Kiwiblog

In my Herald column of 28 October I wrote:

Introducing the principle of means testing, is another very welcome step. I think it is wrong that we pay millionaires such as Sir Bob Jones, NZ Superannuation.

Sir Bob has e-mailed to comment:

Dear David,

Before using a photo of me to make your point you could have enquired whether I actually receive the Government super, which I have been eligible for over the past seven years.

The answer is I don’t. It is essentially a form of welfare which I absolutely don’t need.

That said I have been shocked at people of considerable wealth whom I know and who do take it.

Just possibly I am not just the only New Zealander who doesn’t have a cellphone but also the only eligible Kiwi who doesn’t take the super.

Best wishes,

 

Bob Jones

My thanks to Sir Bob for putting the record straight. In hindsight I am not surprised he doesn’t take it. I wonder how many others do not take it, whom are entitled to?

In my column at the Herald, I cover Labour’s Savings Policy. Some extracts:

New Zealand has the most generous public superannuation scheme in the world. …

So Labour have opened the doors for a national debate on both the age of eligibility and on means testing NZ Superannuation. They deserve praise for such a bold step. Our current scheme is too generous and unsustainable. …

Labour’s policy overall has a mixture of good and bad. I think it is an improvement over the status quo, and their willingness to advocate the age change gives them greater credibility. It’s a bold start to the campaign to tell New Zealanders that our taxpayer funded superannuation scheme is too generous. It almost reminds me of the Phil Goff of old, and yes that is a compliment.

I find it amusing that even when I praise Phil Goff, some nutters attack me for being too partisan.

In my latest blog at Stuff I foment a small amount of mischief by musing whether Labour’s stealing of ACT’s policies means an ACT/Labour Government is now more or less likely than a National/Green Government

Labour’s detailed policy is not online, but according to this Herald report, this may all be a smokes and mirrors policy. Why do I say that? Well the Herald reports:

Mr Goff said Labour recognised for some New Zealanders, to continue working beyond 65 such as those doing physically demanding work and would introduce a “Transition” payment at the same level as NZ Super which could be accessed between the age of 65 and 67.

Now my reading of this is that people aged 65 and 66 will be able to access the payment, which is at the same level as NZ Super. Sothat means they will be getting Superannuation from age 65, just under a different name.

There is a current benefit for those close to retirement, but it is far below the level of superannuation. A transition payment at the same level as NZ Super, is well NZ Super.

Maybe Labour is proposing that superannuation for 65 and 66 year olds be means tested – you only get it, if you are not working or earning below a certain level. If this is the case, then Don Brash will be endorsing their policy even further – means testing and a higher age. For if you are going to means test 65 and 66 year olds, why not 67 and 68 year olds also?

I  also look forward to the reaction from Andrew Little to this policy. Here is what Andrew said in 2010 about raising the age:

Retirement Commissioner Diana Crossan’s proposal today to raise the retirement age from 65 to 67 is unfair and won’t work, says New Zealand’s largest private sector union, the EPMU.

“In a low wage economy sch as New Zealand shifting more of the burden of superannuation funding onto working people doesn’t make sense,” says EPMU national secretary Andrew Little.

Will the New Plymouth candidate stand by his words?

Also David Cunliffe seems unconvinced:

Labour will keep Super as it is – will National?

Labour is committed to keeping both the current age of eligibility and entitlement level for New Zealand Superannuation, Opposition Finance spokesperson David Cunliffe said today.

“Labour is committed to retaining the age of eligibility at 65 and entitlement at 66% of the average wage,” David Cunliffe said.

That was in 2009.

I’m starting to think No Right Turn is right in his analysis:

its a cynical, calculated ploy to wedge National against their own base while driving voters to Winston, who is Labour’s only hope of government. Winston, of course, will veto any increase as the price of his support, so its an empty threat, purely for show, dishonest as well as evil.

They are desperate to get Winston back in.

UPDATE: Now seen Labour policy here. It confirms they will means test superannuation for 65 and 66 year olds.

3 News have just announced that Labour have done a massive u-turn on the age of eligibility for superannuation. After 15 years of scare-mongering and saying National will put up the age (which led Key to rule it out so definitively), they are saying if elected they will increase the age of eligibility from 65 to 67, starting in 2020 and ending in 2033 with an increase of two months a year.

