National Superannuation
Address to the 5th Annual Super Funds Summit by John Key National Deputy Finance Spokesperson
Wednesday, April 7th 2004, 1:06PM
Thank you for the opportunity to speak at the 5th Annual Super Funds Summit.
In 1971, the US Secretary of the Treasury John Connally said, “It’s our dollar, and it’s your problem”.
If he were here before you this morning, I suspect he might say something like,
“It’s our industry, but the problem of all New Zealanders”.
It’s certainly correct that whether Kiwis are sharing their 5th birthday with you today or their 65th at home, the issues confronting them on Super cannot be ignored.
Sadly, few New Zealanders seem to give Superannuation planning the focus or attention it deserves. The reasons range from being too busy paying off their credit cards and mortgages to simple inertia.
For many, they consider superannuation is something that can be left for another day.
Although I know that the measurement of savings is fraught with difficulties, the data does suggest that the rate of private saving in New Zealand has been lower than in other OECD economies during the last two decades.
Should we be worried about this? Well it may just be that our low rate of savings is due to “transitional factors” – most notably the deregulation of financial markets in the mid 1980s, which drastically increased New Zealanders’ access to credit. If this were the case, we might expect to see some improvement in the near future as we move beyond the transition. If we don’t see an improvement, it is likely that other factors are to blame.
One of the Treasury’s background papers to the Periodic Report Group noted three potential areas for concern in relation to New Zealand’s savings rate:[1]
The first results from New Zealand’s increased reliance on foreign savings to finance our savings shortfall. Our ongoing borrowing has resulted in a net external liability position now equivalent to 80 per cent of GDP – one of the highest ratios in the developed world. For as long as foreign investors are happy to lend their savings to us, this shouldn’t be a problem. But should sentiment change and foreign investors decide they are no longer willing to lend to us, even for reasons unrelated to New Zealand, our economy could be in a very vulnerable position.
A second concern is the flow of income overseas from foreign investment in New Zealand. Currently the share of income that accrues to foreign providers of saving equates to about a net 6 per cent of GDP. But of course, if we compare this “loss” of income with the constraints our economy would have faced if we were restricted to financing investment from domestic saving only, 6% of a much larger GDP is relatively modest.
A final concern is that savings may be inadequate for retirement needs. We would expect saving for retirement currently to be making a large positive contribution to overall saving, especially in light of the fact that the baby boomers are now in their highest income earning years – yet this does not appear to be happening.
So why are our saving rates poor? And what can be done about it? These are two complex questions.
One potential reason that I haven’t mentioned yet is the fact that for many years our living standards have been improving very slowly - much more slowly than the average standard of living in most other developed countries.
As financial sector liberalisation made loans easy to get, and the abolition of import controls and tariffs has made first-world goods and services more readily available to us, perhaps increased debt was the inevitable result?
If that is the case, improving our sustainable growth rate could help to improve our saving performance.
The rate of economic growth is also the most fundamental determinant of the standard of living of future retirees, as well as the standard of living for the rest of population of course.
The impact of stronger growth is easily illustrated using the Treasury’s current long-term economic projections. Currently, the net New Zealand superannuation rate is about $20,000 per annum for a married couple. According to the Treasury’s baseline projection of 1.5% labour productivity growth per annum, that rate would increase by 35% over 20 years to around $27,000 in today’s dollars. If we managed to improve growth in labour productivity by say, 0.5% each year, the rate would increase by nearly 50% to $35,000 in twenty years time.
So if we really care about improving the living standards of the elderly, it is imperative that we improve our rate of economic growth. And to this cause, National is absolutely committed. Despite all the spin and rhetoric, the reality is that current Government policy is reducing our sustainable growth rate, not improving it.
We urgently need to reform current policies in tax, employment law, resource consent processes, and infrastructure development, just to name a few. Not only will these measures improve the welfare of New Zealanders today, but it will also lead to a much better standard of living in years to come.
However, under current policy settings, stronger growth in productivity alone will not solve the looming superannuation funding problem facing New Zealand. The basic reason is that the rate of superannuation is linked to wages. Therefore as labour productivity and wages improve, so does the cost of funding superannuation.
As a politician I’ve learnt very quickly that talking about Superannuation is always a sensitive issue.
In the States they refer to it as a ‘third rail issue’, just like the third rail that runs down the centre of an electric railway track - touch it and you’re dead.
That said, today I want to take the risk of offering my perspective on - amongst other things - one of society’s taboo issues: the sustainability of New Zealand superannuation as it currently stands.
