Kiwiblog

I am of the view that the current superannuation scheme is not sustainable. In fact almost everyone who has studied the long-term demographics is of this view. Treasury, especially, has done some excellent work in this area.

The Government has ruled out changes while the PM is PM. I understand the politics of why that decision was made (to reduce the scare mongering from Labour) but regret it was made. However just because the Government is not going to change anything in the next few years, is no reasons why we can’t start a discussion on what sort of public superannuation system we want in our future. We know a future Government will confront this issue, so let’s start the discussion now.

Rather than focus on tinkering changes to the current system, I’m hoping over many posts we can have a first principles discussion on what our public (or first tier) superannuation should look like to be fair and sustainable. Second tier superannuation incidentally is workplace scheme such as KiwiSaver and third tier are other private superannuation schemes.

However the reasons changes to superannuation has been so politically lethal in NZ, is because the changes have been to the current scheme, and affecting those already retired. I understand the upset this can cause when changes are made that affect someone already retired. How would you like it if overnight your pension is means tested?

Therefore what I want to propose as a first principle is that the current superannuation scheme be preserved and locked off for the currently and soon to be retired. No more changes of any sort – including both upwards and downwards changes. This would give absolute certainty to those retired, and also prevent politicians such as he who must not be named as trying to make the current scheme even ore expensive for taxpayers.

The current scheme is:

1. eligibility age 65
2. NZ citizens and permanent residents who have spent both at least 10 years since aged of 20 and five years since age of 50 in NZ.
3. A floor so that the pension for a couple after tax is no less than 66% (and a ceiling of 72.5%) of the average ordinary time earnings after tax.
4. The single living alone rate is 65% of the couple rate
5. Inflation adjusted annually
6. No income test
7. No asset test

The above scheme is incidentally thought to be the most generous in the world, with no asset or income testing and a link to the average wage.

So to allow us to design a sustainable scheme for the future, I propose the current scheme be locked off, as per a certain date. The key question, is what date.

I would propose around 2025. In other words, those aged 50 or over in 2010 would still get the current scheme. The costs of the current scheme would remain high through the 2020s and 2030s, but from 2040 to 2050 fall significantly so by 2050 less than 10% of retired people would still be on it.

The population projections are:

• 2010 – 586,000 over 65s
• 2015 – 698,000 over 65s
• 2020 – 811,000 over 65s
• 2025 – 944,000 over 65s
• 2030 – 779,000 over 70s
• 2035 – 606,000 over 75s
• 2040 – 431,000 over 80s
• 2045 – 264,000 over 85s
• 2050- 130,000 over 90s

So a 2025 cut off date, would give those aged 50 or over at present certainty, but by 2050 only a small number of people would still be on the scheme.

I am specifically interested in feedback on two things:

1. The principle of preserving and locking the current scheme for the currently retired and near retired.
2. The desired date to cut off the current scheme, and have a new scheme come into force.

People may be interested in what the numbers would be like if one had a 2020 or a 2030 cut off. For 2020 they would be:

• 2010 – 586,000 over 65s
• 2015 – 698,000 over 65s
• 2020 – 811,000 over 65s
• 2025 – 667,000 over 70s
• 2030 – 517,000 over 75s
• 2035 – 366,000 over 80s
• 2040 – 224,000 over 85s
• 2045 – 107,000 over 90s

For 2030 they would be:

• 2010 – 586,000 over 65s
• 2015 – 698,000 over 65s
• 2020 – 811,000 over 65s
• 2025 – 944,000 over 65s
• 2030 – 1,071,000 over 65s
• 2035 – 884,000 over 70s
• 2040 – 686,000 over 75s
• 2045 – 489,000 over 80s
• 2050- 301,000 over 85s

The problem of waiting until 2030, is you will still have 300,000 people on the “old scheme” in 2050, plus the cost of one million on the “new scheme”.

Incidentally it is likely one might have some sort of transition between the two schemes, but until one has designed the new scheme, you can’t detail a transition.

I was reading through a submission by Michael Little wood in the 2001 Super Fund legislation, and what struck me was that New Zealand has never really had a proper public debate on how we want our “tier 1″ public superannuation structured.

Some of the issues one can debate are:

• Eligibility Age (was also 65 in 1898 when life expectancy was 60)
• Residency Eligibility (how long someone should have lived here)
• Level (do you tie to CPI, median wage, average wage, GDP, )
• Different levels by age – should it be at one level at say age 65 and a higher level at say age 68 or 70
• Regional Variability – should the level vary based on where you live, to reflect living costs – as the Accommodation Supplement does
• Income Testing
• Asset Testing
• Pay as You Go or Fully Funded
• Level for singles as opposed to couples
• Hospital Rates
• Payments to overseas based people

But I don’t want to debate any of those options today. We’ll deal with them one at a time over the next few months. Just because the politicians are saying there will be no change, doesn’t mean we can’t have a debate.

The question for today, is what is the date at which any future changes should start to apply, or conversely for how long should we guarantee the current settings?

I believe it is very important not to make changes quickly. It is unfair on those who have already retired or are near retirement, who have made plans based on what the Government has said. This is also what provoked so much outrage in the 80s and 90s.

So this is not about what the current Government’s policy should be, as it has been made clear that is not going to change anyway. This is about when a future Government might want to make changes.