I personally warmly welcome the policy. The current age is not sustainable in the long term. This policy gives Labour greater credibility on economic issues, even though I suspect their motivation is more trying to force the PM into breaking a promise than a real belief in raising the age. But regardless of motivation, it is a good policy and congratulations to Labour for putting the issue back on the table. We should be debating not just the retirement age but the whole design of our public superannuation scheme. This is the first step towards being able to have that debate.

There will be some opposition – the unions traditionally have been very opposed to an age increase as manual workers are less able to keep working until 67. Also Maori groups are normally opposed as the average life expectancy for a Male Maori is just 70, which means the numbers of years they would receive superannuation is reduced by 40%.

The biggest challenge Labour may have, is their coalition partners. There is no way Labour will form Government alone. The Greens might sign up to such a policy, but one can only assume Winston will fight it with all his might. Is this a case of Labour promising it, knowing they won’t have to implement it? Would they have made this policy pledge if they were at 40%?

The challenge now for National is to respond to the policy. The PM unwisely ruled out any change to the entitlement age not just in his first term of office, but for his duration as PM, so it doesn’t leave them a lot of room to respond. If they maintain that there is no need to raise the age, then Labour will gain in the economic credibility stakes – not necessarily enough to overcome all their other negatives, but any gain will be welcome for Labour.

As a fiscal conservative, I welcome Labour’s policy on the retirement age. I’ll cover the other aspects once they are released.

David Fisher at the HoS reports:

Grey Power is studying a proposal to take the pension away from retired people who earn more than $80,000 a year.

Studying is probably a euphemism for ritually burning.

The proposal, leaked to the Herald on Sunday, was written by Grey Power’s Coromandel representative, Mac Welch, and distributed by the organisation’s president, Roy Reid.

Welch described national superannuation as “unaffordable” and said the Government was “under pressure”.

He wrote of hearing Grey Power members referred to as “old greedies” and it was time to consider means testing.

He said he wanted to start discussion around a $40,000 income trigger for reducing pension payments and completely cutting the payment at $80,000.

Earnings of $80,000 a year work out at $1180 a week. Welch’s proposal would mean someone on that money would no longer be able to collect the $340 a week pension payment as well.

I believe all welfare benefits, including super, should be both income and asset tested.

David Chaston at interest.co.nz writes:

The experts say that without changes – like raising the retirement age – the present system is not sustainable for people who think they are paying into it now.

But the big failure – the really big failure – has been our longterm affection for ‘pay-as-you-go’ systems to fund basic and universal retirement superannuation. Pay-as-you-go approaches only work with positive trending demographics. But we have now converted to negative trending demographics where the proportion of claiming retirees rises and the proportion of working age payers diminishes.

The result will a disaster. People will get hurt.

I’ve said many times – the current super scheme should be locked off and guaranteed for those who reach 65 before say 2025 or even 2030. But a more sustainable scheme that takes account of initiatives such as KiwiSaver should be designed for those retiring after 2025.

Basically, someone who finished high school with the School Certificate qualification in 1962 will be aged 65 in 2011, and eligible for NZ Super.

Statistics NZ has relevant data of earnings and taxes from 1962 and we can use that data to track the earnings in that working life – and from that data determine the taxes paid over that period.

Essentially, our statisically average person will have earned about NZ$1.4 million and paid about NZ$342,000 in tax, taking home a pay packet of a little over NZ$1 million over those 50 years.

Converting these raw earnings and taxes to 2011 dollars, they earned NZ$2.7 million, paid NZ$620,000 in taxes, and had take-home pay of a bit more than NZ$2 million.

However, for the next 20 years of retirement, they will claim in 2011 dollars NZ Super to the value of NZ$544,000 – or almost 88% of all the taxes they have ever paid.

If they live for 30 years in retirement, they will claim almost a third more than they paid in a lifetime of taxes. They ‘break-even’ after 22+ years.

That is a very valuable calculation. The income tax paid by the average retired person will only cover 22 years of super.

That essentialy means someone else has to pay for their lifetime use of all other public services, including their health care needs as they age.

So how do you pay for that? Do you tax the rich pricks?

Even if that other 10+% were taxed at a much higher rate, it is unlikely to generate the funding required to pay for a long-but-normal life in retirement at current NZ Super rates; there are just far too many people about to become retired and eligble for their ‘fair share’.

