Putting money in the super cookie jar good idea: Cullen
Finance minister Michael Cullen responds to criticisms over the government's plans to partially pre-fund New Zealand Superannution.
Tuesday, April 4th 2000, 12:00AM
Superannuation commentator Michael Littlewood has attacked the proposal to partially pre-fund New Zealand Superannution as "fiscal and economic window-dressing", "smoke and mirrors", and "a bad idea". Let me respond.
Littlewood’s core thesis is that "we can continue to support an increasing elderly population at current income levels only by growing faster than we are". He deliberately confuses two features of New Zealand Superannuation. Firstly, there is the actual level of NZS – what it will buy in terms of milk and potatoes. Defending the living standards of the elderly does require increasing NZS in line with increases in the cost of living. A growing economy makes it easier to do that.
The problem is that while this is a necessary condition for the defence of NZS, it is not a sufficient condition. The reason is that the current formula for setting NZS also maintains its value relative to the average wage. If – as has been the case throughout most long sweeps of history – living standards for the population as a whole are rising as technology advances, so too should the living standards of the elderly. They should not be frozen into a standard of living defined by the state of the economic art at some arbitrary point in time. If the elderly lose relativity they are gradually marginalise and no longer have the incomes to feel a part of and to participate actively in society.
A growing economy is not a sufficient condition to protect the relative position of the elderly. There are some small technical adjustments that occur when an economy grows, but by and large if the economy grows, wages rise, and if wages rise, NZS rises with them. Growth cannot finance NZS. It can make the retired better off, it cannot reduce the numbers of the retired.
And here is the nub of the matter. The number of over 65 year olds will increase relentlessly over the next half century. Now, NZS costs – net of tax – about 4 percent of the total value of annual production (GDP). That will stay fairly stable for the next decade. It rises gradually to just over 6 percent by 2025, hits 8 percent in 2035 and is only fractionally below 9 percent by 2050.
If we do not have an extra source of revenue – what the superannuation fund is designed to generate – there are very few options. We can double the amount of tax that has to be collected to cover the cost, slash the level of NZS relative to other incomes, or apply a savage income and asset test before paying it out.
The government has rejected these last three options. If there is no fund, Mr Littlewood has to advocate one or a mix of these alternatives. His argument that "we need to agree on the long-term shape of New Zealand’s superannuation is the real smoke screen in this debate: it is code for cuts. I firmly believe that knockers of the fund have a duty to construct the alternative to be put to the public. The more the alternatives are clarified, the more attractive the fund will become.
There are other, lesser, criticisms that Mr Littlewood levels. These too are shallow.
He claims that putting money in the fund, assuming no change in tax or spending, leaves the government’s overall surplus unchanged. True but pointless. The point being that if the government has large surpluses and low debt, and does not put the money into the fund, the money will be spent. It is precisely to avoid spending today rather than saving for tomorrow that the fund is set up ring-fenced from short-term political opportunism.
He says the fund is simply the current scheme with higher payments, extra costs and lower surpluses. The payments are higher today to avoid higher taxes tomorrow. But the fund will be invested in a professional way by independent fund managers. The higher returns and compound interest build up to avoid higher taxes in the future.
Mr Littlewood is making mischief by comparing this proposal with the scheme that was rejected in the 1997 referendum. This scheme is to ensure the continuity of NZS. The referendum scheme was designed to replace it. It is the opposite of the referendum proposal.
Finally, it is true that there are no constitutional arrangements that can prevent future governments raiding the fund. That is why a dedicated fund, targeted to finance future pensions, enlists the force of democracy as its ultimate protector. A government that tries to raid the pension fund of the people to finance a spending binge will not get the numbers.
Mr Littlewood says that "the government of the day will simply reorder its spending by taking more superannuation payments from the fund’s cookie jar and less from the general tax jar" Precisely. We don’t want to have to take twice as much from the general tax jar. That is why putting money in the super cookie jar is such a good idea!
To see what Michael Littlewood had to say about Labour's proposed super fund CLICK HERE
What do you think? Have your say on Super in the discussion forum. TO GET THERE CLICK HERE
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