Submission

To the Finance and Expenditure Select Committee

 

The New Zealand Superannuation Bill

 

Susan St John

 

Senior lecturer

Economics Department

Auckland University

Private Bag 92019

Auckland

New Zealand

fax 09 373 7427

ph 09 3737599 ext 7432

Home ph  09 3778889

 

Thank you for the opportunity to submit on this bill.

I wish to appear before the committee to speak to my submission. My contact details are above

 

Susan St John

 

Background

·        Deputy Chairperson Periodic Report Group Review 1997.

·        Consultant to International Pension study, Institute of Fiscal Studies, London, 1998

·        Presented paper on NZ pensions at the International Research Conference on Social Security in Helsinki, Finland, 25-27 September 2000

·       Member steering committee on development of net worth survey, Statistics NZ and the Office of the Retirement Commissioner

 

Recent publications include

 St John S.  ‘Superannuation in the 1990s: Where Angels Fear to Tread’ in Dalziel P, Boston, J. and S. St John (eds) Redesigning the Welfare State in New Zealand: Problems, Policies Prospects  Oxford University Press. (1999)

St John, S  and Gran, B.  ‘The World’s Social Laboratory: Women Friendly Aspects of New Zealand pensions’ in  Women, Work and Pensions: International issues and prospects Editors: Jay Ginn, Debra Street and Sara Arber, Open University Press, UK  forthcoming 2001

St John, S  and  Willmore, L. ‘Two legs are Better than Three: New Zealand as a Model for old age Pensions’  accepted Journal World Development forthcoming

St John, S. ‘The New Zealand Pension System’ in Pension Systems and Retirement Incomes across OECD countries Edited by Richard Disney and Paul Johnson, Institute for Fiscal Studies. Forthcoming 2001

 

Abreviations:                                                            

NZS                 New Zealand Superannuation

NZSB              New Zealand Superannuation Bill

NZSF               New Zealand Superannuation Fund

PRG                Periodic Report Group

 

General summary

 

I do not have many specific comments on the bill because the problem resides more in the  accompanying political claim that the NZSF will give certainty and security to future retirees. I would like to see the wording of the bill reflect the more modest contribution the fund will actually make.

 

While I support the idea of the state accumulating some assets before the babyboom retirement, debates about the division of future output between the old and the young, about the size of shares and the shape of NZS are not resolved by this bill.

 

If there are genuine surpluses in boom conditions, and only if, I believe it is highly desirable that the government buys assets and puts them on the balance sheet. Prefunding may then enhance national saving by preventing inappropriate tax cuts such as those of 1996 and 1998.  The pressure might therefore be lifted from monetary policy with lower interest rates than otherwise would be the case. By some tenuous connections, the current account deficit might be lower and the economy might improve. Business confidence may also be enhanced if the fund acts to underpin the ailing sharemarket. Overall we might have improved quality of investment.

 

Whatever future government expenditures we face, it will be useful, as it was in the past, to have the income from Crown assets to supplement taxation.  While fiscal prudence should not require placing a ring placed around NZSF assets and reserving their use for NZS specifically, the idea of the fund may be what it takes for the public to accept that tax cuts for the babyboom generation are not warranted.  The thrust of this submission is that the concept of NZSF may therefore be helpful.

 

However NZSF should not be tied to promises about the shape of NZS. The bill unhelpfully gives the impression that the fund itself guarantees the pension, and this is reinforced by accompanying political comments.

 

 

Part one

 

This sets out the existing parameters of NZS. It unfortunately indicates little flexibility for the future design of NZS.

 

It is good to see the commitment to the 65% floor for NZS, but even that, and certainly other parameters of NZS may need to change over time. There must be a suitable process to allow for measured change and adaptability as the pressures of ageing, some of which are unknown unfold. (see Part 3 below) 

 

There are also several immediate design issues. The 1997 Periodic Report Group for example, thought that marital status should not determine the rate of an individual’s NZS. Two single people who share accommodation have the same economies as a married couple and it is hard to see why they are treated differently.

 

 

Universal pensions

 

Part one locks into place the entitlement of each person, whether working or not, whether wealthy or not, to a generous universal pension. The PRG 1997 reported on the skewed nature of the distribution for today’s retired. The babyboom retirement is likely to see the very affluent minority increase and the gap between the top and bottom of the distribution continue to widen.   The difference between the % amounts clawed back in tax for the pensioner with no other income and those in the top 5% of the distribution is (39%-15%) or only 24%.  It should be noted that for many wealthy older people the top rate of 39% rate is easy to avoid. So the maximum rate many pay is only 33% or less. The wealthiest of those over 65 get as much as three-quarters of the pension of the least wealthy (as compared to 0% with the surcharge). The progressivity of the current system is thus very low to support a universal pension of the magnitude of NZS.  (The answer is not to reduce the level of NZS!)

