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The case for an Eco Nation over pre-funding superannuation: Greeens co-leader Rod Donald spells out why his party does not support pre-funding NZ Super.

Sunday, June 3rd 2001, 12:01PM

The Green Caucus has taken a long time to reach a position on the Government's proposal to set up a Superannuation Fund because we believe this decision is one of the most important we will make in this term of Parliament.

We have discussed the proposal on a number of occasions with Government officials, we have sought independent advice and we have studied carefully the submissions from many organisations on the Superannuation Bill. We had a workshop on the issues at our January policy conference, we have discussed the issue extensively in our caucus and have also sought endorsement for our position from the party's policy committee. We are now ready to share our decision with you.

The Greens support 65 at 65

We have already made public our support for part one of the NZ Superannuation Bill. This guarantees the universal provision of superannuation to everyone aged 65 and over, paid to couples at not less than 65% of the average wage. That is a commitment we stand by because we believe it is important to give all New Zealanders, especially those who are currently on a pension, a sense of stability and security in relation to their retirement.

There is political consensus over the need to stop using superannuation as a political football, and over the need for a secure future for our old people. There is no consensus, however, over how to best achieve this.

The Green Party will oppose a dedicated super fund

The question that all political parties are asking themselves in regard to Superannuation is how can you best provide certainty and security in retirement. In our view, "pay as you go" from general taxation is sustainable and there is no need for urgent or radical changes to fund super. That means that we will not be supporting part 2 of the Bill, the section that creates a fund. We will be voting against that Part of the Bill.

The reforms that we want in order to achieve long term security and sustainability are far more fundamental but they do not involve creating a dedicated super fund. Indeed we believe that setting up a dedicated fund solely for superannuation is contrary to New Zealand's best interest.

So why not a fund?

The Government parties now believe meeting the level of provision we have supported in part one of the Bill is only possible through a dedicated Superannuation fund. They argue that as the baby boomers retire there will be fewer young people to support them. This smaller working age population will, the Government claims, not be able to afford the current scheme without a fund being created now.

Money will be channelled into a dedicated super fund from two sources: budget surpluses and the earnings from the money already invested in the fund. The fund would peak in value about 2030 and eventually disappear sometime next century.

At its peak the fund is projected to meet only around 14% of superannuation payments. General taxation still has to pick up the other 86% of the bill.

In effect the Superannuation Fund delays and smoothes out the increase in the direct cost of superannuation. Taxes rise less quickly but the fund does not eliminate the need for extra tax.

A dedicated super fund is not a new idea. And nor is opposition to it. Jim Anderton said as recently as 1997 that "our present superannuation scheme is a very good one. Not only is it affordable long term, it is by far the best of the available options. It's a scheme to which the whole community contributes this gives us all a stake in our community because we know that just as we contribute for those who are now retired, so those who follow on will do the same for us."

He went on to say "there is a great deal of nonsense talked about the affordability of the present superannuation scheme. The present scheme is perfectly affordable. All analysis and indication show its going to remain affordable until the middle of the next century." We agree.

Population issues are more complex than it first seems.

The need for the fund is also questioned by mainstream commentators. Former BNZ Chief Economist Len Bayliss maintains that the grim picture of a society unable to provide for its helpless elderly has been painted by political and corporate propagandists brandishing demographic projections in order to scare us. Older people are not victims and they are not helpless. Indeed older people are not necessarily even dependants - many continue in paid and unpaid work.

Thinking about dependence reveals a much more complex picture than the Government would have us believe. Firstly not everyone of working age (15-64) is in paid employment - they may be seeking work or they may be full-time parents and caregivers, students, sick or disabled.

The Government has sold the fund by comparing the working age population with superannuitants, but when it reports internationally on New Zealand's aging strategies, it uses the ratio of employed to dependants. Using this ratio the picture is nowhere near as bleak.

For example the proportion of dependants in 1999 is 55% and it is projected to actually fall to 52% by 2030. We're not claiming that there isn't a demographic problem, simply that it is not as simple as the current Government has chosen to represent it within New Zealand.

Looking forward

The Government would like the public to believe the choice is between saving and spending. They claim this fund is providing security for the future.

There is no more insidious form of ignorance than misplaced certainty.

Today's population projections out to 2050 and beyond may sound highly credible, but we must not forget we are doing the equivalent of standing in the time before Richard Pearse (or was that the Wright brothers) first flew and attempting to foresee the world after World War II. Population projections in 1950, needless to say, bear little resemblance to who we are today.

Defining all the challenges which will face our country in 2050 is almost impossible, but there are signposts for the road ahead. One is the projected bulge in superannuitants which has brought on this discussion. Another is climate change. Another is the approaching transport crisis. And yet another is the unsustainability of current agricultural practices in many parts of the world.

