Cullen explains civil servants saving scheme

The government announced earlier this month that a new retirement savings scheme is to be set up for state sector employees.

The announcement reflects two important government objectives: first, our desire to promote retirement savings amongst employees; and second our dedication to building a strong public service.

We believe it is important that the government - as a major employer - sets a good example in encouraging retirement savings.

The scheme will be available to state sector employees in government departments, employees in the state school sector (including support staff) and registered teachers employed by free kindergarten associations, if they are not part of an existing employer-subsidised scheme. It will run alongside the primary school teachers' scheme, introduced last year.

Employees joining the scheme can choose their own level of contribution, and the government will match that up to a maximum of 1.5% of salary in the first year and 3% in the second year, less withholding tax.

It is estimated the scheme will cost $19 million in year one, and $32 million in year two.

The retirement savings scheme is one of the fruits of the Partnership for Quality Agreement, aimed at building the long-term strength of the public sector. The government, the PSA, the Council of Trade Unions, and NZEI have been working together to develop the scheme over the last year.

Of course, to an association such as yours the concept of encouraging retirement savings through the workplace seems so eminently sensible that it is a wonder that successive governments in the 1990s wavered over their commitment to state sector superannuation.

The fact is that superannuation fell victim to the prevailing ideas about the role of government that held sway in the late 1980s and 1990s. The pendulum had swung towards small government, and towards a reduction in the size of the 'core' state sector as many former departments were transformed into state owned enterprises and crown-owned entities operating at arms-length from government.

At the time, the belief was that this was a permanent realignment of the balance between public and private sectors.

It immediately became obvious to the government of the day that the GSF was on shaky ground. The scheme, like many others around the developed world, was a defined benefit scheme, where the scheme's guarantor (in this instance, the Crown) undertook to provide beneficiaries with a pension based upon years of service and salary. Such schemes depend upon a pyramid-shaped age structure amongst their members: that is, a wide platform of current contributors supporting a much smaller population of beneficiaries.

The effect of the state sector restructuring, of course, was to narrow the base of the pyramid so markedly that it risked toppling over. The GSF's sustainability and indeed its technical solvency came into question. As a result, as you are aware the National-led government sealed off entry into the scheme in 1992. They also, in a rather churlish move no doubt inspired by the general disregard in which state sector employees were held, reversed the decision made by the previous Labour government to equalise the cost of living adjustment for all members. You will remember that those who retired at 60 or later could access a $1,000 cost of living allowance, whereas those who retired younger received only $500 and had to cover the rest themselves.

After 1992 the official policy on superannuation schemes in the state sector was rather vague, but appeared to rest upon two principles. The first was that any scheme would be on a defined contributions basis and would have to be fully funded, that is, to maintain sufficient reserves to meet all of its future obligations.

The second was that the decision as to whether to offer a superannuation scheme to public servants, and if so what regime of matching contributions to put in place, was left up to Chief Executives as part of their responsibility for human resource management.

In short, the policy was laissez-faire; and - given the ongoing uncertainty about the future of many departments and crown-owned entities - this meant that nothing of significance happened. In a context of uncertainty and unease regarding the future role of government, state sector superannuation ended up in the too-hard basket.

When the Labour-led government came to power in 1999, we recognised the necessity of the first of these principles - that of fully-funding schemes on a defined contributions basis. However, we rejected the second principle. We rejected it because we believe it is incumbent upon the state sector to act as a good employer, and because we believe that employment-based superannuation is the best single tool for enabling ordinary employees on low to middle incomes to save for retirement.

We have also made it a point of principle to reverse the 1991 National government decision on the $500 cost of living allowance.

What this symbolises is a wider commitment to an ongoing and vital role for government in New Zealand society. Unlike our predecessors, we are not mealy-mouthed about the importance of the state sector. Indeed, we have recognised that a strong public sector and a highly motivated, professional public service workforce is one of the most important factors underpinning a growing economy and a strong community.

Governments are not simply a necessary evil. They are in fact the foundation of the nation state and ensure the safety and security of its citizenry. They create internal order, and indeed they create and sustain markets through which the citizens can specialise in economic production and exchange the rewards from their labour and the returns to their capital.

I make this rather obvious point because debate on the role of government sometimes sees the state as the enemy of business and of the market. The reality is that the market is a product of the state. Without a government to define property rights, and establish and enforce the terms under which property rights transfer, there is anarchy, not markets. Contrary to what those on the right maintain, less government can mean less effective markets and an environment that is hostile to business. Adam Smith's 'invisible hand' cannot do its work unless it is connected to the visible arm of the state.

This has been shown again and again in comparative studies of economic performance. Far from stimulating economic growth, as was promised, a blind commitment to smaller government can result in weaker administration of crucial functions such as law and order, border control, environmental protection and commercial regulation. These in turn make investors wary of committing funds, so that they demand higher rates of return to compensate them for their perceived risk. As a result, businesses suffer, confidence is suppressed, and employment growth is hampered.

So the lesson of the 1990s is that government that is lean and mean can very easily deteriorate into government that is sickly and lethargic.

By contrast the Labour-led government is deliberately pushing the pendulum back towards a stronger public sector because we believe in an essential role for government as one of the forces that drives our economy and sustains our communities.

Hence one of our imperatives has been to build up the long-term strength of the public sector workforce. That means policies such as workplace superannuation, which encourage commitment and motivation. And it also means investment in skills and encouraging government agencies to be innovative in how they serve the public. It means, for example, encouraging greater cooperation between universities and Crown Research Institutes on the one hand, and key export industries on the other.

The days of the public service as a kind of hermetic order are surely over. We intend in the years ahead for government to work in close partnership with communities and businesses to better our standard of living. That requires many of the new disciplines that were brought in during the late 1980s reforms, such as flexibility, responsiveness to the public and freedom for managers to manage towards objectives rather than slavishly follow the manual. But it also requires something that was missing for more than a decade: a government that is unequivocally committed to a strong professional public service, which offers fulfilling careers for New Zealanders with skills, imagination and energy. That is the commitment we are seeking to restore.

This is a speech Finance Minister Michael Cullen gave to the Hawke's Bay Branch, Government Superannuitants Association.

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