 

In the context of a welfare state that is tightly targeted and a system in which children have lost the right to universal healthcare and a universal family benefit and students no longer have universal tertiary education, universal pensions must be questioned.

 

The loss of the surcharge was regrettable[1]. At very least it clawed back for  those still in the workforce in an equitable manner. Can we now expect there to be an expansion of universal provisions for the rest of the population too, along with a tax base broadening and a more progressive tax structure?

 

While  Part One  may attract political support in the short term, it is difficult to see how it can be the basis of long term agreement in light of the obvious social inequities. Intergenerational conflict is likely and the NZSF does nothing to avert that. 

 

Child Poverty Action (2001) have written in their publication ‘Our Children the priority for policy’[2]

 

Increasingly, the obligation to pay into the superannuation fund will constrain the ability of government to increase either social welfare benefits or family payments. While there may be good arguments to support fiscal prudence, and the fund may prevent the further damage done by tax cuts, intergenerational conflicts have not been discussed. One outcome of the superfund may be a neglect of children’s increased levels of poverty.

 

Reducing the pension, or making payment of it conditional on means-testing, would not solve the problem. The pension is a success story, as it has removed most of the elderly from poverty. An attack on the old cannot help the young. However, we suggest it is unjust to apply the universal principle so selectively. To be fair, the cost of paying pensions to very well-off older people without requiring any additional clawback must be compared with the costs of extending the child  tax credit to all low income families. p21

 

 

Part Two

 

Section 44

Lesser amount of annual capital contribution

 

This section is far too rigid. The fiscal situation in any one year may not led itself to capital contributions of the magnitude calculated, and the economy may remain weak so that the catch up for the next years may be implausible too. In this case the whole edifice of certainty and security is threatened. If the promise of not increasing taxes for current payments of NZS cannot be met what message will the public take about the point of the NZSF?

 

The capital contribution will take precedence over other important fiscal choices. It is highly questionable that there is a widespread agreement of the primacy of the needs of the elderly over the needs of other groups as the government has asserted. New Zealand has a serious problem of child poverty. At the margin, investment in the younger population may be a much better safeguard for the future of retirement pensions than siphoning off money for the fund

 

Section 47

Withdrawals from the fund after 2020

The bill envisages that the fund will eventually run down (to zero?). It is difficult to understand the reasoning. Capital withdrawals will require sale of assets. Asset sales, as opposed to only using the income from the assets, to fund current expenditure could be dubious macropolicy. Once the assets are sold, the higher contribution of GDP required for the permanently older population will all have to come from tax. 

 

If the more modest aim of the fund was to provide income to supplement tax sources it would not be necessary to run the fund down.

 

The sale of assets to fund NZS by no means solves the sacrifice problem of the working age population. After all they could have benefited from the proceeds from the sale (had these not be appropriated by the old).

 

 

Part Three

 

The original Accord and the regular 6 yearly reviews provided a process for measured change. It is not clear what role these reviews now play. Will the Retirement Income Act 1993 be repealed?

 

The provision of consultation with the signatories to this bill in Part 3 before changes are made is an inadequate substitute for an accord process. It does not, for example, imply that consensus will be sought, nor that there is an independent chair for the process.  Yet a reasonable degree of consensus must be the firm basis for ongoing stability and certainty.

 

The PRG report ‘Building Stability’ set out some clear guidelines for achieving political consensus. It is of concern that these ideas along with the rest of the report has been ignored.

 

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Appendix

 

 

Comment

Security and certainty may be enhanced, but only to the extent that New Zealanders believe they have a pension not a welfare benefit. The funding is only partial and hence the size of NZS will always be a political decision.

 

The political power of the old is overstated. The issues is not whether they would not vote themselves into poverty, but whether the wealthy and well protected old can see the basic inconsistency in universal pensions for them and tightly income tested assistance for the young.  Intergenerational conflict is likely to be aggravated by the passage of the NZSB

 

Prefunding does not reduce the costs of NZS. The use of the fund for NZS is always at the expense of using the money for something else. If the wealthy old are to have universal pensions, children and young people will make do with less and the sick including the old will get less.