National's Superannuation Policy

A speech by Don Brash, National Party Leader, to the North Shore Rotary Clubs.
Pupuke Golf Club, 29 November 2004.

Tonight, I want to talk about superannuation.

And in doing so, I will announce some significant new policy, about which there has been a degree of media speculation in recent days.

When I first talked about superannuation earlier in the year, I wanted to outline, in a straightforward way, the options we face in ensuring that superannuation will be available for all as we move through this century.

The problem is easily summarised: over the next 30 or 40 years, we face a sharp increase in the proportion of our population over 65 years of age, and that means that the cost of providing superannuation will increase substantially also.

As an interested spectator, I have watched as both major political parties have kicked this ultimate political football. And I have to say that neither the Labour Party nor the National Party has emerged totally unsullied from what has been a pretty un-edifying display.

The reaction to my comments earlier in the year on what might or might not happen to the state pension age in 20 years' time illustrates just how puerile the debate has often been.

So tonight let me reassure New Zealanders and end the political squabble over the superannuation issue.

In doing that, the first point I want to make is that there is a lot right about our current arrangements. By world standards, New Zealand Superannuation is an elegant, easily understood and simple structure for the public provision of retirement income.

We should be reluctant to mess with that structure. Something that is easy for everyone to understand has some important advantages, and makes it easy for people to plan their own affairs around.

That leads naturally to my second point about New Zealand Superannuation. People make financial plans for their retirement that often span decades.

They might pay off their mortgage, educate themselves and their children, build up a business, train for part-time work, put money aside in a superannuation scheme, buy a second property, buy shares or build up deposits at the bank. There are a great variety of ways that people can prepare themselves financially for their retirement years. The common feature about most of them is that they require years of planning.

Once people have actually reached retirement there is not much they can do financially if things change or go wrong. Even before retirement, for most people financial options diminish significantly as they get older.

So before I talk about what National will do when it becomes the next government, I first want to make clear the things that it will NOT do.

If New Zealanders are ever to gain some confidence about the sustainability of New Zealand Superannuation, it is going to require an opposition political party to make the hard decision to stop kicking the political football.

If ever we are going to give New Zealanders the greater certainty they deserve about retirement savings, a Leader of the Opposition is going to have to declare the game over.

And that is what I am doing tonight.

Tonight I am announcing that the next National Government will retain the New Zealand Superannuation Fund, sometimes called the Cullen Fund.

Tomorrow, I intend to deliver to the Minister of Finance a letter outlining National's support for Parts 1 and 2 of the New Zealand Superannuation Act 2001, the first part confirming our support for the calculation of the value of, and the age of entitlement to, New Zealand Superannuation - 65% of the average wage at age 65 for a married couple; and the second part committing to the New Zealand Superannuation Fund.

Our support for the New Zealand Superannuation Fund is a change from our position at the last election.

National will continue the New Zealand Superannuation Fund in its current form, and with the current contribution rate. There will be no difference between the two major parties on this, and that will allow a more constructive discussion about how we deal with the strains on financing New Zealand Superannuation through the middle part of this century.

I should perhaps note that the change in our position on the Fund is not as significant as perhaps it looks on the surface. National was always committed to running a fiscal surplus at this stage of our history - at a time when there are a relatively small number of New Zealanders eligible for New Zealand Superannuation - to ensure that the government accounts were in as healthy a state as possible to cope with the pressures of an ageing population.

Let me explain by way of a simple analogy.

A household with a large mortgage has the option of reducing the mortgage, or leaving the mortgage constant and building up other assets, perhaps by investing on world share and bond markets. In both cases, the household is saving. Its net worth is rising.

Of course, one strategy - investing on world sharemarkets - is riskier, and it may or may not prove to be the better path, although over long time periods it could well be the better option.

At the last election, National favoured paying down the mortgage. The New Zealand Superannuation Fund represents the alternative course, leaving debt levels roughly stable and building up an investment fund. The net worth of the government, and therefore its ability to manage future pressures on funding New Zealand Superannuation, is much the same whichever course is taken.

But it seems that many people find some reassurance in having a fund they can "see", a fund which gives some visible reminder that there is an ongoing determination on the part of government to meet the commitments implicit in the New Zealand Superannuation scheme.

By election time next year, the Fund will have been in place for four years. It will have accumulated over $6 billion.

Reassurance, stability and predictability are vital in this area.

And that is why National will commit to continuing the Fund, with the same contribution rate as at present.

