Is there a need for compulsory super?

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Winston Peters, leader of NZ First, recently addressed the attendees at a Financial Planning Forum held in Wellington on the need for New Zealand to introduce compulsory savings.

Thursday, February 24th 2005, 9:50AM

To save or not to save

You have asked whether there is a need for compulsory super?

The answer is unequivocally “yes” as each year goes by it seems more and more like such a silly question.

Of course we need compulsory super – just look at our savings record without it.

But let us examine today exactly why it is needed.

When we talk about savings we must also address debt levels because our debt levels have a significant impact on our capacity to save.

We must also realise that when we talk about savings and debt we must distinguish between aggregate or national level savings and debt, and individual and household savings and debt.

It would be great if we could report that one or the other were in healthy shape, but sadly neither is.

Our Current Account Deficit is reaching a crisis point, much like our Balance of Payments.

In the September Quarter of 2004 our Current Account Deficit reached $8.2 billion, up almost 40% from the previous year.

It has now exceeded 5% of our GDP.

This dramatic drop is driven primarily by a deteriorating Balance of Merchandise Trade and Balance of Payments.

Put simply, we are importing far more than we are exporting and we are now having to pay heavily for this.

This is also compounded further by a growing net income investment deficit.

What this means is that the more than $10billion dollars a year (and growing every year) that we are losing offshore to investors in New Zealand is not being offset by the meagre returns that we are getting from New Zealanders investing offshore.

We are being taken to the cleaners by foreign investors and only now are beginning to realise that our substantial reliance on foreign investment since the failed experiment of the 1980s is coming home to haunt us.

This is truly depressing but when we take a look how we manage our household finances the picture is even bleaker.

Our household debt is growing at an exponential rate. It is now well in excess of $110 billion.

This is huge and has nearly doubled over the past six years.

What is frightening about all of this is that the fastest growing category of debt is non-housing personal loans – basically credit card and other personal debt.

This is now more than 120% of what it was six years ago.

The next fastest growing area of debt is student loans which have now passed $7 billion.

Our young are now carrying greater debt than our generation, and before they even get a job.

We have now reached the point where our household debt is so large that our collective assets and incomes will not be sufficient to offset it.

These are sobering thoughts indeed and without good planning and an effective strategy we will never redress these imbalances.

We are at the crossroads and if we go down the wrong road we may not be able to repay our debt.

So what has this abysmal state of our collective finances got to do with the idea of compulsory savings.

Well let me be absolutely clear – it has everything to do with it; in fact I would go as far as saying that compulsory savings is the only hope for New Zealand to rectify this pending financial crisis.

And it is not difficult to work out why.

Not only were the failed policies of unfettered free market economics unleashed on unsuspecting New Zealanders in the 1980s and 90s, but also this philosophy’s twin sister – unrestrained hedonism was also unleashed.

The reality of freeing up credit and the proposition of “buy now and pay later” has led to very dangerous spending habits and a mentality of consumerism.

Now no one is suggesting that we should not enjoy the latest technology and consumer devices but only that in our rush to secure them we place ourselves at financial risk.

Sadly, probity and thrift have been replaced by raw consumption.

The consequence is that we no longer as a matter of course save any more.

We are in fact more likely to spend our disposable income and whatever credit we can get on consumer goods.

Hence the absolute requirement for a compulsory savings scheme.

Now having been an advocate of compulsory savings over many years, I find some irony in the belated recognition for the need for some savings plan.

In 1997 the Labour Party campaigned against it.

Now this government has made a tentative step with its work-based scheme for government workers.

While it is not perfect it is a step in the right direction but still far more work must be done.

New Zealand First is committed to facilitating the transition from the current pay as we go scheme through the cost smoothing mechanisms of the newly established Cullen fund, into a save as we go scheme contained within individualised accounts.

This will have to occur over several stages.

We would initially utilise the provisions that New Zealand First had inserted into the legislation establishing the Cullen fund to establish individual accounts.

There would then be a transitory period, where funds already accumulated in the Cullen Fund would fairly, by prior contribution, be distributed among these accounts.

We would also ensure this legislation was amended to ensure future governments could not touch this money.

Our next step would be to introduce the compulsory savings aspect of this regime.

This would be done in the first instance by offering tax deductions as the means of ensuring that money going into these accounts would be as fiscally neutral to business as possible.

We would then propose that a proportion of future salary increases would go straight into the individual’s account.

We would establish a favourable fiscal regime to encourage greater savings, particularly for those who are at the peak of their earning power and who want to take greater amounts of their wages and salaries in the form of superannuation payments.

We must also ensure that those who are caught by the intermediate phase of this process are not disadvantaged by the scheme.

Now once this system is in place we must make this growing superannuation account work for New Zealand’s benefit.

We would direct the guardians of the New Zealand superannuation fund to prioritise the purchasing of shares in local infrastructure companies, particularly when they are being sold by overseas investors in favourable circumstances for the buyer.

The aim would be to build a solid base of New Zealand ownership of these assets.

However, this process will all be placed at an arms length from politicians to ensure that there is no political interference with the process.

We would also require that the guardians of the funds have the capacity to make funds available at competitive interest rates to infrastructure and other growth industries – particularly in the export sector – such as transport and local government for capital projects. Let me tell you why investing in New Zealand is a good idea.

First, if you look at how well infrastructure assets which were previously owned by the government have performed since they were sold off you begin to see what we are missing out on and what foreign investors are gaining.

Let me give you just three examples.

Telecom – which was sold in September 1990, for $4.2 billion, has made over $7.3 billion dollars in profit since it was sold.

With the vast majority of Telecom shares being owned by foreign investors, that’s a lot of money heading offshore.

How much better would it be if that was money in our superannuation coffers.

Let’s have a look at Contact Energy, sold in May 1999 for $2.3 billion. Since that time $751 million profit made, and a large chunk gone overseas.

Finally one asset sale dear to my heart – Wellington Airport.

This was deal which broke the proverbial camel’s back when we were in coalition with National.

They sold the government’s 66 per cent share this airport in August 1998 for $96 million. Since that time the Airport has made over $40million in profit.

Even Air New Zealand with its irresponsibly handled private ownership, which has seen its share value tumble, has made significant net profit margins in most of the years it has operated.

Fortunately the government now benefits from this.

My point is this – most of these companies still operate as monopolies or near monopolies because of new Zealand’s relative size.

Where competition has entered the market like the telecommunications industry, this has not prevented Telecom from remaining the dominant market player.

So these companies make relatively large profits and will continue to do so.

Therefore it actually makes good economic sense to invest in them.

No investment is risk free, but when you are investing in a monopoly the risks of not making money are greatly reduced.

Now, as I mentioned earlier we are at crossroads in this regard.

We could continue down the path we are currently on, and in 15 to 20 years time reach the point of financial collapse, or we can take the prudent path and act now.

What I have outlined today is a part of New Zealand First’s plan to arrest this deteriorating situation.

If we act now, we can turn things around and compulsory savings must be a part of this solution.

New Zealand has just wasted the last thirty years in failing to properly address the critical issue of savings.

Only a fool would suggest we carry on doing that.

Unfortunately the fools on this issue uniquely in this country have held centre stage.

It’s long past time to change this act.

An address by Rt Hon Winston Peters to Financial Planners, TePapa Tongarewa, 11.00am, Tuesday, 22 February 2005

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