The 'right of citizenship' wins out
Vance Arkinstall argues NZ Super should be a universal entitlement, but paid at a significantly lower level than it is now.
Sunday, October 31st 1999, 12:00AM
One of the questions that needs to be answered, as part of developing a sustainable long-term superannuation required for the future, is whether public provision of retirement income should be an entitlement or a benefit (i.e. do we all receive a Government-sponsored retirement allowance upon reaching a predetermined age or will such a public provision only be paid to those who meet some form of eligibility criteria, probably an income threshold)?
To date there has been limited public debate on this issue with most comment directed towards how higher levels of private savings can be encouraged. This has covered compulsion versus voluntary, 401k type incentives versus level playing field and funded public provision versus pay-as-you-go.
The point that often gets lost as parties promote various interests, is that the health of the economy and economic growth of the country are the fundamental foundations for the future of superannuation. If the basic economy is not sound and economic growth is not in place then as a country we will struggle to fund superannuation requirements irrespective of which model is in force.
ISI Research
In the ISI Report on Retirement Savings: A Wake-up Call, ISI research raised the six stark and obvious conclusions that must be addressed to reduce the fiscal and economic problems for an ageing population, namely:
- Raise economic growth
- Limit Government spending
- Consistent approach to immigration
- Avoid distortions that influence private savings
- Enhance private sector investment
- Enhance adequate retirement income to those in greatest need.
On the issue of universal entitlement versus targeting, ISI research suggested that economic efficiency and fiscal affordability could both be reasons why a reduction in the amount of publicly funded superannuation could be considered. The research identified a clear role for the Government providing security of retirement support to those who are disadvantaged or are unable to save or have not saved enough.
The ISI report suggested that it is important to establish society’s relative preference on the issue of universal entitlement versus targeting, to improve the likelihood of retirement income policy meeting the aspirations of New Zealanders and thus reducing the potential for future policy reversal. Setting the level of public provision so low as to allow for survival but not active participation in the community may result in public dissatisfaction forcing the Government of the day into another policy change. Equally, overly generous levels raise questions of affordability and the need for voluntary saving.
The two options send entirely different signals to the public and inevitably influence the savings decisions of those who are in a position to provide largely for themselves.
Periodic Report Group – December 1997
The PRG, when discussing the integration of public and private provision, stated: "there is a considerable amount of groundwork to be laid before reaching a broad public and political consensus. This is why we have assumed that the key discussions and debates will need to start soon and will take some time to resolve."
The PRG report contains 5 scenarios, from a universal amount (NZS) indexed to wage growth, which recognises that "a public pension is seen as a right of citizenship", to an income tested benefit alone, only providing a welfare benefit to retired people unable to provide an adequate retirement income from their own resources.
Overseas experience
Comparing the approach of other countries is probably of little value given the New Zealand way of adopting a totally contrary approach in most things to do with superannuation (e.g. assistance to savers, taxation regime, use of annuities).
The obvious point to arise from the 17 countries that I have information for, is that all have an element of entitlement in respect of public provision but in all cases the level of public provision declines quickly relative to earning levels. The public entitlement ceases completely as a result of income testing rules in Australia ($100,000) and Hong Kong ($50,000). In all other examples the public entitlement continues, albeit at a low level for high income retirees.
The overseas experience therefore indicates that although a public pension is seen as a right of citizenship it is accepted that the level is determined by income testing rules. This decline in the level of universal provision is designed to encourage private provision for those who can save.
New Zealand experience
New Zealand Government sponsored retirement provision has largely been based on means testing, and on occasions incorporating both income and asset testing.
Only twice in New Zealand’s history has Government sponsored superannuation been free of some form of targeting, 1977-85 and 1996 to the present.
The vigorous public objection to the surcharge must be seen as some form of aberration, reflecting more the public response to a broken political promise than an objection to the impact of the surtax. I say this because the "noise" surrounding the surtax was out of all proportion to the low number of the retired population who were affected.
Conclusion
We need to follow the call of the PRG and ISI reports for active debate to establish the community’s preferences.
To me the answer is clear; the "right of citizenship" wins out. NZS should be a universal entitlement but at a significantly lower level (perhaps at 30% of the average wage). A safety net should be available by way of a top-up provision for those who are disadvantaged and who are unable to provide.
Somehow this seems consistent with my belief that we all have a responsibility to provide for our own retirement. We may well like to consider extending the age for universal entitlement from 65 to 70.
Whatever the outcome a point often forgotten is that the final decision must be clearly signaled years ahead to allow adequate planning to take place.
Vance Arkinstall is the chief executive of the Investment Savings & Insurance Association.
The views expressed are those of the writer alone and may not necessarily agree with those of the ISI.
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