Greens want to dismantle the Cullen fund

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TGreen party co-leader Rod Donald says his party will campaign to dismantle the Cullen Fund. Read the full speech here.

Friday, January 25th 2002, 12:42PM

Superannuation is shaping up to be a significant issue in this year's election campaign. The debate revolves around whether the Labour-Alliance Government's recently established superannuation fund is the best way to provide pensions for the projected growth in the number of retired people.

This evening I would like to outline why the Green Party believes the Cullen super fund will fail to achieve what it has been set up to do and what we would do instead.

Support universal super - oppose Cullen fund
For the record, we supported Part One of the NZ Superannuation Act. This guarantees the universal provision of superannuation for everyone aged 65 and over, paid at not less than 65% of the average wage to couples and 60% of that amount to single people.

That is a commitment we stand by because we believe it is important to give all New Zealanders, especially those approaching retirement, the stability and security they seek and deserve. On that issue there is almost unanimous agreement - only ACT refused to sign up universal public provision while New Zealand First claims we can pay 72.5% without saying where the extra money will come from!

In our view every party that committed to guaranteed superannuation should have been entitled to a seat at the table to discuss how best to achieve that goal. Unfortunately the Labour-led Government was determined to push through its own "silver bullet" solution to the challenge of an ageing population.

The Greens opposed their solution and therefore voted against Part 2 of the bill which set up the fund. Put simply, we don't believe building up a large fund and investing it on the overseas share and bond markets is the best way to pay for future superannuation. In fact we regard Dr Cullen's prescription as not merely benign but down right dangerous.

Is there a problem with "pay as you go"?

Before pointing out the pitfalls of the Cullen Fund and presenting our alternative I would like to pose the question "is there a problem?"

We believe the current "pay as you go" system is sustainable and affordable. We are not alone, Retirement Commissioner Colin Blair says that New Zealand has one of the simplest and most efficient tax funded retirement pensions in the world.

The Alliance policy at the last election said "the New Zealand superannuation scheme is soundly based and is not threatened by a change to the age profile of the population and other demographic shifts". It went on to say "the Alliance does not accept the need for a special fund into which a certain proportion of income tax will be paid to fund NZ superannuation and to form some reserves for an anticipated increase in NZ superannuation payments".

So is there a problem all of a sudden, as Mr Anderton now claims? Former BNZ economist Len Bayliss used to be his main external adviser. As it happens, Bayliss is one of a number of people, along with Auckland University Lecturer Susan St John from whom we sought independent advice.

Bayliss is blunt. He says that for years population figures have been used by politicians to paint a "grim picture of a society unable to provide for its helpless elderly" in order to scare us. Interestingly, National admitted to doing that when they joined the Greens in opposing Dr Cullen's super fund.

The main rationale for this fund is that our ageing population will lead to an increase in the cost of superannuation as a percentage of gross domestic product. We accept that superannuation payments are expected to rise from 4% of GDP to 9% by 2050 and therefore we don't deny there is a demographic problem but we dispute claims that the impact will be anywhere near as large as the government makes out.

This is because the government uses the ratio "working age population" to "superannuitants" to justify, within New Zealand the establishment of the fund. However in its report with the OECD it uses the ratio of "employed" to "dependants". This ratio gives a quite different picture because it takes account of the decreasing number of young dependants and any shifts in labour participation rates within the working age population.

For example, the proportion of dependants in 1999 was 55% and is projected to actually fall to 52% by 2030. Compared with other Western countries, where the proportion of dependants is expected to rise to 57%, New Zealand is well placed to sustain our relatively low cost super scheme.

Pitfalls with the Cullen fund
First up, the Cullen Fund will only meet 14c of every dollar of superannuation payments and eventually it will be run down to zero. In other words, general taxation will still have to provide 100% of super costs until 2020 and at least 86% thereafter.

If that doesn't leave you feeling uncomfortable, what about the fact that in last year's budget the government revealed that over the next four years it was planning to increase net Crown debt by $3.8B at the same time as it wanted to put $6.1B in the super fund. The December Economic and Fiscal Update (DEFU) shows that the net debt will now go up by $4.7B while super have been cut to $5.7B, eventhough the required capital contribution should actually be $7.3B.

The DEFU reveals an even bleaker problem. At the same time as the fund is being built up the Government will be borrowing an extra $9.1B for capital projects, up $1.5B on budget night because of the Air NZ bale-out, higher student loan advances and refinancing health board debt. No matter how much the Minister of Finance tries to claim the different lots of money live in separate pots on his mantelpiece you can't help but draw the conclusion that without the super fund extra borrowing would be $3.4B over the four year period.

Either way, the government intends to borrow money on the bond market at around 6.2% interest to "invest" on the sharemarket, in the hope of earning an average return of 7.5% after tax. If it was that simple we would all be rich!

