The Big Cullen Fund: Is it a good idea?
The immediate reaction to the name Cullen is often big, powerful and a winner. Think of All Black fullback Christian Cullen: fast, powerful and a match winner. Think of his namesake, the famous trotter. Again fast and a winner. Now think of the Michael Cullen superannuation fund: big, powerful, but is it a winner?
Monday, June 26th 2000, 12:00AM
The jury is still out on this one, mainly because so little detail is known about the fund, however Finance Minister Michael Cullen confirmed his commitment to the scheme in last week's Budget.
Because superannuation affects every New Zealander it is imperative that there is public participation in the development of a new scheme.
So far the Labour/Alliance Government is scoring high points from the savings industry for its willingness to discuss possible solutions to the super problem. Investment Savings and Insurance Association chief executive Vance Arkinstall says the Government has shown through its actions, and dialogue with the industry that it is serious about tackling the superannuation issue. Likewise AMP manager superannuation strategy Kevin Casey gives the Government 6 out of 10 for its efforts in trying to find a super solution.
"I get the sense that, for the first time in a long time, we are making real progress," BT Funds Management vice-president Myles Baron-Hay says.
Not bad considering the previous Government's efforts on superannuation amounted to the establishment of another taskforce (which has been abandoned following the election).
Before delving into the issues of the Big Fund it's worth outlining how New Zealand's superannuation regime works.
Firstly we are unique the developed world in that we have a two-tiered system which offers no carrot to save, such as tax incentives, nor does it take the big stick approach of compulsion (if you ignore the fact that paying taxes is compulsory).
At the first level there is the state pension, New Zealand Superannuation, which all New Zealanders over the qualifying age are entitled to no matter what their level of income.
This is funded by taxpayers on a pay-as-you-go basis. That is it is paid for out of tax revenue each year.
Currently, NZ Super is the Government's biggest single item of annual expenditure.
The second tier in the structure is the voluntary private provision element. That is if you want a lifestyle in retirement better than what you can have through NZ Super you better save money for it now.
One of the first things the Labour/Alliance did when it won power was to restore the level of NZ Super back to its previous rate of 65 per cent of the average weekly wage.
The concept behind the Big Fund is nothing magic. What Dr Cullen is planning to do is siphon off 8 per cent of taxation revenue each year and put it into a dedicated fund.
Figures within the budget documents show that the dedicated fund would need annual injections of $2 billion after initial input of $3.6 billion spread over the three years from 2001.
The earnings from this fund, which would be managed by private sector businesses, would later be used to help pay for NZ Super.
What is interesting about the fund is that it would grow to be huge and there is the potential risk politicians would plunder it in future years.
Research by sharebrokers J B Were shows that the fund could grow to be somewhere in the region of between $80 billion and $130 billion in size.
Prudent asset allocation models suggest that more than half of this money should be invested offshore, however many billions of dollars would be feed into the New Zealand economy which in turn would fuel growth and the local share market.
One of the major concerns raised by opponents of the scheme is that there is a risk future politicians may plunder the fund for other purposes. To counter that the Government has talked about introducing a mechanism to protect the fund, however research from Victoria University's Institute of Policy Studies shows that entrenching would be "unusual" and very difficult to achieve.
Clearly Labour thinks it has the Super solution and is willing to pursue it, it is unknown how much support it has from other political parties. Alliance leader Jim Anderton has always been cool on the Big Fund idea and Labour has yet to discuss it with other parties such as the Greens, New Zealand First and National.
There are a number of other issues which need to be discussed and decided by the community. Two of the biggest are:
- Should NZ Super continue to be a universal entitlement or should it be a benefit which is either means or asset tested?
- What rate should NZ Super be set at?
The present Government has said a number of times that it sees NZ Super remaining a universal entitlement which would not be means-tested, likewise it has already restored it to its former level.
Despite this there is a strongly held view in the savings industry, and among economists, that even by prefunding NZ Super, as Dr Cullen is proposing, it will become unaffordable in future years.
"It might be what we believe we are entitled to," Mr Baron-Hay says, "but something's got to give in the future."
Mr Casey says setting the pension at 65 per cent is very generous. He says an individual would have to save about 15 per cent of their total earnings during their working life to have sufficient capital to provide a pension at that level.
The savior for future governments in this area may be the different generational attitudes to NZ Super. Current retirees will not entertain the idea that NZ Super is anything but a universal entitlement and they have flexed their political muscle to enforce this view. Witness the abolition of the superannuation surcharge two elections ago and the increase in NZ Super last election.
However, the younger generation (who actually pay the current oldies their pension) have been conditioned to believe that the state won't provide them with an adequate pension.
In the latest quarterly SaverPulse survey of attitudes to retirement savings 84% of respondents disagreed with the statement that they expect the Government will provide them with an adequate pension in retirement.
Another key finding in the survey is that that 70% of people favour some form of compulsory savings scheme to ensure that people provide for themselves in retirement.
What's more this figure has been rising steadily over the past couple of years.
This contrasts sharply with the 1997 referendum on a compulsory scheme promoted by former treasurer, and New Zealand First leader Winston Peters. When put to the vote New Zealanders overwhelmingly rejected the idea.
The Big Fund idea, which is getting all the attention at present, only addresses the first tier issue of superannuation. So far very little has been said about what will happen at the second tier level of private provision.
The current set up is a paradox.
The Government promotes the need to save, principally through the Office of the Retirement Commissioner, while at the same time it disadvantages savings through managed funds by bad tax law.
One of the rare exceptions to this is the recent introduction of the 39 cent tax rate on earnings over $60,000. Dr Cullen has introduced tax changes which allows high income earners the opportunity of avoiding the higher tax rate if they direct some of their pay into registered super funds.
But that may only be the start of incentive. Dr Cullen has talked about the idea of changing the tax system so earnings on savings are tax exempt until they are spent, similar to what the United States government does with its 401 (k) savings plans.
The two key messages for New Zealanders in the super debate are this.
Don't stop saving for your own retirement. While this Government may be being generous there is nothing to suggest that future Governments will be so benevolent.
Secondly, put pressure on politicians to tell them how you want superannuation to be run.
On that point the Government needs to have a full and frank discussion on the options. The last "solution" which was put to the electorate, Mr Peters' fund, was soundly defeated, partly because the public wasn't given a choice beyond yes or no.
There are plenty of other worthwhile options to discuss, such as establishing a system similar to what the Australians do. Adopting their approach may make sense as the two countries are constantly moving closer together on economic and legislative issues.
Mr Casey describes the Australian example as a shared approach to prefunding by the Government and its citizens. A key difference is that the individuals are prefunding their own pension through compulsion and the money is owned by the individuals, rather than the Government.
As Baron-Hay says, the decision lies with the public and they need to take an active role in the debate.
"New Zealanders will get the superannuation system they deserve," he says.
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