Column: Cullen skins the super cat a different way
For all that Finance Minister Michael Cullen's new formula for creating a universal pension scheme will be reported as a change wrought in negotiations, the new version is virtually identical in its effect to his original proposals.
Wednesday, July 19th 2000, 12:00AM
For all that Finance Minister Michael Cullen's new formula for creating a
universal pension scheme will be reported as a change wrought in negotiations
with the Alliance and the Greens, the new version is virtually identical in its
effect to his original proposals.
By calculating contributions to the fund as a proportion of GDP rather than as a defined portion of the tax take, Dr Cullen is simply skinning the cat a different way.
Dr Cullen announced the most new detail on his dream of ensuring greater financial security for retiring baby boomers and their offspring today (Wednesday, July 19). But in doing so, he changed none of the the assumptions outlined in Annex 4 of this year's Budget Speech and Fiscal Strategy Report, issued on June 15.
That annex said that contributions to the new fund would initially build to $1.8 billion annually within three years, and that after that "the contribution rate is a percentage of GDP sufficient to finance NZS over a 40-year time frame".
"At this stage, projections show that the initial required contribution to the Fund immediately after the transition is likely to be around 6 per cent of GDP."
This included the ongoing "pay as you go" element, currently around 4 per cent of GDP, plus a retained contribution at "around 2 per cent of GDP initially, and would decline to zero by 2025", the annex says.
Annual GDP is currently about $100 billion, so Dr Cullen is targetting on-going annual contributions of around $2 billion in the near term, although the exact proportion of GDP required to fund the scheme will alter to reflect changing demographics, fiscal circumstances, and the length of time that the fund has been building up.
By 2040, Dr Cullen expects the fund to have accumulated funds equivalent to 50 per cent of GDP.
So far, he is cagey about the investment regime for the fund, although the Budget Annex not surprisingly assumes that a return at least equivalent to long-term government bonds of 7 per cent annually should be achieved.
The extent of foreign investment has yet to be decided, and is one of several political Achilles Heels to be overcome.
Shadow finance spokesman Bill English has been swift to point out that the natural constituency for a universal state pension might also be a constituency naturally opposed to their tax dollars being invested offshore.
However, Mr English faces an interesting political test in battling Dr Cullen's scheme. He raises numerous valid concerns about what the scheme might do to savings behaviour and the potential for future politicians to hi-jack it, and says that if New Zealanders don't understand the scheme, then they won't support it.
However, the Cullen scheme is politically quite easy to understand and therefore to sell. Mr English's problem is that the arguments against the scheme are more complex and less conducive to intelligible translation onto the television news than Dr Cullen's intuitively seductive appeal to saving now for greater future certainty.
However, it is clear that Dr Cullen himself is less than happy with the compromise over the funding formula.
One of the Alliance and Greens' main fears is understood to have been the potential for an income tax-linked formula to complicate future tax system reforms, such as adoption of the Alliance's financial transactions tax or shifting the tax burden from income to environmental "bads".
Given that Alliance leader Jim Anderton, like Mr English, thinks the existing National Superannuation scheme is perfectly workable, he was not about to trade away his capacity to try and broaden the tax base in new ways.
However, while the GDP formula elegantly meets his coalition partners' concerns, Dr Cullen has introduced an element of the one thing that the whole scheme seeks to mitigate: risk.
The new policy has been developed with an eye to masking off opportunities for future politicians to change, stop contributing to, or steal from the fund in hard economic times.
The more complex or negotiable he makes key elements of the system, the more open it will be to death by a thousand cuts.
When asked whether the GDP formula raised the risk of "future fiddling", he said: "I would still prefer clearly a system linked to a specific hypothecated tax, but there is no point in continually pushing something uphill."
Although his hope of entrenching the scheme by gaining 75 per cent parliamentary support looks unlikely, Dr Cullen will be more than usually determined to prevent future subversion of the scheme.
More than any other piece of government policy, Dr Cullen wants as his legacy the creation of a a universally paid pension which is on a trustworthy footing for future generations.
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