The cost of public superannuation as a % of GDP is projected to be the following by Treasury:

2010: 4.7%
2015: 4.8%
2020: 5.3%
2025: 5.9%
2030: 6.7%
2035: 7.3%
2040: 7.7%
2045: 7.8%
2050: 8.0%

I tend to think 2025 looks about right. If one started to change the age from 2025, that would mean those aged over 50 would still retire at 65, but under 50s would know it is likely to be older.

It is basically about balancing up minimising the impact of changes on those already retired or close to retirement, and the fiscal impact of any delays.

Up until what date do readers think the current scheme should be guaranteed to remain as it is? My pick is around 2025, but what do you think?

The Herald reports:

Lifting the age of eligibility for superannuation to 67 could save future taxpayers at least $100 billion by 2061, says a study made public today.

I have no doubt some future Government will move to increase the age to 67. The move from 60 to 65 was a transition that took ten years to do (off memory). So a transition from 65 to 67 probablyonly needs a 5 to 7 year lead in – even though longer is always better.

The crunch starts to come around 2030 so I would expect whoever is in Government in around 2020 – 2023 to start to make the move to a later retirement age.

Personally it would be desirable that at the time of that change, some sort of automatic indexing is looked at, maybe linked to average life expectancy.

Michael Littlewood writes:

From the post-Budget rhetoric, it appeared the National-led Government’s first Budget had struck at the heart of future retirees’ security. Here is what Phil Goff said:

“And the biggest dishonesty is to talk about a commitment to superannuation because there won’t be any money to pay for it – they’ve taken away the certainty New Zealanders rely on.”

According to Mr Goff, “[T]he net result will be that future entitlements to super are put at risk.”

After a week of headlines, let’s look at Labour’s claim. Was Mr Goff right? No, he wasn’t even a bit right.

Not even a bit right.

Now is the time to be putting money into share markets, he suggested, when markets were at their bottom.

Really? There is in fact no guarantee that markets haven’t further to fall. The super fund will be doing really well if, in the next few years, it recovers the losses it has already suffered. All fund managers are in a similar situation so that is no criticism of the fund’s guardians (they were doing what they were asked to do). But the question is, do we really want to borrow $2 billion a year for the next 10 years and put it all into sharemarkets in uncertain times?

If the US economy has another crash in five years time, and agains billions of dollars gets wiped out of funds, will Goff then insist we borrow even more money to invest into the US economy?

It’s scaremongering to suggest that the incomes of future retirees are put at risk by last week’s decision. Task forces of the 1990s concluded that New Zealand is relatively well placed to afford all the costs of an ageing population, including pensions and health costs.

Taxes will increase because the number of retired people will about double but even then, in 50 years, New Zealand will probably be paying quite a bit less than some countries are paying today for their retired populations.

The talk of a crisis, is just talk.

New Zealand can afford New Zealand Superannuation with or without the New Zealand Superannuation Fund, so we don’t have to change superannuation just on account of the Budget’s decision to suspend payments.

To suggest otherwise is to ignore the major independent reviews of 1992, 1997, 2003 and 2007.

That doesn’t mean we have to preserve New Zealand Superannuation in all its respects for the next 50 years. In fact, the country needs a proper, research-led debate on whether the scheme that was set up, essentially, in 1938 is the one we should still have in 2050.

A research led debate would be nice.

There are still cash deficits to finance, so why not sell the fund’s assets to finance these?

This is a risk issue for the Government’s balance sheet – we know the cost of debt but we don’t know what the super fund’s assets will be worth in one or 10 years’ time. In theory, they should be worth more than the accumulated cost of debt, but that hasn’t worked over the last seven years.

Here Michael and I differ on our views. I agreed the Super Fund could be wound up. Higher economic growth will do more to make future superannuation affodable, than the Super Fund.

But I would split the Super Fund into individual KiwiSaver accounts – so it gives people a boost in their private retirement savings.

A somewhat mixed editorial from the Dom Post:

Last week’s suspension of contributions to the Cullen superannuation fund has made one unpalatable fact painfully clear. The age of eligibility for national superannuation is going to rise.

The suspension has not affected that fact significanly. It has always been likely at some future stage. Even Dr Cullen said so.

That is not what the Government says. Both Prime Minister John Key and Finance Minister Bill English say NZ Super will continue to be paid at a minimum of 66 per cent of the average wage from the age of 65.

And that will be the case while they are in office.

The reason the scheme will have to change is that there is a $31 billion hole in the government accounts. That is the hole that will be created over the next decade as a result of the Government’s decision to “temporarily” halt contributions to the fund established by former finance minister Michael Cullen to partially pre-fund the superannuation costs of baby boomers.

No, no, no, no. This is just crap. Even ignoring the reduced debt by suspending contributions, the impact on future superannuation is minimal. Taxpayers in 2050 will fund 91% of super, rather than 88%. The so called hole has minimal impact.

Our level of economic growth is what will determine future affordability.

Stopping contributions to the fund was the right thing to do. Despite the protestations of Labour, it makes no sense to borrow money to speculate on the world’s sharemarkets. Doubters should consider the performance of the fund since it was established in 2003 with the objective of exceeding the risk-free rate of return the interest rate on Treasury bills by 2.5 per cent. Its annualised rate of return is 3.26 per cent about half the Treasury rate and, in the year to April, the fund suffered losses of almost 30 per cent, more than double the average losses of retail managed funds.