Before I do, I’d like to briefly comment on the Government’s attempt to address this issue by setting up the New Zealand Superannuation fund. National’s policy at the last election was to scrap the fund, and to use the balance to retire debt. We haven’t resolved exactly what our position will be for the next election, but at the moment we still see a number of key problems with the fund.
Firstly, there are very significant investment risks involved for the Government. The current projections are based on the fund achieving a very ambitious average return of 10.1%. If it doesn’t, its fair to say the whole validity of the scheme is challenged.
Secondly, the fund may discourage private savings for investment by creating the illusion that payment of New Zealand Superannuation is guaranteed forever. Certainly the recent Sovereign survey on savings shows that the proportion of people saving for retirement has reduced since the fund was set up.
Finally, the fund enables the government to pretend that the New Zealand superannuation problem is solved. Put bluntly, it isn’t. Any Government that suggests that the problem is solved is being more than a little economical with the truth.
Some weeks ago National leader Don Brash registered his view that in 20 years, the age of eligibility for National Superannuation will start rising gradually, regardless of which party is in Government. The comments sparked significant controversy and even outcry from some sectors.
But it really shouldn’t have. Don was simply being honest about what anyone who is aware of the imminent aging of New Zealand’s population already knows.
A raft of commentators including the Retirement Commissioner, the Periodic Review Group, the Treasury and even rogue but honest Government Ministers, have highlighted the same issue.
It is not one that is confined to New Zealand. In fact New Zealand’s demographic situation is actually more favorable relative to other OECD countries.
Last week’s Economist magazine contained a special feature “Survey of Retirement” which focused on what it termed the “crisis” of population aging that is facing governments all around the world.
A number of governments are already taking action. In the US the retirement age is gradually being increased to 67, and Japan is likewise continuing to increase their public pension age. In Europe the retirement age is already set at 67 for a number of countries. In Australia, Treasurer Peter Costello recently made a major speech addressing population aging issues and discussing the required policy changes.
The aging of the population in developed countries is being driven by three trends all running in parallel. The first is the bulge in retirement, which will kick-in from about 2011 when the first baby-boomers reach 65. The last of this group will retire in the late 2020s.
The second trend is the decline in fertility rates, which have been trending down for well over a hundred years – with the exception of the baby boom in the middle of last century. The latest statistics show fertility rates have fallen to about 7% below the replacement rate in New Zealand – to an average of 1.97 children per woman.
The third trend is the significant and ongoing improvement that we are seeing in life expectancy. Two famous demographers have recently shown that in those countries where people already lived the longest, life expectancy continued to rise by a remarkably constant two-and-a-half years per decade since 1840. If these historical trends continue, and many experts argue that they will, the average life expectancy in New Zealand could increase to around 90 within 50 years.
Using more conservative numbers than these, Statistics New Zealand’s latest survey of older New Zealanders showed that population aging will lead to the number of people over 65 increasing from 1 in 8 New Zealanders presently, to 1 in 4 within fifty years. That’s more than a million people over the age of 65.
This change will have a massive impact on the government’s liabilities – both in terms of health and superannuation expenses.
Currently the government devotes over five billion dollars each year to funding New Zealand superannuation or, put another way, an amount equivalent to 4% percent of New Zealand’s GDP. This spending is funded on the ‘pay as you go’ basis. Currently the ratio is five workers paying for every one superannuitant.
In fifty years time the cost of providing a guaranteed income of 65 percent of the average wage to a couple over the age of 65 will lift to above 8 percent of GDPs dollar terms costing xxxxx. Health expenses will increase from 6% of GDP currently to more than 11% of GDP. Even more alarmingly, these cost increases will need to be funded by a shrinking workforce. It is estimated that there will be only two workers for every super annuitant by the year 2050.
Statistics like these really should be worrying ministers. Dare I say it, they certainly do worry ‘would be’ Ministers of Finance!
Barring huge increases in future tax rates or significant spending cuts elsewhere, the current parameters of New Zealand Superannuation are clearly unsustainable beyond the next twenty years – with or without the Cullen Fund. The Periodic Report group suggested three possible options to address the sustainability issue:
1. Altering the age of entitlement; or
2. Altering the way New Zealand superannuation rates are set, or
3. Means testing entitlement.
At this point I’d like to stress that National does not support income or asset testing. National believes those policies run counter to encouraging individuals to accept personal responsibility for their financial management. It sends the message that if you spend up large, the state will provide for your old age; but if you work hard and save for your retirement, you will be punished.
But will lifting the retirement age by a couple of years in twenty years time be all that big a deal?
I suspect not. If anything it is likely to be welcomed by the majority of New Zealanders who recognize that increased levels of longevity, inevitably means that any private capital they have squirreled away will need to be spread more thinly and last longer.
