr Cullen thought how his fund might evolve after the
baby-boomers are dead? Generation Y, who will have paid twice, will be well
rewarded in their twilight years; that is, in the unlikely event that the
Cullen fund really does deliver certainty.)

 Of course a bigger slice of a smaller pie is no real solution. Rather, it
will generate a considerable degree of inter-generational conflict.
Generation Y will be foregoing their needs for the sake of their parents'
retirement fund and their grandparents' retirement. They will have every
incentive, and, by the 2020s, much of the political power, to redirect the
proceeds of the fund; for example, to alleviate child and family poverty.
Would it really be responsible to let the children of 2030 get rickets
while protecting their grand-parents' Super fund?

 In reality, the proportion of GNP in 2030 that will be allocated to
retirement income will be determined by today's children in 2030, and not
by Dr Cullen in 2000. We should not try to deny our children the democratic
right to set their own income distribution priorities.

-#3-
 So for the third parameter. Most of the total retirement income fund (of
which the proceeds of the Cullen fund will be just a part) will go to the
more affluent minority of persons of retirement age. Cullen Super, as
proposed, will be neither means-tested nor tax surcharged. Only a small
proportion of the goods and services made available to persons over 65 will
go to those who worked hard in low-pay or no-pay jobs or who participated
in the 'reserve army of labour'. Those people die younger and, when old,
pay rent while depending entirely on publicly-sourced retirement income.

 Cullen Super is a compulsory savings scheme. Rather than balance the
budget across the 10-year business cycle, the government plans to run
budget surpluses every year; big surpluses in boom years and little
surpluses during recessions. We will be paying through higher net taxes
and/or reduced expenditure on health, education, defence etc.

 Who will pay the most through higher net taxes? Whoever would have been
the beneficiaries of lower net taxes will be the losers. I emphasise "net
taxes", because, in economics, benefits and subsidies are accounted for as
negative taxes. High net taxes means, among other things, lower benefits
and lower family support tax credits. It means continued low
income-thresholds for student loan repayments. It means that low income
young people will continue to pay the absurdly high average rates of tax
that are at present driving them out of the country.

 ...
 The best new pension scheme would be to invest our surpluses in today's
children; in their creativity, their technical capability, their historical
awareness and their ethical appreciation of issues such as the
inter-generational social contract. Part A of the intergenerational
contract (the support of children) forms the moral and technical foundation
for part B (the support of the elderly). On the other hand, overtaxing the
young is a recipe for harm.

-#0-
 What is the problem that the Cullen fund is intended to solve? There is no
dependency problem. After all, the dependency rates forecast for 2030 are
no higher than those which prevailed in the 1950s and early 1960s, and in
the period from 1988 to 1992. It's just that a greater proportion of the
"dependent" population in 2030 will carry the label 'retired'. In 1955, a
greater proportion were called 'housewives', 'children' or 'disabled war
veterans'. In 1991, a greater proportion were called 'jobless',
'discouraged workers' or 'domestic purposes beneficiaries'.

 We know, through experience, that the present system of benefits and
pensions can support the dependency rates forecast for 2030. What we do not
know is whether today's young will honour the intergenerational social
contract. Why jeopardise that contract by overtaxing young people of modest
means?

 We overstate - to the point of giving ourselves repetitive brain injury -
the issue of retiring baby-boomers. Having manufactured a problem, we have
created a market for an elegant solution.

 © 2000 Keith Rankin <keithr@ak.planet.gen.nz>

 Thursday Column Archive (2000): http://pl.net/~keithr/thursday2000.html

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sent on to Positive Futures by David.
(David MacClement) davd@ihug.co.nz 
http://www.geocities.com/davdd.geo/index.html#top
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