Indeed. If the Fund had never been set up, NZ would be in a better position to fund future superannuation. That is a fact – not a projection.

Sure, the world is in the midst of the worst economic downturn since the Great Depression; sure, markets will eventually bounce back; but there is no certainty about which ones or when.

Politicians who think they can read economic portents are free to play the markets, but they should use their own money.

I think it is quite possible that there could be another crisis in five or six years when the level of US Federal Debt gets so high the Government effectively defaults by printing more money to pay its debts.

At midday I blogged about the hysterical nonsense claims that a suspension of contributions to the Super Fund would endanger future superannuation. In fact at worse it means that future taxpayers will pay 92% of future superannuation, instead of 89% – a mere 3% difference.

Now to show how trivial this difference is, look at this answer in the House today:

Peseta Sam Lotu-Iiga: If the Government were to make no contributions to the fund for another 11 years, how would the future cost of pensions compare with that expected when the fund was established?

Hon BILL ENGLISH: Whether there are contributions to the fund, and for how many years they are made, has no effect on the future cost of pensions compared with what was expected. When the fund was established back in 2000, the Government did projections that showed that by 2021 the total cost of New Zealand superannuation plus contributions would be 6.75 percent of GDP. Today’s projections available on Treasury’s website show that the total cost is now 5.43 percent of GDP in 2021. Maintaining New Zealand superannuation has actually become more sustainable because of changes in assumptions relating to demographics and rates of return.

So the cost of future superannuation as a percentage of GDP has dropped in relative terms by 19%. And this suspension of contributions increases the future tax burden by just 3% or so.

Yes one can make a but of a difference around the margins by pre-funding through a Super Fund. But the overall sustainability will be decided by economic growth, and demographics.

The Dominion Post appears to have a front page jihad against the Government. On Friday their front page boomed that it was the slash and burn budget, with holocaust fire type illustrations on their billboards.

Yes the budget that (despite the global recession) protected every existing social entitlement, boosted health, education and justice spending, and cancelled future tax cuts was headlined “slash and burn” as if it was the 1991 Mother of all Budgets. It has been years since I saw such a misleading front page. There are many criticisms you can make of the budget – but calling it slash and burn is not one of them. Disgraceful.

Then on Saturday the Dominion Post cries out “Who will pay for our super?“, saying there will be a $37 billion gap in the Super Fund in 2030, making future superannuation unaffordable.

This is economic illiteracy on two fronts, and I will detail both. The first is ignoring that borrowing to contribute to the Super Fund will equally make future superannuation unaffordable, and the second is what proportion of future superannuation is funded by the Fund.

First of all, it is true that under the 11 year contributions holiday, the Super Fund in 2030 will be worth only $81 billion instead of $118 billion – a $37 billion difference.

But let us look at what the cost of those contributions would have been. Over the 11 years 2009 to 2020, there would be $19.5 billion of borrowing. Then the interest on the borrowing (calculated at 6.73% – the average cost of Govt bonds according to the Super Fund) would be $7.7 billion. So by 2030, the Crown would have an extra $29 billion of borrowing.  The difference between the extra debt and the fund’s level is estimated to be $8 billion – less than 1/4 of the $37 billion cited by the Dom Post.

An extra $29 billion of debt (costing $2 billion a year more in interest) makes future super almost as difficult to pay for, as having $37 billion less in the Super Fund.

And if we get a credit downgrade, leading to higher interest rates, you could end up with debt rising by far more than the shortfall in the Super Fund. Likewise of the Super Fund does not meet targets, you can end up with less money.

What the Dom Post failed to explain, is that what threatens future superannuation is not how much you invest in the Super Fund, but the level of economic growth New Zealand has. The $50 billion wiped off the economy is what has created the problem. You can not grow money – you need to earn it. The solution to future superannuation is increased economic growth – something worth remembering.

Treasury have done a useful report on the impact of the suspension of contributions. Now this only looks at the Fund, not at the overall crown accounts with the impact of an increase in gross debt. But even putting aside the debt issue, the viability of future superannuation is not greatly changed:

In 2050, without a contribution holiday, the withdrawal from the Fund would have paid for 24% of the increase in net NZS expenditure (to GDP) compared to 2009 (or 11% of nominal net NZS expenditure in that year).

This means that in 2050, the Fund would pay for 11% of superannuation, and current taxpayers pay for 89%.

In 2050, with an eleven‐year contribution holiday, the withdrawal from the Fund would pay for 18% of the increase in net NZS expenditure (to GDP) compared to 2009 (or 8% of nominal net NZS expenditure in that year).

And with the contributions holiday, it means that in 2050 current taxpayers will be paying for 92% of superannuation, as opposed to 89%.

So remember this. Even if you discount the reduction in debt and finance costs by suspending contributions (which you shouldn’t anyway), the long term impact is that future taxpayers have to pay for 92% of superannuation, instead of 89%.

So when the Dominion Post bleats on its front page, who will pay for our superannuation, the answer is future taxpayers – as always.

So again, for those who are really slow:

1. It is the lack of economic growth, not the decision to suspend Super Fund contributions, that most impacts the future affordability of superannuation.
2. The suspension of contributions will merely mean that the percentage of future superannuation not funded by the Fund will increase from 89% to 92%

Phil Goff’s (and the Dom Post’s) insistence on borrowing to save is bizarre. Think of the analogy if you are a household.

