Making the superfund fly

It has been suggested that the Government's proposal to set up a "Superfund" represents one of the most far-reaching fiscal policy decisions undertaken in years, one that could arguably determine the direction of our economy well into the second half of this century. It is not a decision that will be taken lightly, but the Prime Minister has signalled that the Superfund will go ahead as early as July 2001 even in the absence of bi-partisan support.

"Stability" and "security" are the keywords being employed in the recent press releases issued by the Government regarding the fund. These words have the potential to win over public support in a debate that has raged for countless years without conclusive result. Indeed, stability and security have previously been significant by their absence.

New Zealand has one of the oldest social security systems in the world and non-contributory old-age pensions paid for from government revenues have been around since 1898. However, in the latter half of the 20^th century, successive governments have ensured that superannuation remains shorthand for broken promises.

In 1975, the Kirk Government introduced a compulsory superannuation system, establishing a fund into which employers and employees paid four percent of their earnings. It was designed so that this money would be paid as a pension on retirement, with up to a quarter available as a lump sum. Whilst in opposition, Robert Muldoon proposed instead to use taxes to pay a universal benefit that would, in effect, increase wages by four percent. This turned out to be a policy that won him enormous popularity and after their victory in the 1975 election, the National party abolished Labour's fund and introduced New Zealand National Superannuation, providing universal superannuation at 60 without a means test.

Funding National Superannuation became increasingly expensive and despite promises in the Labour Party's 1984 manifesto to retain the status quo, a year after Labour's election victory, the surcharge was brought in to claw back National Super from relatively high-income superannuitants. Furthermore, in 1990 Labour raised the age of entitlement for the renamed "Guaranteed Retirement Income" from 60 to 65. Promises were again broken when the Bolger Government failed to abolish the surcharge, after being elected on this pledge in 1990.

This time around, New Zealanders can take heart in the scheme being entrenched in legislation, which means that any scheme will be extremely difficult to dismantle on a political party whim, requiring a super-majority in Parliament or a referendum to change it.

At this stage the current proposal's main objective is to establish a universal entitlement to New Zealand Super, provided from age 65 and without the threat of income or asset testing. But perhaps the aspect of the proposal that will be of most interest to the public is the level of retirement support provided by the fund. At this stage, a figure of 65% of the average after-tax wage has been suggested for a married couple. This is where most people's enthusiasm for the scheme is tempered, because, that figure is currently only a sobering $17,162 pa.

The success of the current proposal is predicated on the ability of successive governments to generate a surplus to fund the scheme, and this is perhaps the area of the proposal that has received the most criticism. Under the scheme the government of the day will have to run budget surpluses every year in order to channel $1.9 billion into the fund. The problem is, only twice since the 1970s have New Zealand governments produced surpluses of this magnitude.

Does this mean that we will just have to pay progressively higher taxes? Well no; by pre-funding superannuation, that is, putting money aside now to pay for those entering retirement from 2010, the working population shouldn't have to pay more tax in the future. However, the other side of the argument is that, with such a substantial fiscal commitment, we can't look forward to any tax cuts either.

The fund will have to generate a net return of 6% to support the superannuitants, and debate is raging over where it should be invested. Realistically, most of the fund will have to be invested offshore to take advantage of higher returns and to achieve greater diversification, but the thought of taking such capital offshore when it could significantly increase the liquidity of the local sharemarket, prompts anti-growth predictions from many media commentators.

Wherever the fund is invested and regardless of the final details of the structure, it is certain that most New Zealanders will not be able to sustain a comfortable lifestyle on this entitlement alone. Dr Cullen has sent out a clear message that the scheme is not about the Government saving on behalf of individuals, but is the only way to manage the dilemma of baby boomer retirement.

Everyone taking an interest in the debate should remember that government-funded super is only one source of retirement income, and resolution of the issues at this high level should not in any way reduce your individual commitment to amassing private retirement savings.