Nats super policy on its way

With the election campaign well underway, superannuation is again on the political agenda.

Whilst the debate will be about the Cullen Fund, in one important respect politicians have made some progress in the historically vexed issue of superannuation.

For the first time in many years, both major political parties agree on the formula for the provision of New Zealand superannuation.

In fact we voted for this in Parliament to help make it law. Both major parties agree. We won’t change it and current superannuation is affordable.

But the reason why superannuation is again on the political agenda is because of the Cullen-fund.

Our opposition to the fund is now well known. It’s the prime reason we now have little cartoon cars traversing our television screens in the evening, and some blatantly political advertising in everybody’s letterbox.

Our opposition to the Cullen Fund was not a knee jerk reaction. It does make superannuation an election issue but our reasons for reaching this decision are fundamentally sound, and I want to take a moment to remind you of what they are:

• New Zealand superannuation and other income support should be funded from general taxation. It makes no more sense to partially pre-fund New Zealand superannuation than it would to partially pre-fund the DPB or health spending on the elderly, or any other aspect of government expenditure.
• At best the Cullen fund will contribute little to the cost of future superannuation, 10% on average. Even with the fund, New Zealand superannuation will continue to be funded mostly from general taxation.
• Government borrowing will be increased to build up the fund. If borrowing to invest in shares were a good way for government’s to fund their spending, they would have done so years ago.
• The fund will be subject to political meddling over time. If anybody doubts this they are politically naïve
• The bulk of the funds will be invested offshore. National believes those funds would be better invested in New Zealand.
• Treasury advice was that the establishment of the fund would lead to a lower level of private savings. There is increasing evidence that this is the case.
• The Cullen Fund locks in current high tax rates for the next 25 years.

Given all these arguments against the Cullen fund it would have been irresponsible of National to support it.

Increasingly, others have come to the same view, with most economists now arguing that the fund has little to offer on economic grounds.

I want to move now to National’s position on superannuation.

Security in retirement is an issue that concerns all New Zealanders – those currently in retirement and those who are planning for it. Most have high expectations about the quality of life they want to enjoy in retirement.

The reality is that the material living standards of retired people and all other people are ultimately dependent on the performance of the economy, between now and when they retire.

The levels of quality of health care, housing and other goods and services that make our lives more enjoyable depends largely on how productive our economy is. The more we produce the more we can consume. To be able to consume more goods and services in the future we need to lift our rate of economic growth.

In other words we cannot have security in retirement, world-class health and world-class education without a world-class economy to pay for them.

National’s economic policy will boost the rate of growth, and is of vital importance for the security of those in retirement, and those who will retire in the future.

That’s our promise for the future – an economy that is growing sufficiently fast so that we can afford the level of social services we expect.

Dr Cullen’s fund will do nothing to lift the performance of the economy and therefore the living standards of future retirees. In fact quite the contrary.

But I think there is a more fundamental problem facing retirement income today – and that is the lack of a clear framework that sets out clearly the role of the state and the individual in the provision of retirement income.

Because of that, there is considerable uncertainty in the community about what people should be doing for retirement saving and too many are doing nothing.

The reality is this. New Zealand Superannuation will only ever afford a modest lifestyle in retirement. It provides the minimum level of income in retirement for everyone. For this reason New Zealand superannuation is commonly referred to as Tier 1.

National believes that beyond Tier 1 provision, a strong emphasis should be placed on the private provision of retirement income.

There are two things a Government can do to change the saving ethic. The first is to remove some of the disincentive to save that is the result of our tax system. The second is that National believes there is room to actively encourage long term savings by offering tax incentives to save.

Let me deal with removing the disincentives first.

Earnings from savings invested through superannuation funds, life offices and similar entities are taxed at 33 cents in the dollar.

This tax treatment acts as a disincentive to save for people who early less than $38,000 a year. They would generally be taxed at a rate lower than 33 cents in the dollar.

At the other end of the spectrum, those on marginal tax rate of 39c (those earning over $60,000) are given a tax incentive to save.

National’s tax policy is to reduce personal, company and related rates of income tax. This will reduce the disincentive over time as the tax rate that applies to savings is brought down in line with the corporate tax rate.

National is also committed to further reduce any inequities in taxing savings at a different rate to the true tax rate of the saver. We attempted this in 1998 when Labour voted against this.

Now to incentives. National will also assist people to save for their retirement by offering a tax incentive to do so.

I cannot give you the details today, as our retirement income policy is scheduled for release further into the election campaign. But there are a couple of points I can make today.

There is considerable conjecture about the impact of incentives on the quantum of savings in the economy. Some say that incentives will not lift the overall level of savings in the economy.

However, we believe there may be some ability to change the type of savings. With our policy we intend shifting the focus to long-term savings and to saving for retirement income in particular.

Finally today, compliance.

National will work with the savings industry to minimise compliance issues and disincentives to save.

Regulation must be clear, simple and light. The industry will be consulted on compliance cost implications of any changes to the current savings regime so that those costs can be minimised.

All changes to the tax system must act to reduce rather than increase tax anomalies for employer contributions and investment earnings to superannuation plans.

For as long as I can remember superannuation has been an election issue. Would a Super Accord or a bipartisan approach ever work to take superannuation off the agenda? I wish but I doubt it.

Politicians sadly and cynically use this issue to create points of difference for short-term political advantage rather than having a true long-term solution to a long-term problem.