You earn $60,000 a year. However your living expenses comes to $70,000 a year. You have a $10,000 a year shortfall. Due to this shortfall you are not making any  repayments on your $200,000 mortgage. In fact you are having to borrow an extra $10,000 a year against your mortgage to cover your living costs. Now your house is worth only $350,000 so you know you can’t keep borrowing for much more than a decade before your credit runs out.

Phil Goff’s brillant policy is that you should borrow an additional $2,000 a year and invest it in overseas sharemarkets. That a household that already is borrowing $10,000 a year, is unable to make repayments on its mortgage, is being charged compounding interest – should borrow an extra $2.000 a year.

And Goff claims this will make your household more secure, as it will provide security for your retirement.

Now you might think – wait – we are going to lose our house if we don’t eventually start earning more than we spend. But Phil is saying no need to worry about that.

Now for those of you who agree with Phil Goff, I have good news for you. You as individuals can follow his advice. The Government has decided not to follow Goff’s advice – but you can.

So here is what you should do if you beleive Phil Goff. Head down to your bank manager. Show them your overdraft, your credit card debts and your mortgage. Explain to the bank manager that yes you are spending $10,000 a year more than you earn. Also explain to him or her that you want to increase spending even more, even though your income is unlikely to improve for some years. But then most of all explain that you want to borrow some more money fro the bank, so you can invest it on the sharemarket.

The manager may be hesitant, but explain that you are sure you will make more money in the long run. And offer to mortgage your house further to pay for the extra borrowing. So long as you offer security the bank will eventually agree.

Then after having extended the mortgage on your house, go off to your investment advisor and tell them to invest it in a fund that mirrors the Super Fund.

Now I don’t want to hear any excuses about why you can’t do this. If you want the Government to do this on your behalf, you should have the courage of your convictions and go do it yourself.

The Herald has a story that opens:

The pension minus essential living costs equals a deficit of $129 a week for Papatoetoe superannuitants John and Marian Laurie.

Then later on we see:

They spend $120 a week on food, $30 on petrol, $40 on other personal needs and $150 a week paying off their credit card, which is the only way they have been able to cover their deficit.

Now it is quite misleading to include paying off the credit card as part of essential living costs. And I note that without the $150 a week towards that, then there is a $20 a week surplus.

My comments are in no way a criticism of the couple, who seem very reasonable – more a criticism of the story.

The couple also qualify for an accommodation supplement and a disability allowance, which bring their total income from Work and Income up to $633.50 a week.

This is an annual income from the taxpayer of $33,000 a year. An economy our size is never going to be able to offer much more than that to a retired couple – especially as the population ages.

David Parker manages both with this press release.

The National Government has given its clearest signal yet that superannuation entitlements will be cut in the future, Labour Associate Finance spokesman David Parker says.

Fearmonger No 1

A reminder. John Key has said he will resign his seat in Parliament if he cuts superannuation entitlements. But not even that will stop Labour trying to prey on the insecurity of retired or near retired persons.

“The pensions of tomorrow need to be protected today. National said before and during the election they would continue with payments to the Super Fund, but have now resiled from this.”

And if Parker reads the announcement from Michael Cullen, when the Fund was established, he will see that Cullen explicitly said that contributions are funded out of surpluses and would be suspended temporarily when there is no surplus.

Not even Dr Cullen was foolish enough to advocate borrowing money to save money.

“Mr English argues that he’s not prepared to borrow to fund the investment in the Super Fund, but he’s already done that to pay for his tax cuts – an astounding third of which go to the top three per cent of income earners,” David Parker says.

Then we have the lie – the claimed borrowing for tax cuts. The extra tax cuts by National were fully paid for by reduced expeniture on KiwiSaver. This is a fact. Parker knows this. He just hopes if you repeat a lie enough times, people will believe it.

“Those tax cuts were not just unfair, but they are a substantial cause of the structural deficit New Zealand now faces and are behind the Government’s plan to now cut investment in the Super Fund.

And he lies again. National’s tax cuts are considerably less foregone revenue that the reduction in KiwSaver subsidisies. The structural deficit would be worse, not better, if National tax cuts and KiwiSaver changes had not been made. This is indisputable. The quantum of each is known and the foregone revenue from tax cuts is les than the reduction in KiwiSaver subsidies.

Everytime you hear Labour talk about borrowing for tax cuts – they are lying. They are desperate to have people beleive it, but it is not true, as National reduced expenditure by a greater amount than the tax cuts to pay for it.

If Labour were honest they would campaign on how National reduced KiwiSaver subsidies for tax cuts, and debate the merits of that. Of course they don’t want to, as anyone economically literate now concedes the KiwiSaver subsidies were far too generous.

Auckland University’s Retirement Policy and Research Centre has done a report based on a 2008 OECD survey of income distribution.

They first note that the Tier 1 pension (NZ Super) for a single person living alone is 46% of the median GDP per capita. By comparison, the UK is 13% and US 17%.

The OECD studied how many people of retirement age (0ver 65 in NZ) were below the relative poverty line of 50% of the median equivalised household disposable income. So this is not a study of absolute comfort, but how those of retirement age in a country fare compared to the overall country.

NZ has the lowest level of elderly people in relative poverty. Only 1.5% of those aged over 65 have an income below 50% of the median income. Also at around 2% are the Czech republic and Netherlands.

