Speech: Cullen outlines details of the Super fund
Finance Minister Michael Cullen explains the prefunding idea to economists.
Thursday, August 10th 2000, 12:00AM
From about 2011, the baby boomers start to retire and the cost of New Zealand Superannuation starts to accelerate. By around the middle of the century, it is 9 percent of GDP. It is at around 4 percent now.
Unless forward provision is made, New Zealanders will face three stark choices:
- reduce the level of New Zealand Superannuation;
- introduce tighter criteria by, for example, raising the age of eligibility, applying income and asset tests or withholding NZS from those who are still economically active;
- increase average tax rates to cover the additional costs.
The Government does not believe that any of these options are desirable, defensible or politically sustainable.
As a society, we need to get out of denial or wishful thinking. The demographic projections are not guesses. We can virtually name the people who will be over 65 in 2050. Whichever way you look at it, there is a basic policy question to confront. Cut the pension for the next generation, or start to save for it.
The Fund is not intended to be a complete answer to income adequacy in retirement. It will provide a basic standard of living, but New Zealanders should, if possible, save to augment their income.
Neither are we funding the complete future cost of the pension. The scheme is about partial, not total, pre-funding. A large part of New Zealand Super will always be funded out of current year revenues.
This leads me to design issues. The core question is what sort of money has to go into any fund and where is it going to come from?
I can pose the policy dilemma this way. The aim is to reassure people that New Zealand Super will continue to be available on roughly the same basis it is today - as a universal pension, payable from age 65 at a rate for a married couple equivalent to at least 65 percent of the net average wage.
If too little goes into the Fund, the uncertainties and the lack of confidence remains. It too much goes in, there is an unhealthy reduction in necessary spending on health, education and economic development, among other things.
Certainty increases if governments are locked into a contribution, but this can mean too little flexibility. Flexibility is needed to respond to changing economic circumstances, trends in wages, and changes in labour force participation. It is also needed to deal with unusual economic circumstances – say financial windfalls, very strong revenue growth or the onset of an economic recession.
The details of dealing with this are still under discussion within the Government. Those discussions are nearing finality and I hope to be able very soon to release a detailed position paper for public consideration and for presentation to the other political parties.
But I can tell you now that the proposed scheme is forming around five core elements.
One: a 40-year forecasting time horizon over which the Government attempts to smooth the costs of New Zealand Super.
Two: an independent or at least transparent calculation of how much has to go into the scheme to meet the costs of NZS over that forecast period.
Three: a review mechanism to regularly – and by this I mean probably annually – review the required contribution rate.
Four: an obligation to pay the assessed contribution into the fund. It will be possible to pay in more or less in exceptional circumstances, but any variations would have to be explained to Parliament.
Five: a mechanism to assure Parliament and the wider public that any contributions are fiscally and economically affordable.
Let me now respond to the argument that we should repay debt first. My justification for establishing a separate fund alongside nominal public debt at roughly existing levels is threefold.
Firstly, I cannot accept that government bonds are the highest yield option in town. Assume that the Government decided to repay its debt. What would it do? It would go out into the marketplace and buy government bonds.
What would a stand-alone superannuation fund do? It would go into the marketplace and buy a mix of bonds and equities, government and corporate. So if government bonds were the best deal in town it would buy them.
It cannot do worse than earn the same as repaying debt, only better.
This is why all fund managers only keep a portion of their assets in government bonds.
Secondly, a stand alone fund is much more secure from political raiding for short-term advantage than is a general run down of debt. As debt reduces, borrowing head-room increases and it is much easier and more tempting to make one-off decisions to expand the debt again.
Thirdly, paying off all debt does not deal with the problem of meeting the costs of the emerging population structure. Even if the government had no debt the basic options still stand: build up financial assets, or increase the average tax rate dramatically in the future, or cut superannuation entitlements, or introduce a savage income and assets test.
Building up financial assets is the only option that is politically sustainable.
To maintain budget surpluses into the future and to sustain a viable pre-funding scheme, we need to improve New Zealand's economic performance.
This is an extract from a speech Finance Minister Michael Cullen made to the Economist Conference
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