Nope.

Our only option is to raise the retirement age.

We have left our run too late to adopt a fully-funded approach for people who will retire in the next twenty years. We are stuck with pay-as-you-go over that period.

I agree we need to increase the age. But not just look at that issue. I think we should have a fundamental debate about what should NZ Superannuation look like for those born after 1960. Should it be inflation adjusted or average income adjusted? Should it be income or asset tested? Should there be options such as a smaller amount if you retire earlier and a larger amount if you retire later?

Due to the political necessity to neutralise this issue in 2008, the PM has vowed no changes to super or the age while he is PM. While that means any changes are unlikely to be agreed upon in the next six years, it doesn’t mean political parties can’t start talking about what superannuation should look like for those born after 1960. We can’t afford to delay the decisions by a decade or more, as that won’t give enough time to implement changes.

United Future released yesterday their superannuation policy which allows for a retirement age of between 60 and 70, with the amount you get increasing the longer you leave off claiming it. They also propose making KiwiSaver compulsory.

Their policy is designed to be cost neutral.  what it would mean is the choices for a single recepient might be:

• Age 60 – $249/week
• Age 65 – $339/week
• Age 70 – $546/week

I think the policy is a good step in the right direction. However as it is cost neutral I think it also might not be sustainable over time.

Katie Bradford-Crozier at NewstalkZB reports:

Politicians have rejected suggestions of raising the retirement age to 67.

Retirement Commissioner Diana Crossan says politicians have their heads in the sand over the affordability of New Zealand Superannuation.

She wants it raised to 67 years by two months a year from 2020 to 2033.

Prime Minister John Key says he has more important things to do than look at raising the retirement age.

He says that’s not going to happen under his watch as he has a lot of things to consider between now and 2020 when it comes to the economy.

Mr Key says he’s given a commitment to Kiwis that he’s not going to raise it.

Labour leader Phil Goff says it’s just not practical.

He says it just makes it harder for people who have worked hard all their lives, who turn 65 and are ready to retire.

The age will rise – it is inevitable. The only issue is how much advance notice we give people.

The increase suggested by the Retirement Commissioner seems reasonable to me. But I would do more than just tinker with the retirement age.

I would lock the current super scheme in place for those over 50. They need certainty so they should not have to worry about future changes.

But for those retiring after 2025 or even 2030, we should have a new sustainable superannuation scheme. The level of payment, the floor and ceiling, issues such as income and asset testing should all be considered. It should be a multi-year conversation or debate, and once concluded then set into place for the post 2030 retired.

Vernon Small reports in Stuff:

MPs’ generous superannuation schemes will not be cut, despite Government plans to slash the subsidies paid to KiwiSaver accounts. …

Since 1992, MPs have been entitled to a subsidy of up to 20 per cent of their salary, receiving $2.50 for every dollar they put in. Those elected before 1992 receive a subsidy equal to 23 per cent of their gross salary.

Asked why taxpayers should subsidise MPs up to 20 per cent when he was winding back KiwiSaver subsidies, Mr English said they were different schemes.

“The MPs’ scheme has been wound down over the last 20 years to something that is pretty similar to what everyone has available to them. In fact, I think a number of MPs are probably members of KiwiSaver.”

There is a vital fact missing from this article. The Remuneration Authority operates on a “total remuneration” basis and the value of that 20% superannuation subsidy is effectively deducted from their salary. If the subsidy increases 5%, then their salary drops around 5%. If the subsidy is decreased, then the salary increases.

Personally I would just pay MPs the full remuneration for their jobs (which would see their pay increase 20%) and leave it up to them to decide whether they put some of it into a savings scheme or not.

The Dom Post editorial:

The $10 billion deficit for the first nine months of this year confirms, if confirmation was needed, that the last government made bad choices. At a time of plenty it chose to buy popularity rather than to save and invest for the future. Worse still, it created an expectation that the bounty would continue to flow in bad times as well as good.

Yep. Labour thought that the economy would never go into recession, ignoring that the tradeable sector had in fact been in recession since 2004/5.

It cannot – a point Prime Minister John Key and his ministers have been trying to get across in advance of next week’s Budget. New Zealand has to get back to living within its means. There are a number of obvious targets for a government looking for what Finance Minister Bill English has quaintly termed the “nice-to-haves”. They include the extension of welfare to families with incomes far in excess of the average wage, interest free student loans and the 65-year age of entitlement for superannuation.