I’ve often said we have the most generous schemes in the world. The average poverty rate in the OECD was 13%.

Incidentally our poverty rate for elderly has got slightly worse under Labour – it was 1.3% in the mid 90s and is now 1.5%. But not a big change and still way less than almost everywhere else.

Australia has an elderly relative poverty rate of 27%. So wages may be higher there, but the pension is not as generous relative to wages.

Interesting we spend around the same amount as Australia on social spending for the elderly, as a percentage of GDP.

I recommend people read the full report. Good food for thought.

The growing debate over the NZ Super Fund, is an excellent example of how politics has to manage perception, as much as reality.

I doubt even Dr Cullen would disagree that if we did not already have his “Cullen Fund”, he would not propose one in today’s circumstances.

I mean could you imagine getting up, just at the time credit rating agencies are warning that they may downgrade our credit rating, and saying “Hey I have a great idea – let’s borrow an additional $20 billion over the next ten years, so we can invest it in a loss making fund”? I mean, you would get laughed out of the House.

The NZ Super Fund was agreed to on an assumption that we would have a permament structural surplus, and out of that surplus could put aside around $2 billion a year. Maybe there would be the occassional year of deficit, but the consensus was that from 2000 to 2020, there would be lots of large surpluses, and hence why don’t we save some of that money to help pay for the cost of future superannuation from 2020 onwards, when an ageing population will make it harder to cover the cost.

So the whole idea was to save money now, to avoid having to borrow money later.

But we have the stupidity (highlighted by Michael Littlewood this week, but something I have been campaigning on for some time) of borrowing $20 billion over the next decade, to put into the NZ Super Fund. So we are borrowing money, so we can save money, so we won’t have to borrow money? Confused? You should be.  Sounds more dodgy than a hedge fund.

But we now have the politics. In an ideal world, everyone would understand that continuing to borrow money to put into the Super Fund will not in any way affect whether or not future pension levels stay the same. John Key has made a “promise to resign” signed pledge that he would resign if they ever cut the pension level. And in fact his atx cuts have helped boost pensions.

But if he does the sensible thing and say “Oh it is stupid to borrow money (and risk a credit downgrade) to try and save money” and we are going suspend contributions until the books are back in surplus”, then Labour and others will launch a campaign of fear and confusion (remember their 2005 one about National evicting state house tenants) telling pensioners that this means their future pensions are at risk. And some people will believe them.

We see this today in the Herald with Phil Goff demanding the PM come clean on his plans for the Super Fund. And this is simple because Key said they have not changed their position, but they have yet to discuss the issue yet.

John Armstrong warns National to tread carefully:

John Key and Bill English ought to think very carefully before tampering with the New Zealand Superannuation Fund – even if the political risks of doing so may seem relatively slight at first glance. …

A short-term stop on contributions would avoid English having to borrow the money to fund the annual payment into the six-year-old fund. That would make it just a little easier for him to write a Budget which gets international credit rating agencies off his back. It might not be too difficult to convince people that it does not make much sense to borrow money to build up the fund – especially when world financial markets continue to nosedive.

Indeed. But …

There are further reasons not to tinker with the contributions. The first is whether the Government will have the political wherewithal to restart them them once they have stopped. More important, however, is the (mostly) all-party consensus on superannuation policy. It took an age to reach. It will not take much to dissolve it. …

Labour know it is daft to borrow money to save money. Phil Goff is not stupid. But Phil Goff wants to be Prime Minister. So sure as hell he’ll try and politicise what should be a sensible non-controversial move (a temporary suspension of contributions until we are back in surplus) into the equivalent of slashing pensions.

And Martin Kay in the Dom Post reports Peter Dunne is saying don’t do it:

Government support partner Peter Dunne is urging National not to tamper with the New Zealand Superannuation Fund, warning that it would again make state pensions a political football. …

“There’s an argument that because, at the moment, this might have to be funded out of borrowings rather than surpluses, it’s a bit dumb to be doing it. There’s some truth in that, but at the same time, it seems to me that if you’re going through a slow patch economically, given the role that superannuation has long-term, this is the one time not to be putting its future into some jeopardy or doubt.”

So you have the perception in conflict with the reality. You know borrowing to save money achieves nothing in terms of making future super more sustainable. But you know it will lead to a nasty campaign of fear if you suspend contributions.

So I guess you ask, the question the other way around. Sure borrowing to save money doesn’t actually achieve anything, but does it actually do any harm? The cost of the borrowing will be pretty close to the returns from the fund. So it isn’t like a bad policy which actually costs the taxpayers money. It’s just a bad policy that achieves nothing.

So maybe it just isn’t worth the hassle? Just keep the stupid status quo.

Mind you, I’d like a journalists to aggressively ask Phil Goff some questions, such as:

“Mr Goff, if you think the Government can guarantee superannuation by borrowing $2 billion a year to put into the Super Fund, why don’t you advocate the Govt borrow $20 billion a year to put into the Super Fund? Then we could triple the pension”

“Mr Goff, why did your party call for a WINZ staffer to be reprimanded for suggesting a beneficiary borrow money to pay off her debts, yet you advocate the Government borrow money for much the same thing ?”

“Mr Goff, do you think households should follow your advice and borrow money to pay off their mortgages, rather than suspend contributions temporarily”

I suspect the Government will stay with the status quo, as it is just too much hassle for too little gain.