History clearly shows us than previous supernatants on average lived for much shorter periods after their retirement and were much less active, the net sum of which demanded less private capital.
Take 1898 for example when pensions were first introduced in New Zealand. There was no TV, no radio, no telephones, little travel and certainly no Starbucks. There was also a scarcity of old people. In 1898 the retirement age was 65 – but the average person died at the age of 59. So granting pensions to 65 year olds was really a Clayton’s pension; helpful to the few who lived long enough, but the reality was that few people actually benefited. What’s more, if you did manage to reach 65, the average life expectancy was only an additional 12 or 13 years.
It’s a totally different picture today. The average New Zealand woman has a life expectancy of 81 years; the average male 76. Once you get to 65, the average life expectancy is of at least an additional 18 years.
As the over 65s become more and more healthy, I don’t believe they will want to retire at such an early age.
A surprising discovery made in recent years is that as people live longer, they do not suffer more years of ill health. In other words, the additional years in life expectancy are for the most part additional healthy years.
We see examples of the marked improvement in the health of the elderly everyday. Take for instance:
The first Olympic Gold medal for the 100 metres, claimed in 1896 by a chap called Thomas Burke who won the event in 12 seconds flat. Today’s fastest 60 year old would have beaten him easily with a time of 11.70.
Home grown Sevens hero Eric Rush at 39 is still playing professional Sevens and scoring tries, something I might add the Auckland Blues can’t achieve.
Our seniors are active, mobile and adventurous. They want overseas travel, entertainment and dare I say it Viagra.
The humble state pension of $10,000 per married person each year has no hope of funding the quality of life that our 65s increasingly desire.
Higher personal savings is one solution – but a seemingly difficult one for many New Zealanders as I talked about earlier. Due to rising divorce rates, student debts, greater consumption expectations, later child bearing and a general misconception that somehow the government will make adequate provisions for all Kiwis in their retirement years - active participation by individuals in private savings schemes continues to decline.
Another solution is staying in work longer. It is in this area that I think New Zealand has the greatest opportunity. Internationally, more countries are turning to working longer, as illustrated the title of the Economist’s feature on retirement; “Work, work, work”.
Working for longer has clear benefits for both for the individual and the country.
For a fit and healthy individual, work offers the opportunity to continue living at a higher standard than a combination of New Zealand Superannuation and modest savings would allow. It also offers the opportunity for them to continue to be actively involved in and connected to wider society, to continue to benefit from the sense of meaning and purpose that work offers so many of us.
What’s more, as technology continues to reduce the need for manual labour, work should become increasingly accessible to the elderly. Ironically, the move to a knowledge-based economy may well be to the advantage of the elderly seeking employment, particularly as future elderly generations will be significantly better educated than current cohorts.
For society, the benefits of the elderly working longer are manifold. An older retirement age – even by only a couple of years – would make a very significant impact on the fiscal cost of New Zealand Superannuation. Scenarios conducted by the Treasury show that increasing the age of eligibility to 68 would reduce the annual cost of New Zealand Superannuation by more than 10%.
Higher labour force participation among over 65s would also lead to higher economic growth. This would help improve the average living standard of all other New Zealanders as well as the elderly, and also reduce the cost of funding New Zealand Superannuation relative to the size of the economy.
There is also evidence that older people make better employees in a number of different sectors. A case in point is within my own caucus. I’m not aware of any MP who would claim to be more productive than our leader, who also makes an invaluable contribution to our team in terms of knowledge and experience. But, under our current superannuation system, Don is encouraged to retire from work in two years time.
Further afield, any talk of retirement for the respected 78-year-old chairman of the US Federal Reserve, Alan Greenspan, sends shockwaves through markets worldwide.
So it seems to me that it is in the interest of all New Zealanders for the Government to encourage higher employment amongst the elderly. That should start with measures such as educating against age-discrimination and offering opportunities to help the elderly continue to retrain and find work.
But such ‘soft’ measures will also need to be backed up one day with financial incentives. The recent increase in the age of eligibility from 60 to 65 has been the primary driver of the strong increase in labour force participation of men and women aged between 60 and 64. Interestingly it also seems to have lifted the employment rate sharply of over 65 year olds to 1 in 4, compared with about 1 in 10 in 1986.
The rise in eligibility passed without great controversy or inflicting significant hardship. My hunch is that a move in the retirement age to say 67 or 68 in twenty years time would pass with even less fuss. In fact, my guess is that most people that age will already be working by the time age eligibility needs to be reviewed.
I’d like to thank you for the opportunity to be here today. Yours is an industry in which I have a great deal of interest and I look forward to hearing the presentations coming up and to working with you over the years ahead.
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