The reality is that returns for global share funds were negative 21.03% for the year to August, according to a fund performance survey published in October (Sunday Star-Times). In other words, if the government had put half of the $600 million they have just set aside into overseas equities, as they say they intended to do, the $300 million would now be worth only $237 million - $63 million less than before they risked it on the casino economy!
I am not just talking about throwing money at the dotcom roulette wheel. The NZ Post Pension Fund recently dropped in value by $7m to $70m over the year to March because of "heavy losses on overseas equity markets". Their report went on to say "we invested in a whole range of off-shore blue chip companies. we weren't into the cowboy dotcom stocks". It's worth noting that the fund is chaired by Ross Armstrong. Last November I asked Armstrong what the fund's investment strategy is now. He said they have cut overseas equities down to 4% of their portfolio. I hope Dr Cullen pays attention!

US tragedy counts against super fund

That's because September's horrific events in the United States has made a bad prognosis even worse. When Reserve Bank Governor Don Brash released his Monetary Policy Statement in August he said "the flow of economic indicators from the United States, Japan, non Japan Asia and Europe makes a deeper and more prolonged slow down seem quite likely. Almost every day brings new reports of major corporations laying of thousands of staff and announcing sharp reductions in earnings".

In his November Monetary Policy Statement Brash said "the international environment has indeed turned out to be much weaker than seemed likely in August. Even before the tragic events of 11 September, it is now clear that the world economy was slowing quite rapidly in July and August". He went on to say "the outlook for almost all our major trading partners is now looking markedly weaker than it did three months ago".

That view was confirmed by the Merrill Lynch annual stockmarket ranking for 2001. Of the 38 markets surveyed 24 dropped in value, including the USA(S&P 12%), Singapore (16%), UK (16%), Germany (20%), Japan (23%) and Hong Kong (24%). On the one hand 17 of the 23 OECD countries surveyed experienced negative growth and on the other hand the stockmarkets of China, Russia, Turkey and Korea all boomed. But would you want to invest there?

If not there then where? Just today Kmart in the US filed for bankruptcy protection. This the largest retail chain collapse in US history. Meanwhile the Enron saga continues to unfold. The former Wall Street darling is now the largest ever bankruptcy in the world with NZ$94B in debts. When Enron began unravelling in October its shares were trading at US$37 each. Two weeks later they were worth 26 cents each, leaving financial firms, banks and pension funds around the world facing billions of dollars of losses. If any of our super had been invested there we could kiss it goodbye.

The conventional wisdom is that the sharemearket always bounces back but democraphic factors suggest a pessimistic long term outlook, according to investment strategist Harry Dent (Sunday Star Times 9/9/01). He says baby boomers are beginning to sell down their share portfolios which could send the stockmarket into a decade long bear market. It is predicted that from 2015 to 2025 there will be a net outflow of funds from the stock market. Couple this with baby boomers' spending peaking around 2009 and you have a double whammy. Consumer spending helps drive corporate profits, corporate profits drive the stockmarket. A spending slow down could pull the stockmarket back as well as boomers selling down their holdings.

Cullen fund creates uncertainty, insecurity
In our view setting up a super fund at this time is economic lunacy. The global economy is clearly heading for, or is in, recession and the risks of failure are enormous. Far from leading to certainty and security in retirement the Cullen fund will cause the current generation of workers to be very worried about whether there will be anything left for them when they retire. It's not smart either. Why invest the savings - or borrowings - of New Zealanders in other economies, thereby strengthening them so they can compete more effectively against us?

Two banks have recently reinforced our concerns. In a hard hitting analysis the National Bank treasury says "the proposed scheme has little to offer on economic grounds. Competition and economic efficiency will be eroded, the sandwich generation pays twice, the scheme does little to address long term fiscal pressures and self provision (for retirement savings) will fall". In their view, there is already a quarter of a percentage point interest rate "risk premium" built into ten year Government bonds, which is also effected in private sector buying rates, because of extra Government borrowing required to feed the super fund. Meanwhile, last month Westpac Trust economists criticised the Government for failing to properly assess alternatives to the Cullen fund, including paying down Government debt and increasing spending on education and other "wealth generating" schemes.

What's best for your family, business?
The situation we face as a nation is analogous to the financial decisions facing a family or a business. Take a family with a mortgage on their house and a couple of teenage children. If you are lucky enough to have some discretionary income, is it wiser to pay off your mortgage faster, educate your kids and keep the family healthy; or do you give the extra cash to your accountant to play the share market?

Maintaining a large mortgage and scrimping on health and education in order to build up an investment fund doesn't make much sense. Instead your priority surely must be to ensure that your family is relatively debt free, healthy, educated and able to earn a decent income so that they can meet the challenges of the future. As individuals learnt in the eighties, you certainly wouldn't borrow money to gamble on the sharemarket!

The commercial parallel, recently described by Deutsche Bank Ulf Schoefich, is just as compelling. If your company is profitable now, but looking ahead you can see a range of factors impacting on your bottom line do you invest your profits in other businesses with the intention of using the expected earnings to subsidise your future lack of profitability? Or do you use your profit now to meet the challenges of the future head on by investing in research and development, staff training, marketing, etc. in your own business?

Even if you did decide to take a punt on the sharemarket a prudent investor would only invest a real surplus, not borrowings. More to the point, what a government should do in the longterm interest of its citizens is, in our view, necessarily more risk averse than what a private citizen might do.