UPDATE: I’m impressed and a bit amazed. The Greens have come out supporting a suspension of contibutions (as have ACT). NZPA report:

And Greens co-leader Russel Norman said any responsible government would reconsider contributions.

“I think people will understand we’re in a very difficult position,” he said on Radio New Zealand.

One can support the principle of the Super Fund, yet agree that it is stupid to currently pay into it, when we are forecast to have to borrow every cent we invest into it for the next decade. Will Goff now accuse the Greens of trying to undermine superannuation?

I blogged on Monday my thoughts on the fiscal crisis, and talked about the stupidity of borrowing money now, as a means of saving for the future.

Michael Littlewood has sent me a response to my post, which I’m delighted to publish. Michael is an expert on superannuation policy and is with the Retirement Policy and Research Centre of Auckland University.

My initials comments are shown in italics and quoted below, and Michael’s comments in normal text below them. My thanks to Michael for his contribution:

The Cullen Fund

The Cullen Fund was based on a premise that as we are going to have surpluses for the next 30 years, then we should save some of those surpluses to meet the future cost of superannuation, so we won’t have to borrow money in the future.

The fatal flaw was always the assumption about surpluses

Not the only flaw – there were at least three others: one that New Zealand in 2020 onwards could not afford to pay for NZS from tomorrow’s economy (there is no evidence of that, despite the ageing population); that somehow, partial pre-funding was better for the economy than the previous PAYG approach; finally that having higher taxes now (to create today’s surplus) was cost-free. This all evidences the previous government’s cookie jar approach to financial management. In fact the Cullen Fund does not change the cost of NZS by $1 but, as has now been demonstrated, can add significantly to New Zealand’s financial risks. And, if I wanted to appoint an investment manager to look after part of my future retirement savings, the government would be last on my list of contenders mostly because no Chinese wall can ever insulate the Guardians from the political process.

but as the years went on and they continued unabated, the opposition to the Fund diminished, and even National signed up to it

Only because it was one of those memorable “dead rats” they had to swallow. Bill English said that you have lost the argument on this kind of policy if you have to explain it. Somehow, New Zealand has to grow up so that we can sensibly discuss this kind of thing.

But we are now in a very different situation. We have a structural deficit, and face massive borrowing for at least a decade.

So the Cullen Fund is now based on borrowing heaps of money today, so we do not have to borrow heaps of money in 25 years? Anyone else see the fatal flaw? Borrowing money to save money is the sort of stuff that caused the credit crisis.

Yes, I agree that leveraging the Crown’s balance sheet to invest in financial markets is a silly idea. But increasing taxes to do the same thing (and creating apparently costless ‘surpluses’) is only marginally less silly.

The Government should seriously consider suspending contributions to the Cullen Fund. We can’t save money we do not have.

And we should also seriously discuss consider selling the Cullen Fund’s investments, even in today’s market. If it makes sense to stop contributions then it makes just as much sense to sell. Not selling in the face of increasing debt is similar to borrowing to invest.

KiwiSaver

KiwiSaver has much the same problem as the Cullen Fund. It is all well and good to help subsidise people’s savings

There is no credible international evidence to support the notion that tax subsidies increase saving. Your statement assumes that, in good times, subsidies are a good thing. They aren’t – tax subsidies to saving are complex, regressive, expensive but, worst of all, seemingly don’t work – based on the best evidence available.

but not if the taxpayer is having to borrow money to do so

No, having to borrow to pay for the subsidies is just a worse idea than having the subsidies in the first place – the need to borrow to pay for them should call their wisdom into question more dramatically.

Because who is going to have to pay back and pay the interest on all that borrowing?

The same argument applies to the higher taxes needed to create the ‘surpluses’ that paid for the incentives in the first place. The counterfactual should be no incentives/lower taxes. Apart from anything else, you ignore the deadweight costs of higher taxes to pay for the incentives.

Those same savers

No, all taxpayers, some of whom are savers.

So once again we have the stupidity of borrowing money today, to help people save. That is not sustainable.

So is having everyone, including the poor who can’t afford to save, paying higher taxes to feed richer citizens’ retirement savings.

I like KiwiSaver

see below

If we were going to continue with record surpluses, it would be great to have a scheme which provides massive incentives for people to save

especially if they don’t actually increase saving (as opposed to savings)?].

But we don’t. Does anyone think Labour would in 2009 have announced the KiwiSaver subsidies they did in 2007? Of course not.

National has wisely already cut the cost of taxpayer subsidies to KiwiSaver. Arguably they need to go further and also look at whether the employee subsidy is affordable. If we need to borrow to find it, then it isn’t.

And what about the tax incentives through the PIE tax regime? That should be up for debate as well.

You see the employer matching contribution is a 1:1 subsidy already, which is massive

but not cost-free to employees. All employees, including the poor who can’t afford to join KS, will help pay for that through lower future pay rises.

Hell most people are happy to get a 10% return on investment and the employer contribution gets you an instant 100% return

Actually no because the 100% is spread over the life to age 65 – you can’t get the money until then.

Now the employee subsidy gets you a further 100% return

No, for the same reason.

so those earning up to $52,000 get a 2:1 subsidy or a 200% return on investment.

