What problem is the Big Cullen Fund trying to solve?
Periodic Review Group deputy chair Susan St John reckons the idea of pre-funding NZ Super is being grossly oversold.
Monday, October 30th 2000, 12:00AM
Will it create more resources for an ageing population? If not, will it matter a jot that we take the dollars out of the pot called ‘the fund’ instead of the pot called ‘taxes’? Are we in danger of being seduced by a crude cargo cult mentality?
Politicians should repeat the following sentence as a mantra every morning until it sinks in. A growing proportion of older people in the population will require a growing proportion of current output regardless of the way it is paid for.
The share of GDP required for pensions in 30 years time is 9% and this share won't miraculously become only 4% (today’s cost) by instituting a fund.
What problem are we trying to fix?
We are already in a much better position to meet the demands of an ageing population than countries with expensive social insurance or privatised schemes. It is not too exaggerated to claim that, under the 1993 Accord, New Zealand had the most simple, fair and cost-effective retirement scheme in the world.
NZ Superannuation prevents poverty among the aged, giving a liveable pension with almost 100% coverage. The absence of tax incentives for private provision makes NZS more easily affordable and avoids the need for complex and costly regulation and controls. The lack of an individual contributory base makes it possible to recognise unpaid contributions to society and is very fair to those who have not had the benefit of well-paid fulltime work.
Michael Cullen claims that there is widespread support for a universal NZS. As evidence, he points to the Accord of 1993. But the Accord incorporated the principle of reducing the public pension for other private provision by means of a surcharge or progressive tax with equivalent effect. Winston Peters upset the Accord applecart by his insistence that the surcharge be removed. Many babyboomers will enter retirement having benefited from tax cuts in the 1990s, no capital gains tax on their appreciated properties, and inheritances untouched by death duties. It is presumptuous to now claim that the working age population of the next 30 years will be comfortable with universal pensions for the wealthiest of this group, some of whom will continue to work in well paid jobs.
The 1993 Accord also provided the mechanism for a careful review of retirement policies every 6 years. The advice of the first review in 1997 was that the issue of the surcharge should be revisited on grounds of equity, and other modifications may be needed as the realities of the demographic change unfold. The fund instead locks into place a rigid system of universal pensions in the forlorn hope that this will guarantee ‘certainty and security’.
The 1997 Periodic Report Group also suggested prefunding may have some merit, but that some rise in the tax share was inevitable. There is logic to the argument that babyboomers should contribute more today as they are getting an easy ride with a relatively small older population to pay for. There is however no magic way to transfer resources to the future.
Income from collectively owned assets is a good way to help fund an egalitarian pension. Having income from shares, such as Telecom, on the balance sheet will be useful, just as in the late 1980s dividend income from SOEs, such as Telecom, was useful. It may also help us appreciate that we have a proper pension system not a just a welfare benefit.
The major justification for prefunding however is that it might strengthen the economy in various ways. If it enhances national saving by preventing inappropriate tax cuts such as those we had in 1996 and 1998, well and good. The pressure might therefore be lifted from monetary policy with lower interest rates than otherwise would be the case. By some tenuous connections, the current account deficit might be lower and the health of the economy might improve. Business confidence may also be enhanced if the fund acts to underpin the ailing sharemarket. Overall we might have improved quality of investment. But these are big ‘mights’ and nothing is for sure.
Curiously, rather than emphasise these economic possibilities, Dr Cullen discounts that there will be any benefits for the cost of ageing population from economic growth.
Surprisingly Dr Cullen also expects the fund to eventually run down to zero. Who is going to buy the assets of the fund but the working age population? What will this do to share prices and confidence? Once the fund itself, rather than just the fund earnings are dipped into, national savings are likely to fall. Why would a fall in national savings in the future be desirable?
In the meantime the real danger is that the government tries to put the legislated amount into the fund when the economy is weak. It is also possible that investing in paper assets in the fund may take precedence over making the real investments in infrastructure and in the education and health of the future workforce that are vitally needed to prepare for the real, not paper needs of ageing population.
Susan St John is a senior lecturer in the Economics Department at Auckland University and she is former deputy chair of the Periodic Report.
| « An alternative to the Big Cullen Fund | AMP & Good Returns launch superannuation website » |
Special Offers
Commenting is closed
|
|
Printable version |
|
Email to a friend |