Superannuation expenditure is projected to rise to 9% of GDP by 2050. Health expenditure is also predicted to rise even more dramatically, reaching 10% of GDP by 2050 under some scenarios. Where is the tax smoothing to pay for this?

The Government is making only a pathetically small attempt to invest now in preventative health. If we could improve our quality of life, improve our diet, exercise more and reduce heart disease and cancer in the next five decades, then maybe we could reduce health expenditure down to 7 or 8 percent of GDP, a saving of 2% of GDP. Putting money into preventative health now would free up money in the future.

We saw in the latest budget that the Government is struggling to fund health and tertiary education. On the day of the Budget, university staff and chancellors were on the streets with their students, protesting about the shortfalls they face. University staff, unlike the Greens, do not pick up a banner at the drop of a hat. There are serious funding problems there, and a commitment to set aside $2.5 billion in 2004/2005, and bigger amounts in future years, is only going to make things tighter.

Two and a half billion dollars. That's close to half the annual education budget. When you look at all the green projects we're getting started out of the $16.4 million of budget funding that we negotiated with the Government, you realise that $2.5 billion is a hell of a lot of money that could otherwise go towards creating an Eco-nation. And that's only the beginning.

Climate change adaptation will tax our resources to the limit. Yet the Government is investing only tiny amounts of money to reducing our dependence on fossil fuels and streamlining our economy to cope with the inevitable shocks which will result from climate change.

If we can reduce our dependence on imported oil and private motorised transport in the next 50 years we will be less vulnerable in a climate constrained world. If we have a better educated people and lead the world in ecologically sustainable industries, then we are more able to pay for an ageing population to live in dignity, and the inevitable and as yet unimagined other challenges we will face.

We need to create a strong, supportive society which can adapt to meet the challenges as they come up. The question we ought to be asking as a nation is how do we best prepare for an uncertain future. And in general that doesn't mean putting all your eggs in one basket, or in this case all your investment towards dealing with one issue. In essence, if it makes sense to smooth taxes to pay for super, then it makes sense to smooth taxes for a whole range of reasons rather than focus solely on super. Yet there is no sign of this.

Budget surpluses should also be used to reduce the net crown debt which is currently around $20 billion and costing us a significant amount of interest each year. This is a prudent strategy compared to investing up to half the fund in international stock markets.

From this broader perspective, the rationale for a dedicated super fund comes down to the fact that it is deceptively easy to crunch the numbers, scare people and mount a campaign. But it was far from obvious to our caucus that diverting large sums of money into a dedicated super fund is the best way to invest money to secure the future.

Just, sustainable future The Green Party went to the people of New Zealand with a commitment to just, sustainable future. Our vision of an Eco-Nation includes full employment, people living healthy fulfilling lives, less violence, less pollution, stronger communities, more cooperation, less consumption of energy and resources and a better quality of life. We want an ecologically sustainable, socially just and peaceful world NOW, not never. Taking such a stand is politically courageous but if we do not have the courage of our convictions then we do not deserve to be in Parliament.

If we thought this fund was at worst benign then we may have simply stood by and let it pass. But it is far more than that - we are talking about the shape of Government investment for decades to come. We agree with the Government that budget surpluses need to be well spent, not only to provide security for future retirees but also to create a healthy and vibrant place to live for all New Zealanders in the next 50 years and beyond. Where we diverge is on the question of HOW and WHERE it should be invested.

The Government is still wedded to the market-driven dogma of the 80s and wants to put money in the hands of private sector fund managers to invest in the global share market. The Greens want to invest in New Zealand's sustainable development. The Government says we must put money aside for superannuation. The Greens say it is important to prepare New Zealand for ALL the future risks we face and to create a healthy, environmentally sound, loving place to live - an eco-nation - rather than pretend that superannuation funding is the only problem on the horizon.

The elderly of 2050 require more than a guarantee of superannuation levels.

They (that is to say we) require a society that respects and provides a meaningful role for elders, that is safe for us and our whanau, and that can meet the full range of social and health needs required for full enjoyment.

A pension is little use if one lives in fear, in substandard housing, in a polluted and degraded world which has little time for the voice of experience. Providing for super is important but so is preparing for global climate change, which could be just as expensive.

Yet creating a future where people have healthy relationships, where we have a friend in each decade of life, and our quality of life is enhanced requires investment now, in our nation rather than overseas stocks and bonds. We applaud the idea of thinking about the future but in our view the Government's focus has been too narrow. Our concern is that by creating a false sense of certainty over superannuation payments, we place more pressure on equally important parts of our society.