I support increasing the age of eligibility for superannuation. It will happen one day also. But any increase would have to be signalled a good decade or so in advance, so don’t think any change to the age will help get the books back into surplus in this decade. Lifting the future age of retirement is important for the long-term sustainability of superannuation, but again that is a different issue to the shorter-term fiscal challenge.

Instead, Mr Key’s Government is taking aim at the KiwiSaver scheme introduced by its predecessor to tackle New Zealand’s chronically low savings rate.

Under the scheme, people who agree to set aside a percentage of their income for their retirement receive a one-off Government grant of $1000 and tax credits worth up to $1040 a year. The scheme has proved remarkably attractive. It now has almost 1.7 million members. However, Mr Key has classified it among the “nice-to-haves” and is signalling that the annual Government contribution will be reduced, probably halved.

He and his finance minister appear to believe the public will not be deterred by the change. If so, they are graduates of the same University of Spin and Hope as their Labour predecessors, who believed that scrapping interest on student loans would not increase the take-up rate. New Zealanders are not stupid. The year before loans were made interest free, 53 per cent of eligible students borrowed from the Government. By 2009 – the last year for which figures are available – that figure had increased to 71 per cent.

KiwiSaver membership involves sacrifices. Contributing the amount required to secure the maximum Government contribution means many members have to make choices between other “nice-to-haves” and even some essentials. However, they calculate that, together with employer contributions, the Government top-up makes the sacrifice worthwhile. Reduce the top-up and many will review their participation.

For most employees, they will still be getting a massive subsidy. Someone on $28,000 will still get around $2.50 into their KiwiSaver account for every $1 they put in. That’s a 150% return on investment compared to 10% most funds deliver. I doubt too many people will dump KiwiSaver becuase their return on investment is 150% instead of 200%.

Those who get most hard done by the Government’s changes are self-employed like me. As I pay both my employer and employee contribution, then I’ll personally be quite a bit worse off by the Government’s proposed changes. But I had been saving plenty anyway, prior to KiwiSaver, so to some degree the KiwiSaver subsidies were just a way to maximise my return. And the Government should be focusing its scarce tax dollars on those who most need it, not people like me.

The Government has a choice. It can encourage the current generation of workers to save more, or it can pander to the “grey” vote by maintaining the pretence that superannuation for all at age 65 is affordable when it is patently not. It cannot do both.

It has made the easy choice, not the right one.

The reality is the age does need to increase, but not until around 2025 by my calculations.

The Herald reports:

The retirement eligibility age should be increased from 65 to 67 by 2033, a review recommended yesterday – but Prime Minister John Key said there would be no change on his watch.

Retirement Commissioner Diana Crossan believes the age should start to increase from 2020 by two months a year until 2033, when it would reach 67.

I agree entirely. One could also do it starting in 2024 and increasing by three months a year.

Mrs Crossan also proposed changing the formula used to calculate the annual increase in superannuation.

It is now set as a percentage of the average annual wage.

But Mrs Crossan said that from 2020, the rate adjustment should be based on the mid-point between the increase in the consumer price index and the average weekly earnings.

She said the changes were essential to preserve New Zealand Superannuation for the next generation.

The Commissioner is very brave, and correct, in recommending this. National Super is unaffordable in the long-term indexed to the average wage.

All other benefits are CPI adjusted only.

The compromise of having the increase be halfway between the CPI increase and the average wage increase is excellent. It means that in real terms national super will still grow pretty much every year, but that it will become more sustainable.

NZ has the most generous public superannuation scheme in the world. Those currently retired and soon to retire should continue to get it. But those retiring after 2025 (my preferred date) should be on a new scheme along the lines outlined by the Commissioner.

The Herald reports:

A colossal turnout for nationwide protests against pension reform yesterday threatened President Nicolas Sarkozy with a long winter of discontent if he pushes ahead with plans to increase the French retirement age from 60 to 62.

Trade unions comfortably exceeded their target of mobilising two million people on the streets as a nationwide strike disrupted transport, schools, government offices and parts of the media.

In Paris, the demonstration was so large – an estimated 270,000 people, or twice the numbers of the last protest in June – that the march had to be split into two halves.

More than 100 marches across the country attracted 2.5 million people, according to union estimates.