The Green Alternative
The Green Party believes the Cullen super fund is not only risky but also represents an enormous opportunity cost. Its establishment means we will not be able to tackle as well as we should all the health, education, employment or environmental challenges facing us. As Bayliss says "the best future safeguard for NZ Super is that funds would be far better spent on education and training and 'active ageing' policies which are vastly more important to sustaining future NZ Super than pre-funding." We agree.

Rather than putting all our eggs, including Dr Cullen's borrowed ones, in one superannuation basket, the Greens would allocate the eggs we own to a number of key areas: debt repayment, education and training, employment creation, positive ageing, health and housing, making the economy environmentally sustainable, strategic asset investment, encouraging private saving and adapting to climate change.

Debt repayment
New Zealand's current net crown debt is around $20 Billion. At the current interest rate of 6.2% these borrowings are costing us $1.24B per year and consuming 1.1% of GDP. As I have already said, the current Government intends to increase the debt level. We would pay it off instead. Reducing debt offers the best guaranteed return on investment because you know exactly how much interest you are saving. In our case, if we committed to paying back $1B of debt every year for the next 20 years we would save over $12.4B in interest alone.

Education and training to achieve greater productivity
The last four OECD reports on New Zealand repeatedly emphasised that low standards of education and training are the prime causes of New Zealand's low labour productivity. At the same time the OECD recently reiterated its conviction that human capital is the core element in economic growth.

There is a contradiction between this Government's rhetoric about the knowledge economy and its failure to invest in our young people, through a Universal Student Allowance and lower fees, and in our tertiary institutions especially through remuneration for teaching staff, who are after all the knowledge generators and facilitators.

Employment Creation
On today's figures, if we could reduce the current level of unemployment from 5.1% or 97,100 people to 1% the Government would be $1.19 Billion better off. This is made up from a saving in benefit payments of $638 million to the 76,000 people who are now in a job plus another $554 million in taxation received from those workers now earning the average wage. Together this represents a gain of 1.1% of GDP.

Positive Ageing
Giving older people the choice to continue working if they so wish is vital. As the OECD says: "encouraging people to work longer would raise economic growth, increase the tax base and reduce the number of dependent older persons. A triple gain". Positive ageing not only strengthens economic growth, improves the dependency ratio and therefore the fiscal position, it also increases the incomes, self worth and quality of life of superannuitants.

Health and Housing
Health costs are expected to rise even more dramatically than superannuation expenditure, from 8% to 10% of GDP by 2050. We say now is the time to invest in preventing illness - improving our diet, encouraging exercise, fixing unhealthy housing, and tackling environmental threats to our health. We believe a strategy focussing on primary health and preventing illness would achieve health savings of up to 2% of GDP in the long term.

Environmentally sustainable economy
Now is the time to green the economy by creating the infrastructure for solar and wind generation, energy conservation, public transport, organic farming and a whole host of other green initiatives which reduce government and citizens' costs and/or increase revenue.

Strategic asset investmentConsiderable revenue is already generated from existing State Owned Enterprises. There is every reason why the Government should reinvest in strategic assets such as Contact Energy, Trans Rail or Air New Zealand, especially in the current situation, providing, of course, they contribute to strengthening the economy, our social fabric and environmental sustainability.

Encouraging private saving
There is much to be done to encourage people to save for their retirement. I liken New Zealand Super to bread and butter. If you want jam you have to make it yourself. But at the moment there is no encouragement from the government and even some impediments. Only 17% of New Zealand workers are members of employer subsidised superannuation schemes. We would like to turn that around by getting rid of the unnecessary bureaucracy and also provide employers with a new tax regime to give them an incentive to top up the retirement savings of all their staff, not just those on the top salary tax rate who get a 6 cent in the dollar tax break now.

Adapting to climate change
No attempt is being made to quantify the cost of climate change but the negative impacts can be summarised as follows: less water in many water stressed regions, more disease and heat shock for stock and plants, greater risk of vector-and water-borne diseases to humans, increased risk from flooding and storm events, more energy demand for cooling and less hydro power in drought areas, increased risk of forest fire, less tourism through reduced snowfall and retreating glaciers.

Greens to dismantle Cullen Fund
The Government's super fund is appealing at first glance but we believe a stronger, more confident nation will be better able to afford future superannuation costs than one shackled by a fund which is largely invested in the economies of other countries. That's why we have decided to go to the election proposing to dismantle the Cullen fund, repay what's been borrowed and invest the rest in future-proofing our economy.

We have not taken the easy route on superannuation. Ours is a prudent, principled decision, not one based on political expediency. As a party that always looks to the future, we know this decision is about much more than funding superannuation expenditure. It is about deciding what to invest in now to put our nation on a just, sustainable and secure footing for this century and beyond.

At this year's election you have to decide what will be better for our children - pre funding superannuation, as promoted by Michael Cullen, Jim Anderton and Winston Peters, or the green alternative.

Rod Donald MP is Co-Leader for the Green Party

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