We would have had fewer problems if the Government had proposed a sustainable development fund to help prepare New Zealand for an uncertain future. Such a fund could invest in New Zealand until it was no longer viable and only then look overseas. And the returns could add to the Government revenue in a way that helps spread the costs of any future burden.

Budget surpluses could be used to regain control of strategic productive assets such as Transrail and Contact Energy and they must be used to invest in new sustainable infrastructure such as solar and wind energy generation, energy conservation, the transition to organic farming, bicycle ways, public transport, rail and a whole host of other green policies that reduce government and citizen costs and/or increase revenue. If we do not make the strategic investment New Zealand needs over the next few years, superannuation funding may well be the least of our worries.

A stronger, more confident, more sustainable nation will be more able to afford future costs. Yes some taxes will rise, but they will rise anyway if we are to create a nation worth living retiring in. The Greens propose shifting taxes off work and enterprise and onto waste and pollution. If over time we must raise this broad range of taxes a little to meet the agreed needs of New Zealand, then so be it. But it may also be that an Eco-nation requires less expenditure, not more, in everything from crime to health to unemployment benefits.

Last but not least, in an Eco-nation we would be heading for full employment. One of the most effective ways to improve the employed to dependent ratio in the future is to commit to achieving full employment.

More people in work means more taxpayers and more tax revenue to meet the cost of super. Investment needs to be made now in education and training to improve the employability and productivity of workers. We also need to plan for more people who reach the age of 65 to stay in the workforce if they wish. This is already part of the Government's positive ageing strategy and is internationally acknowledged as one way of maintaining prosperity in an ageing society.

A comfortable retirement is not solely a State responsibility. We believe Universal public provision of superannuation needs to be matched by a more encouraging approach to private saving. There are several ways to encourage people to think actively about private provision on top of a universal scheme. One obvious approach, closely linked to investing in people, is lifting real wages so that people have discretionary income to put aside for the future. Other measures include removing the tax disincentives that work against employers offering superannuation to lower paid workers and removing the tax distortions created by taxing capital gains in super funds but not property. We have already raised this latter issue in our submission to the tax review.

Political consensus

We now come to the question of how to stop superannuation being a political football. The Government says that unless the Fund is locked in now a future right-wing government will cut taxes and then cut pensions. The Greens say that those cuts will simply happen somewhere else if we artificially claim to create certainty in respect of super. It is only political pressure which would stop future governments raiding the fund, that same political pressure would come to bear on any Government backing away from universal provision of super at the agreed rate.

The political risks are more complex. Another risk the fund presents is that a future Government could transfer the bulk fund into individual accounts and a contributory scheme. This could severely discriminate against women and Maori. More fundamentally it also undermines the collective social contract at the heart of pay as you go. And it's much easier to create individual accounts with a fund!

Equity between and within generations is at stake as well. The Superannuation Bill provides certainty for present and future retirees yet as a society we do not offer the same certainty of state support for our young, our unemployed, our parents, our low income families or our sick.

Indeed Child Poverty Action has commented this year that:

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

The proposal feels uncomfortable for those of us over 40. We enjoyed free tertiary education and we are now looking forward to a guaranteed retirement income, whereas those people newly entering the workforce are burdened with student loans and at the same time will be required to contribute to the Superannuation Fund.

It's important to see that the Government is scrabbling for votes on the super fund. This is not a cross-party consensus that the Greens are destroying. Perhaps the Government will now realise that a true cross-party consensus requires consultation before, not after, a solution is announced.

We are doing our best to teach the Government about consensus, but we're the first to say we have a way to go.

Ethical investment

If none of the arguments above sway you then consider the problems we would have with how the funds are to be managed. Firstly, the Government intends to play a "hands off" role by handing the funds over to Guardians who in turn will contract with private fund managers to invest them. This will place a significant proportion of government revenue in the hands of the private sector. Instead of the government choosing how to spend that revenue in the best interests of society as a whole the Guardians' of the Superannuation Fund will be focussed narrowly on making "prudent, commercial" investments.

In other words "prudent, commercial" is the over riding factor when deciding what to do with our money. This means there will be little effort to ensure the money is invested to achieve sustainable environmental and social outcomes and no effort to invest the money in developing our local economy.

In fact it is highly likely that most of the fund will be invested off shore, financing businesses which in turn compete with out own capital strapped ventures. Therefore the fund will be used to perpetuate globalisation rather than fostering self-reliance.

In case the fund goes ahead despite our opposition we are endeavouring to move amendments to the investment sections of the Bill but every indication is that the Government does not want to move beyond a token gesture towards ethical investment.