They are complaining about 62, when Australia and other countries are moving to 67 or 68.

It is inevitable that in NZ, the age will increase from 65 also.

The SST reports:

Kiwis could soon be made to save for their old age, with compulsory savings back on the political agenda.

The government will put compulsory retirement savings on the table as part of a review to boost Kiwis’ retirement nest-eggs and reduce New Zealand’s dependence on overseas borrowing.

The fate of the Cullen superannuation fund, KiwiSaver and tax breaks for savings – which could halve the tax paid on some bank deposits and other investments – will also be in the mix.

A working group, based on last year’s Tax Working Group, is close to being finalised, and ministers plan to use its findings as a centrepiece of next year’s Budget, and for the election campaign.

Government sources said PricewaterhouseCoopers tax expert John Shewan would be part of the group, possibly as its chair.

I am not a fan of compulsory superannuation, as it forces people into superannuation funds, when a better investment for them may be paying off the mortgage or investing in their own business.

However KiwiSaver is close to de facto compulsory as it is opt out, and the subsidies are so great you have to be very poor or very stupid not to take them up.

The NZ Herald editorial:

The way in which the National and Labour parties slapped down a welcome entrance by Don Brash into the vexed issue of superannuation did them absolutely no credit.

The Deputy Prime Minister, Bill English, and Labour’s deputy leader, Annette King, were guilty of burying their heads even further in the sand as they insisted, in effect, that there was no problem.

Both said there was no need to change either the qualifying age or payment levels of NZ Superannuation.

And they are both wrong. The changes don’t need to be made today, but they do need to be made by 2025 (in my opinion) and the earlier we do it, the easier the transition period is.

Now Dr Brash has offered a further alternative. He suggests, as have many others, that the age of entitlement should be raised from 65 to 67. But he would also allow people to retire earlier or later on different superannuation rates.

Under Dr Brash’s scheme, people who chose to take the pension early would be paid at a lower rate over the rest of their lifetimes compared to those who claimed it later.

This would not directly reduce the cost of NZ Superannuation – the amount paid out would be equivalent to drawing the pension at the age of eligibility – but it would encourage people to continue working longer, and to continue paying tax.

Don’s proposal has some interesting aspects to it.

As Maori have lower life expectancy than non-Maori, the option to retire earlier at 60 could be appealing to many Maori. If you are likely to be dead by 70, would you rather than ten years on a pension at a lower rate or five years at a higher rate?

On the other hand, if you are in good health and reckon you will be okay until 80, you might well be happy to not claim superannuation until you are 70, if it means then a higher pension for the rest of your life.

There are challenges with Don’s proposal also. But it is a debate worth having.

John Key mentioned in his conference speech that a couple receiving superannuation will come October be receiving $70 a week more in the hand, than in 2008. I thought this can’t be right. Surely Grey Power could not be so grumpy, if this was right – but it is – I asked for the details.

1. 30 September 2008 – $439.80
2. 1 October 2008 tax cuts +$22.94 = $462.74
3. 1 April 2009 CPI adjust +$15.64 = $478.38
4. 1 April 2010 av wage adjust +$11.04 = $489.42
5. 1 October 2010 tax cuts +$21.64 = $511.06

So over two years, the level of married superannuation has gone up a whopping $71.26 a week.

The Herald reports:

A population professor has come up with a novel idea to cope with New Zealand’s ageing population – pay a higher pension to those who have children.

Professor Natalie Jackson, the new director of Waikato University’s Population Studies Centre, says the welfare state is “a great pyramid scheme” based on a pyramid-shaped population with only a few old people at the top supported by growing numbers of young people at the bottom.

“Just like a pyramid scheme, you have to have a continuous supply of new people coming in to support the numbers of old people,” she said yesterday. …

She said society would have to give more priority to children to maximise their contribution to the labour force and hence to the tax base that pays for pensions. And it would have to look at linking pensions to producing children.

“The welfare state has to change, and one of the potential things we might look at is limiting pensions to those who have had children,” she said.

Heh, can you imagine trying to pass that one into law. Best response is from Susan St John:

However, the co-director of Auckland University’s Retirement Policy and Research Centre, Dr Susan St John, said linking pensions to having children “doesn’t bear thinking about”.

“How do men get their pensions? Surely not more based on the number of women they happen to impregnate?”

A fair point!

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.