Gambling on the casino economy won’t secure our future: Donald
Green Party co-leader Rod Donald outlines his party's position on superannuation.
Wednesday, July 3rd 2002, 1:17PM
Superannuation is one of a small number of issues where we significantly disagree with the government. 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 the Green Party would do instead to secure New Zealand's economic future to ensure adequate pensions for the growing number of retired people.
Support universal super - oppose Cullen fund
The Green Party supports the universal provision of superannuation for everyone aged 65 and over, paid at not less than 65% of the average net ordinary time 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. There is almost unanimous agreement on that issue– 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.
Every party that committed to guaranteed superannuation should have been allowed to decide how best to achieve that goal. Unfortunately the Labour-led Government was determined to push through its own "silver bullet" solution to the challenges of an ageing population.
The Greens opposed their solution because 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 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.
Even Jim Anderton campaigned against a fund at the last election, stating that "the Alliance does not accept the need for a special fund" and that "the New Zealand superannuation scheme is soundly based and is not threatened by a change to the age profile of the population.
So is there a problem all of a sudden, as Anderton now claims? Former BNZ economist Len Bayliss, who is one of the people from whom we sought advice, 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. National admitted doing just 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. True, super payments are expected to rise from 4% of GDP to 9% by 2050 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 but in its report to 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 shifts in labour participation rates within the working age population.
In fact, the proportion of dependants is projected to actually fall to 52% in 2030 compared to 55% in 1999. In other Western countries the proportion of dependants is expected to rise to 57%. We are therefore well placed to sustain our relatively low cost super scheme.
Pitfalls with the Cullen fund
General taxation will still have to provide 100% of super costs until 2020 and at least 86% thereafter because the Cullen Fund will only meet 10c in every dollar of superannuation payments on average, 14c at its peak and eventually it will be run down to zero.
What's more, the government is planning to borrow an extra $8.3 billion for capital projects and increase net Crown debt by $2.26 billion at the same time as it intends putting $7.7 billion into the super fund.
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 new borrowing would otherwise be $7.7 billion less over the five year period and net Crown debt could have been reduced.
Either way, the government intends to borrow money on the bond market at around 6.8% 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!
Global economy fragile
The reality is that returns on global share funds are negative. The Westland District Council has just learned the hard way. It has lost almost $900,000 after putting $3.15 million into an overseas investment fund. In 22 months their shares in the ASB World Shares Trust dropped 28% in value and the council would have lost even more if they hadn't sold half of its shares a few weeks ago before another plunge in value.
The Community Trust of Otago has just reported a negative return of 4.6% on their $164 million investment portfolio and last week. Environment Waikato announced it lost $823,000 in just 30 days on its overseas share investment. In the last 15 months they have lost almost $1.5 million. The irony is that they invested the money overseas instead of keeping their shares in the Ports of Tauranga and Auckland. When Environment Waikato sold their shares for $1.07 cents in 1992 Environment Bay of Plenty kept theirs and they are now worth $7.69 each. .
Last year the NZ Post Pension Fund recently lost $7 million out of $70 million because of "heavy losses on overseas equity markets". They said "we invested in a whole range of offshore blue chip companies. we weren’t into the cowboy dotcom stocks". The fund, which is chaired by Ross Armstrong, has since changed its investment strategy, cutting overseas equities from 48% to 5% of their portfolio. Despite these lessons, Dr Cullen still wants to gamble our money on the global casino economy.
Imagine if Dr Cullen had invested any of the Super Fund in Worldcom or Enron? 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. The former Wall Street darling is now the largest ever bankruptcy in the world with NZ$94 billion in debts.
Worldcom is the latest example of what NZ Herald political columist Colin James describes as "gangster capitalism". As James said in yesterday’s Herald bent managers at Worldcom cooked the books (to the tune of $7.8 billion), bent brokers talked them up, bent auditors ticked off their accounts and gullible fund managers bought their stock. I would add, naïve investors have lost their shirts.