The Green Party wants to use the money to help build New Zealand as an Eco Nation rather than hand it over to private fund managers who are charged with continuing to prop up the current flawed economic model - a model that is looking increasingly unstable.

The clearest indication of the divergence between the Green and the Government on this is seen in the Government's attitude to ethical investment. Our Government seems to regard a fund that chooses a socially responsible investment path over the next century as irresponsible. We say that we are at the point of needing all our hearts and minds to work on creating a sustainable world. Our creativity and our passion needs to go into building a new dream not propping up the present. People will make money out of that, and feel good about it - if that is irresponsible then we are proudly reckless!

The question "without the super fund, how will you pay for superannuation" is a cheap shot. Whether we have a fund or not, there will be enormous challenges ahead, and we have to remember that the fund would only pay for a maximum of 14 percent of superannuation. It is politically appealing to claim to solve the "ageing problem" with this fund - but it is also a gross simplification. The fund is no silver bullet - all this fund really does is transfer risk and uncertainty to other parts of Government activity.

The Greens alternative is a mix of investment in New Zealand and New Zealanders and debt repayment. We need a fundamental shift to an economy that is rich in work and treads lightly on the Earth. Will New Zealand be better equipped in 50 years time if we invest $2.4 billion over the next two years in global sharemarkets, or would that money be better invested in our rail system, our future health, our universities and in debt reduction?

Warning - don't try this at home!

If you think about the situation facing the Government, it is very similar to the financial decisions facing a family with a mortgage on their house and a couple of teenage children. If you're lucky enough to have some discretionary income, is it wiser to use it to pay off your mortgage, to pay

for your kids education and to keep the family healthy; or do you give it to an accountant to play the sharemarket?

For our family, to scrimp on health and education so that they can build up an investment fund makes no sense. The priority for the future is to keep all the family healthy, happy and able to earn a decent income. Surely the same priorities apply for our country as a whole.

In fact it was revealed last week that the Government is going one step further, and is borrowing to pay for the fund. Over the next four years it's planning to increase net crown debt by $3.8B at the same time as it intends to put $6.1B in the super fund. As individuals learned in the 1980's, borrowing to put money into the sharemarket is very risky. I doubt very much any financial advisor would recommend to our family of four that this is a responsible investment strategy.

Conclusion

The Government's position is appealing at first glance - putting money aside for the future appeals as an idea. The Greens say that we are also putting problems aside for the future.

A stronger, more confident, more sustainable nation will be more able to afford future costs. Yes some taxes may rise, but they will rise anyway if we are to create a nation worth living to receive superannuation in. The Greens propose shifting taxes off work and enterprise and onto waste and pollution. If over time we must raise this broad range of taxes a little to meet the agreed needs of New Zealand, then so be it. But it may also be that an Eco-nation requires less expenditure not more in everything from crime to health to unemployment benefits.

The Green solution is about moving away from a model of scarcity and fear to one of opportunity and vision. The Greens have not taken the easy route.

Ours is a principled decision, not one based on political expediency. As the Party that has always looked to future, we know that this decision is about a lot more than funding future superannuation expenditure.

The challenge for New Zealand is to find a national identity built around security and prosperity. We welcome a national debate, but what we need is a national debate on our future, rather than just on funding superannuation.

We do not do current or future generations any favours by pretending otherwise.

 

SUPERANNUATION FUND

The Green Party thinks:

The situation facing the Government is similar to the choice facing a family

with a mortgage on their house and a couple of teenage children: if they are

lucky enough to have some discretionary income, would they use it to pay off

their mortgage and pay for the kids' education or would they give it to an

accountant to gamble on the sharemarket?

 

 

The Green Party supports:

• stability and security for retired New Zealanders;
• prosperous communities that value and look after their old people;
• universal provision of superannuation to everyone aged 65 and over;
• guaranteed retirement income of 65 per cent of the average ordinary wage.

The Green Party opposes pre-funded super because:

• the present superannuation 'pay as you go' scheme is a good one;
• the proposed fund will put a large amount of capital in the hands of private fund managers: there is no system of democratic accountability of the Guardians of the fund and no requirement for them to invest ethically;
• an intelligent state should never increase borrowing to increase savings;
• the fund will be used to perpetuate globalisation rather than foster self-reliance;
• it would be better to use the money to achieve full employment, increase productivity, improve people's health, reduce net crown debt, regain control of strategic assets, invest in new sustainable infrastructure in order to build the framework for an Eco Nation.

Greens oppose pre-funding - story here

To read Rod Donald's full speech CLICK HERE
Find out Michael Cullen's reaction here

This is a speech Greens co-leader Rod Donald made to the party's annual conference.

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