That should allay any concerns that abolishing the Fund would be the inevitable precursor to a rise in the age of eligibility, or some other adverse change in the scheme.

With that issue behind us, it should allow a rational discussion to take place about what, if any, changes are needed to ensure the sustainability of the New Zealand Superannuation scheme in the very long term.

Does retaining the New Zealand Superannuation Fund mean we therefore have nothing to worry about in respect of the sustainability of New Zealand Superannuation through this century?

That question is very hard to answer now, as we are trying to anticipate the situation as it might be in 30, 50, or 80 years' time. Even with the New Zealand Superannuation Fund, there will be significant financing pressure ahead. It also makes little sense to ignore the reality that people will be healthier, wealthier and will live longer by mid-century.

Does National have a specific plan to change the rules, such as the age of eligibility, in ways that will affect younger people? No, we most assuredly do not.

Whatever emerges from the national conversation that I will talk about in a moment, I want to assure all New Zealanders who are currently receiving New Zealand Superannuation that a National Government will NOT change the way their pensions are calculated. National recognises that their financial position was effectively fixed when they retired and that's that. So there will be no changes for them.

I believe that all parties should also commit to the expectations that older working New Zealanders will reasonably have for a pension when they reach retirement age. Those within a decade or two of retirement should be absolutely assured they will still get New Zealand Superannuation on the present basis - from age 65, at 65% of the average wage for a married couple, with no income test or asset test.

That's what it is now - that's what older New Zealanders have knowingly or implicitly built into their plans. That's what they should get.

Both these groups of New Zealanders - those who are now in receipt of New Zealand Superannuation and those within a decade or two of receiving it - must be ring-fenced from the effects of any discussions on the way New Zealand Superannuation might change in the very long term.

The real issue with superannuation is how we deal with the demographic pressures affecting those below the age of 30 or 40, the group I want to talk about next.

I am concerned that, in facing the demographic pressures coming in the future, we have often provided an overly alarming view of our ability to deal with these pressures.

That demographic pressure is easy to understand. At present, only one person in eight is over 65 years of age. By 2040, that will probably have risen to one in four. There will be many more retired people, with fewer working people paying the taxes that support those people receiving superannuation.

We know that the total net cost of New Zealand Superannuation will rise over the coming decades. Currently, the net cost is about 4% of GDP. By 2020, that will be about 6%, and by 2050 the number will be about 9.5% of GDP.

Is 9.5% too high? I don't know for sure - it has never been properly discussed or debated. But spending almost 10% of GDP on superannuation does look quite high.

The New Zealand Superannuation Fund won't make any difference to those numbers - it changes the timing and the pocket from which the government will take the money needed in 2050, but it won't change the total cost.

While these expectations of cost are a simple extrapolation of current demographic trends, it is also true that we need not panic about this. The level of spending on superannuation that we are likely to face by mid-century is no higher than several European countries are facing today.

Moreover, there is an even more important fact to remember. Over a period of several decades, real incomes will rise markedly. By mid-century, ours will be a much wealthier society. We should comfortably be able to manage the rising cost of superannuation and health services - rising incomes solve many apparently insoluble problems.

That is why lifting New Zealand incomes is so vital, and why National is committed to that task

Consider this:1

People retiring after 2025 will have been earning much higher incomes than those retiring now (the average income for a full-time worker is about $40,000 today, but in 20 years' time that will, in today's dollars, be around $54,000, and in 40 years' time around $72,000, if not higher; the average household income today of $68,000 is likely to rise to over $120,000 in 40 years).

People will be living significantly longer, and they will be healthier at age 65 than people are today. Wealth at retirement age will be considerably higher than is the case today.

And the weekly value of New Zealand Superannuation will be considerably higher than it is today (the current payment for a single person is around $13,000, but in 20 years' time is likely to be over $17,000, and in 40 years' time around $23,000. If we kept current policy unchanged for a century, it could be over $50,000).

So let's keep some perspective about all of this.

We have to ask ourselves this question: why are we trying to solve - today - all of the manageable problems of what will be a much wealthier and healthier generation in 50 years' time? It doesn't make sense.

We don't need to solve those problems now, but we do need to put in place a process that will allow small evolutionary changes to the scheme, well in advance, if and as they prove necessary.

And that process should be as far away from political manoeuvring as possible. A good example of this being done in another important area of policy occurred in the late eighties, where both major political parties agreed that controlling inflation was too important to be subject to the day-to-day vagaries of the political process, and without dissent in Parliament passed a law to remove monetary policy from political influence.