The conventional wisdom is that the sharemarket always bounces back but demographic 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
Setting up a super fund at this time is economic lunacy. The global economy is clearly very fragile and the risks of failure are enormous. Far from leading to certainty and security in retirement the Cullen fund is causing working people 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. The National Bank says "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". WestpacTrust economists criticised the Government for failing to properly assess alternatives, including paying down Government debt and increasing spending on education and other "wealth generating" activities.
What's best for your family, business?
The situation we face as a nation is very similar 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?
Surely your priority is to reduce debt while ensuring that your family is healthy, well educated and able to earn a decent income so that they can meet the challenges of the future. As individuals learnt in the 1980s, you certainly wouldn’t borrow money to gamble on the sharemarket.
The commercial parallel 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 surplus in other businesses in the hope that they will make enough future profits to subsidise your expected losses? Or do you use your profit now to meet the challenges of the future head on by investing in product development, more efficient machinery, 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 does in the long-term interest of its citizens should, in our view, necessarily be more risk averse than what a private citizen might do.
The Green Alternative
The Green Party not only believes that the Cullen fund is risky but it also represents an enormous opportunity cost. Its stops us from properly tackling the many 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, eliminating child poverty, education and training, research and development, employment creation, positive ageing, health and housing, putting the economy onto an ecologically sustainable footing, strategic asset investment, encouraging private saving and adapting to climate change.
Debt repayment
New Zealand’s net crown debt is around $20 billion. At the current interest rate of 6.2% these borrowings are costing us $1.24 billion per year and consuming 1.1% of GDP. 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 $1 billion of debt every year for the next 20 years we would save over $12.4 billion in interest alone.
Eliminating child poverty
Society is judged by how it treats its most vulnerable. It is simply not acceptable that we have 300,000 children living in poverty in New Zealand. We have just launched a strategy to end child poverty by 2010 which includes the reintroduction of a universal child benefit, at a cost of $500 million, and a number of other initiatives.
I agree with the Child Poverty Action Group who say that if the Government is going to protect even the wealthiest of those over aged 65 with generous universal indexed pensions then it should provide the same protection for low income families with children.
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. This contradiction is further highlighted by the Government’s recent announcement that it wants to offer incentives to attract talented people from overseas to fill skills shortages here. Why not spend the money on training our own people?
Research and Development
We should also be investing more in research and development if we are serious about the knowledge economy. The focus of this research and development should be to make the most of our natural assets - our unique environment and out talented people.
Employment Creation
On today’s figures, if we could reduce the current level of unemployment from around 5% or 100,000 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.
Ecologically 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 investment
Considerable 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, Tranz Rail or Air New Zealand, providing, they contribute to strengthening the economy, our social fabric and ecological sustainability.
Encouraging private saving
Much more should be done to encourage people to save for their retirement. New Zealand Super is the bread and butter of a retirement income. If you want jam you have to make it yourself but the government should offer a sweetener to give you an incentive. At the moment only 12-17% of New Zealand workers are members of employer subsidised superannuation schemes. We want to revitalise private saving by providing employers who subsidise the staff super with an across the board tax incentive.
Incredibly the Labour-Alliance Government currently gives employers of staff on the top tax rate a 6 cent in the dollar tax break for contributions to their superannuation while imposing a 12 to 18% penalty on employers who contribute to the super of their low paid staff.
The government says it can’t afford to fix this anomaly but will to do something by 2004. Yet it has just announced that it wants to offer incentives to attract more foreign investment to New Zealand. Instead the Government should be helping New Zealanders to reverse the negative household savings trend. It was minus 3.7% last year and is expected to be minus 5.5% next year. If we saved more ourselves we could invest it in our own economy instead of becoming even more dependent on overseas capital and losing even more control over our economic destiny.
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 that we will be better able to afford the future costs of superannuation by building a stronger, more confident nation than by depending on 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 how to fund pensions. It's 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 your children and grandchildren – prefunding superannuation, as promoted by Michael Cullen, Jim Anderton and Winston Peters, or the green alternative.
This is speech Green Party co-leader Rod Donald gave to Kapiti Grey Power.
| « Greens go clucky over super | AMP & Good Returns launch superannuation website » |
Special Offers
Commenting is closed
|
|
Printable version |
|
Email to a friend |