Unless the fiscal fortune improves, maybe the employee subisdy has to go also. Sure that means only a 100% return instead of a 200% return, but that is a lot better than the standard 10% return and I doubt it would discourage people going into KiwiSaver. Maybe raise the employer contribution rate to a maximum 3% so the total saved isn’t decreased.

A bad idea for the reasons already given.

We need, as a country, to discuss the retirement saving issue. We never had a proper discussion about these sorts of things in the nine years of the last government. What about the evidence that, before KiwiSaver, most New Zealanders were saving ‘enough’ or ‘more than enough’ for retirement? If you want to see some of the evidence, here is a sample from www.PensionReforms.com – you can see more by sorting the abstracts by New Zealand as the country:

New Zealand’s taxpayers will be spending a lot of public money on new retirement income saving initiatives after nearly 20 years of spending none. Was this decision based on sound analysis of data on New Zealanders’ savings behaviour? Is this policy shift likely to meet any of the stated objectives? Probably not.

Changes to the way retirement incomes are financed should be based on good evidence that is subjected to robust investigation over time. New Zealand missed those steps with its new KiwiSaver scheme, justifying its existence on seemingly dubious economic analysis.

For the last 20 years, New Zealand has had a two-pillar retirement income system – an elegant, universal, PAYG state pension plus voluntary saving. There have been no tax incentives or compulsion for the second pillar of private provision. So, how have New Zealanders responded? Apparently, mostly quite rationally. So what’s the problem?

Strongly negative household ‘saving’ might tell us something about the behaviour of New Zealanders but not whether they are saving for retirement, let alone saving enough. A ‘stocks’ measure of wealth is much more useful than the ‘flows’ of income and spending. more

And here is a report that shows how the existing retired are faring – the answer is “quite well thank you very much”:

The living standards of different types of households cannot be adequately measured without asking the people affected how they are managing and how they perceive their living conditions. That must be done in a systematic way. A new measure allows living standards to be compared across groups and over time. more

I do not favour the government rushing to change things (as it has done with KiwiSaver III). I do favour a full-scale, research based debate on all the things that should matter when we talk about financial preparation for retirement. And the objective of this process must be nothing short of consensus – on the evidence, on the things that matter and on the appropriate public policy settings. Anything less than consensus will sow the seeds for future policy uncertainty. We have had far too much of that over the last nine years.

I really like the changes to KiwiSaver – it keeps the good parts of the scheme, makes it easier for low income employees to particpate, gets rid of much of the paperwork, reduces the overall cost to taxpayers (making it more sustainable in the long term) yet still has huge incentives to save.

I suggest people read the full policy paper.

• Retain automatic enrolment of new employees, with the right to opt out.
• Retain automatic deductions from a member’s wages or salary
• Retain $1,000 ‘kick-start’ payment when people first join KiwiSaver
• Retain the member tax credit, paid by the government into KiwiSaver accounts, which matches members’ contributions up to a maximum of $1,040
• Retain compulsory matching employer contributions – but only for 2%, not 4%
• Retain employer contributions exempted from employer superannuation contribution tax (ESCT)
• Retain annual fee subsidy and the first home deposit subsidy
• Still spend $800 million a year on KiwiSaver
• Lower the minimum contribution rate from 4% to 2%, recognising how difficult it is for some people to put in 4%. Employees can still choose to put in 4% or 8%.
• Lower the compulsory employer contribution to 2% also, to match. Employers can choose to put in more than that but 2% is the requirement.
• Abolish the employer tax credit. Thank God for that – every employer in the land hates it – the paperwork creates more problems than the value of the credit. It makes it impossible to easily budget for staff costs also. The lower compulsory contribution matched with the abolishment of the tax credit means the overall impact on en employer with an employee on $52,000 is fiscally neutral – and no more paperwork!
• Allow employers to pay staff who do not go into KiwiSaver more, but make it illegal to reduce someone’s pay if they choose to go in.
• An employee on $50,000 will only have to contribute $1,000 a year to KiwiSaver and will get a total of $3,000 into their KiwiSaver account – a 200% subsidy. Previously they would put in $2,000 a year and get a total of $5,000 which is only a 150% subsidy. Either way it still represents a huge subsidy and you’re mad not to go into KiwiSaver.

There are also some bribes goodies on the wider superannuation issue:

• Keep floor for National Super at 66% (under Labour is meant to revert to 65% again next year)
• The tax cuts will see a couple on National Super getting $15 a week more in 2011 due to the link to the average after tax wage.
• Lift the partner’s abatement threshold for Super from $80 a week to $100 a week

Helen has a cunning pension plan for her old age. Her massive parliamentary pension isn’t enough – so what will she be relying on? Your children!

I am a very firm advocate of means testing the NZ Superannuation. I think it is silly multi-millionaires get paid a welfare benefit.

Hati Tip: Whale Oil

NZPA reports that Winston has announced the following policies for NZ First:

1. No tax on first $5,200 of income
2. GST to reduce to 10%
3. Superannation to increase to 68% of net average wage

Now once fully implemented, what would be the reduction in the surplus:

1. $14.7 billion of income would have no tax, and with a current rate of 15% would be less income of $2.21 billion
2. GST income would drop by $2.38 billion according to Treasury Ready Reckoner
3. Superannuation at 66% of average wage costs $7.29b so taking it to 68% would cost around $0.22b

So Winston is saying the surplus is large enough to be reduced by $4.81 billion a year. I suspect Dr Cullen does not agree.