To achieve this distance from politics in the field of superannuation policy, it is my view that the Retirement Commission's role should be extended.

Accordingly, a National Government will ask the Retirement Commission to take an active role in leading the national conversation that New Zealand must now have - raising the issues in an ordered way, seeking the views of interested parties, doing the research, and suggesting a framework around which consensus can be built, not just among the political parties but among all New Zealanders. We will strengthen the Retirement Commission so that it has the necessary resources - both money and people - to discharge this responsibility.

This suggested framework would, to the greatest extent possible, de-politicise the issues and the process, in particular by having a very long horizon - looking at any changes that might be necessary 20 years ahead.

However, it won't remove from Parliament the ultimate responsibility for bringing into law the changes that are needed to give younger New Zealanders the certainty they deserve.

If you ask most young New Zealanders how much they think they will get from New Zealand Superannuation when they retire, the most common answer is "nothing" or "it won't be there when I retire".

That's not right. That is not remotely right. And it is tragic that this misunderstanding is so widespread.

What can we say to those below the age of, say, 30? I think we can say this:

You can be confident that New Zealand Superannuation will be available for your retirement; its value will be a good deal more than it is now; and your income over your working life, your wealth at retirement, and your life expectancy are all likely to be significantly higher than for your parents' generation.

And, if you have a National Government through most of your working life, then your taxes will be lower than under Labour, which will make life easier, make it easier to save and build an ownership stake in society, and will mean you have a larger pool of private retirement savings available to you in retirement.

For those currently retired, let me just repeat: don't believe the scare tactics. There will be no change to your superannuation entitlement.

For those within a decade or two of retirement, you have an absolute commitment from National, and I am sure from most other political parties, that there will be no change to your entitlement to New Zealand Superannuation for the rest of your life.

For younger New Zealanders, the demographic pressures are manageable. Even if, in 20 or 30 years' time, there is a need for some adjustment to the scheme, there is little doubt that, because of rising incomes, the value of your superannuation will still be much more generous than it is today.

We have an election next year, and I relish the challenge of the campaign. I look forward to releasing our policies, but I don't intend to help Labour out by announcing them all yet.

Labour is already imitating the form and wording of what we have announced this year. They are doing so because they know that core Labour values are wildly out of touch with the core values of working New Zealanders.

Labour is copying the style, but not the substance of our policies. If you really want the Treaty grievance industry behind us, if you want a genuinely tougher stance on violent criminals, if you want a meaningful reform of the Resource Management Act, if you want roads built, if you want lower taxes through your working life and retirement, then you need to vote for the real thing - the National Party.

National will be announcing policies next year which will help lift the real incomes of New Zealanders, so we can start catching up to countries like Australia, not keep falling behind. That is the only way we can ensure that family reunions don't involve overseas travel.

Lifting New Zealand incomes is also the solution to the concerns many have about the way the character of this country is being changed by rapid immigration. The underlying reality is that if New Zealanders are leaving this country, as they have been doing in large numbers, to seek a better life and higher incomes elsewhere, New Zealand requires a strong migration inflow simply to offset the loss of kiwis heading overseas.

I am in favour of a moderate, controlled inflow of immigrants to add skills and vitality to this country. It enriches us as a nation. But I am absolutely committed to ensuring that we do not build a nation where our children and grandchildren drift overseas for good, so that immigration then simply becomes a tap used to refill a tub that has had the plug pulled. That is no way to build a nation unified by common values and purpose.

The next National Government has some very clear priorities. We will put a stop to the politically correct pandering to violent criminals, and we will work to keep our communities and families safe.

We will ensure that, through a demanding and aspirational education system, we no longer complacently allow about a quarter of our children to come out of our schools barely literate and barely numerate.

We will deal with entrenched welfare dependency by ensuring that able-bodied people are obliged to perform some work while receiving unemployment benefits. No child should grow up in a household where their able-bodied parents are permanently on welfare, with no obligation to work to earn the support provided by the taxpayer.

We will work to create an efficient health service, where extra dollars of funding go into cutting surgery waiting lists, not adding more bureaucrats.

And, finally, we will build a nation where the Treaty grievance process is put well behind us, and all New Zealanders are equal before the law.

1 The following projections are based on a 1.5% annual productivity or real income growth trend, as assumed by The Treasury. National is committed to raising that growth trend to equal or better the higher growth projected for Australia.

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