Just as the Government had signalled it would do, the 2009 Budget stopped making fixed annual payments into the National Superannuation Fund (now $12.5 billion nest-egg). It did not tinker with National Superannuation entitlements or eligibility. National Super – and the country’s savings policies – nevertheless became subjects
of heated debate and alarmist conjecture yet again.
Labour leader Phil Goff led the charge, saying the death knell had been sounded for superannuation for generations of Kiwis, after National’s earlier decisions to scale back the KiwiSaver scheme. “The net result of today’s decade of deferrals will be that future entitlements to super are put at risk…”
Martin Lewington, head of Mercer’s investment business in New Zealand, said: “If I was baby boomer, I’d be very afraid.” Financial adviser Peter Smith urged New Zealanders to join up with KiwiSaver because of the continued uncertainty around the future of superannuation funding in New Zealand.
Indeed, there are uncertainties. Means testing could be introduced; the age of eligibility could be raised; pension payments could be reduced.
But when challenged by Goff in Parliament about his commitments to New Zealand Superannuation, Prime Minister John Key insisted: “Yes. My cast-iron commitment has always been that the Government will maintain payments at minimum of 66 percent of the after-tax average wage, and that people will continue to be eligible for superannuation when they reach the age of 65. I am happy to say that as part of last Thursday’s Budget, future funding at this level is locked into the Government’s long-term spending path, and is reflected in all of the Budget’s projections.”
Political commitments, at best, are good only for the term of the government that makes them (in the case of promised tax cuts, they didn’t last six months). More important is the impact of the Budget decisions on future government’s ability to meet superannuation entitlements.
The fund – at its height – will pre-fund New Zealand Superannuation by around 12 to 14 percent, according to the Treasury’s reckoning. Much of the pension will still come from the general tax base. “And one of the strongest ways to make sure we can ensure that future superannuation is there is to have strong economy without having an indebted economy,” Key said.
This underlined the projected budget deficits – and mounting public debt – that gave him justification for stalling the tax cuts and deferring the payments into the fund.
Tax and superannuation expert Michael Littlewood earlier this year made five suggestions on how New Zealand might face the economic crunch. Reviewing the need for the New Zealand Superannuation Fund was top of the list. At the very least, the annual contribution should be stopped while we discuss whether we need or want it, he argued. Is it really the best use of taxpayers’ money? Where is the evidence it will help?
If the fund was continued, Littlewood wanted changes to the investment strategy. “It isn’t good idea (as National proposed in 2008) to require any minimum proportion to be invested in New Zealand.” The fund should first focus on new job- and growth-creation opportunities in New Zealand, which would mean investing in new businesses or in the growth of existing businesses that, for example, had export potential. The rest should be invested (passively) in listed overseas shares.
Another proposal was removal of the rest of the KiwiSaver tax breaks. Again, Littlewood raised questions: do we really need to convince New Zealanders to save for retirement? Should taxpayers’ money be spent on encouraging them to put more money into superannuation schemes? And what evidence is there that we need KiwiSaver?
Littlewood similarly questioned the need for the Superannuation Fund when it was established in 2003 to partially pre-fund New Zealand Superannuation. It was “just another version of compulsory saving for retirement that was defeated in 1997” and would be “an arm of government”, no matter how many Chinese walls were erected.
He raised more fundamental issues with Parliament at that time. Most pertinently, he pointed out that since the establishment of the National Superannuation scheme some 25 years earlier, New Zealand had never had properly researched discussion on the state pension age; the dollar amount paid; the inflation linkage; the qualifications for payment; the relationship between the married and two different single rates (which “just about covers every single important part of the design”. Fixing the benefit’s design would mean fixing the costs, whereas the Cullen Fund could hope to achieve no more than minor contribution to inter-generational smoothing of how it was financed.
Littlewood’s questions this year perturbingly show that scant progress has been made in tackling the questions raised then.
Bob Edlin is leading economic commentator and NZ Management’s regular economics columnist.