I suspect Winston’s proposals would be bad for inflation – which is no surprise as Winston does not beleive in low inflation. They also do little for home affordability – in fact make it worse probably.

Cutting tax on spending instead of a tax on earning is more likely to be inflationary.

Giving every person a tax cut of $780 or $15 a week will see most of that spent not saved.

Boosting Superannuation (already the most generous scheme in the world) will see most of it spent not saved, as retired people tend to spend their savings (as they should).

My ideal package would be increase GST to say 20%, but compensate for that by a tax free threshold for say the first $20K of income. Say someone earns $25,000 on the minimum wage. They would pay $3.630 less income tax if first $20,000 is tax free. Now their current after tax income is around $20,320. Let’s say they spent $15,000 on rateable goods and services including GST. Well an extra 7.5% on that is only $1.000 so they are $2,630 better off.

Middle to high income earners would not fare so well, which is why I would also move to a a top tax rate of 30%, eventually reducing to 25%. Not got time to cost that but the extra GST would bring in $7 billion so could do a bit lowering income tax from that.

Of course the GST increase would have one off inflation issues, so timing would be important.

The Centre for Independent Studies has published a critical analysis of KiwiSaver. I am actually a reasonable fan of KiwiSaver (but not of how they did it with no consultation with business), so disagree with the conclusions in the CIS analysis. However I support most of their analysis, which I will summarise here:

• Most people were already saving enough for retirement, with 80% of couples saving enough to maintain a level of consumption similar to or better than in pre-retirement.
• With KiwiSaver and New Zealand Super combined, it is now possible for a someone on the average wage to retire on a higher income than they enjoy during their working life.
• It is over the top to have a subsidised saving scheme on top of an age pension that is the most generous in the OECD.

This is a very strong point. People are being over-taxed and over-subsidised now. The NZ Super scheme is the most generous in the OECD as it is neither means nor asset tested. You combine that with a scheme that all bar the very stupid or very poor take part in with an average 10% of salary saved per annum, and you end up with higher incomes in retirement than during your working life.

• KiwiSaver largely benefits the wealthy, who can afford to save more.

Yep, and every wealthy person I know is making sure they get the maximum subsidy from the taxpayer, and self employed people are upping their salaries so they get to claim their employer contribution as a tax expense.

• KiwiSaver politically and economically threatens the future of New Zealand Super and makes means testing more likely in the future.

I reached this conclusion during the budget lockup, when it was announced. There is no way in 30 years time we will have both NZ Super (including Cullen Fund) and KiwiSaver. Dr Cullen has actually destroyed the consensus over publicly funded non means tested superannuation. If he was a National Minister, the left would be baying for his blood.

• Evidence from around the world suggests that subsidies for savings schemes do little to actually
  increase overall savings. Instead, people tend to shuffle around existing savings to take advantage
  of the subsidies.

Yep. Most incentives change individual behaviours rather than change the fundamentals. However as the incentives for KiwiSaver are so strong, and as you have to opt out of it in a new job, I do think it will have some impact on overall savings levels.

• It is now more rewarding for people to join KiwiSaver than it is to pay off debt or a mortgage, or
  to invest in business or an education.

The CIS paper actually quotes me as saying “You have to be very very poor or very very stupid to turn down an up to 2:1 subsidy”. And indeed, the level of subsidy is so high that it makes sense to borrow money so you can save it!

• The requirement for employers to contribute 4% of a worker’s salary will put downward pressure on wages and job growth.

Of course. Employers look at the total cost of remuneration. What is unfortunate is those that do not join KiwiSaver may be punished for the cost of those who do join.

• The total cost will rise to $2 billion a year, which is more than New Zealand spends on its entire defence force.

It is a lot of money, and not sustainable on top of the Cullen Fund and NZ Super. But it is not necessairly KiwiSaver which should go.

• The easiest way to fix KiwiSaver is to scrap the generous incentives to contribute,

That is one way to fix the problem, but not my preferred one.

CIS are looking at this in terms of what is best for New Zealand, and they may be correct. But first let us look at this from the view of the left:

1. Penalises poor people who can not afford to save
2. Gives the greatest advantage to richer people
3. Allows rich self employed people to avoid more tax
4. Pushes wages down
5. Undermines universal provision of superannuation
6. Privatises savings from the state to the private sector

KiwiSaver is everything the left should hate. I guarantee you if Bill English had introduced this, it would have been denounced.

Now CIS are saying this is bad public policy, even if it is something the right should love (which demonstrates that they are not as ideological as critics claim).

I support KiwiSaver because it is inevitable that it will lead to means (and maybe asset) testing of NZ Super. And I believe in means testing.

I support KiwiSaver because in 20 years or so (once takeup is near universal) the $50 billion or so in the Cullen Fund will be dished out into people’s KiwiSaver accounts. And after giving over $25,000 to each family, no future Government would ever take it out of their KiwiSaver account.

I support KiwiSaver as I would rather choose my investments manager, than have the Government do it for me.

I support KiwiSaver as it will lead to a reduction in the size of the state.

So while I agree with much of the analysis of the CIS, I disagree with their conclusion to scrap the incentives and subsidies. Instead just wait for the Cullen Fund to be privatised and NZ Super to end up means tested, and probably CPI adjusted instead of wage adjusted.