Skip to comment form | Skip to poll | Send to a friend

In his rush to judgement (The Politics of Retirement, 18 June 2008 [http://www.nzcpr.com/midweek30.htm]), Mike Moore slides by some inconvenient truths about the last 30 or so years of New Zealand ’s superannuation history.  Before getting to this, let me first agree that politics have been the consistent enemy of debate and considered policy development on superannuation issues since the mid 1970s.  However, it takes a seemingly forgetful former Prime Minister from one major political party to lay all the blame for that at the feet of the other major political party.  That illustrates perfectly what’s been wrong about the last 30 years.  In truth, both major parties share significant blame for both the current mess as well as the past.

Mike Moore rightly points out National’s shortcomings – winding up the New Zealand Superannuation Scheme in 1975 (by a press release, let us not forget), National Superannuation in 1977, the “Mother of all Budgets” in 1991 and the attempt to reduce New Zealand Superannuation in 1999.  These were all badly done.

But here, just to balance things up, are Labour’s transgressions that were just as peremptory; just as unresearched; just as badly introduced:

• The compulsory savings scheme in 1975;

• The “surcharge” – 1985;

• “Guaranteed Retirement Income” and the “Retirement Tax” - 1989;

• Abolishing the Super2000 Taskforce – 2000;

• The “ New Zealand Superannuation Fund” – 2001;

• KiwiSaver I – 2005;

• KiwiSaver II – 2007.

Whether or not any of these initiatives were good ideas, the criticism here is the process by which they were introduced.  In each case, there was no research-based justification for the changes and where there was any debate, it was about the “how?” not the “why?”  Labour, like National before it, knew what New Zealand needed and wasn’t going to let pesky facts get in the way of decided change.

You can see a two page summary of the last 30 or so years of all the superannuation sins here >>>. Mike Moore still favours tax incentives and compulsion – the Australian model. The trouble with both of these is with the international evidence.

Tax breaks certainly change the way citizens behave but almost certainly don’t increase national saving (one of KiwiSaver’s stated objectives). See here [insert link to http://www.pensionreforms.com/Preview.aspx?138] for an example from Spain and here [insert link to http://www.pensionreforms.com/Preview.aspx?20] for another example from the US .  As well as not increasing saving, tax breaks are also regressive, distortionary, complex and very expensive.  The fact that they seem not to work is, however, their biggest defect.

Compulsion doesn’t seem to make much difference either.  In Australia, despite the large amounts in compulsory, tax-favoured schemes, Australia’s household savings have, like New Zealand’s, “collapsed” since 2000 according to an Australian report of 2007 (see here – insert link to http://www.pensionreforms.com/Preview.aspx?194 ).  National saving in Australia , despite compulsion, is below the OECD average and has, in fact, remained at about 20% of GDP ever since compulsion really got going in 1991.  In other words, compulsion seems not to have changed things much.  The most the government can now say is that, without compulsion, things may have been worse – see here [insert link to http://www.pensionreforms.com/Preview.aspx?160 ] - though even that can’t be taken for granted.  In Chile , the World Bank’s poster child for compulsion, forced saving has apparently made no difference to household saving in 25 years.  The amount households as a whole have contributed to their compulsory schemes has been almost exactly matched by a fall in household saving – see here. [insert link to http://www.pensionreforms.com/Preview.aspx?72]

As well as not really seeming to work, compulsion is also regressive, distortionary, complex and expensive to administer.

Mike Moore suggests that the New Zealand Superannuation Fund and KiwiSaver have somehow made superannuation more secure.  He seems not to have heard of the Law of Unintended Consequences.  New Zealand used to have a simple retirement income environment that sent New Zealanders clear signals about what they might do for themselves privately.  New Zealand Superannuation was probably affordable into the distant future and New Zealanders were seemingly saving enough for their retirement – that’s what the best evidence we have on this says – see here, for example [insert link to http://www.pensionreforms.com/Preview.aspx?168].

Now we have a very complex, confusing environment and New Zealanders will soon be spending, through taxes, about $4 billion more a year on retirement income initiatives than we were before 2001.  That means New Zealanders will be paying about $4 billion a year more in taxes than seemed necessary before 2001.  Even though the New Zealand Superannuation Fund’s money will eventually help pay for New Zealand Superannuation from the 2020s, as a country we are now exposed to unnecessary investment risks through the Fund.  Also, paying more taxes now has economic costs that raise the risks to New Zealand and the Fund does not change the future cost of New Zealand Superannuation by a dollar.

None of this makes the retirements of baby boomers more secure as Mike Moore seems to think.  With so much money now heading in that direction (including the costs of New Zealand Superannuation itself) and with politicians in charge, future change is almost inevitable, unless we can change politicians’ behaviour.

One missing piece from Mike Moore’s piece was a really major gap and a surprising one, given his recent international experience.  The only way New Zealand can afford to support the growing numbers of older Kiwis who won’t be working in the future is for us to become more efficient, to become more productive and to grow more than now.  The amount of money in superannuation schemes (public or private) only alters the economic claims on future production.  It doesn’t change that production – growth is what changes that.  The international evidence suggests that growth isn’t caused by more saving (even if that happens); higher saving seem to be caused by growth – see here, for example [insert link to http://www.pensionreforms.com/Preview.aspx?103].

So, how will the extra $4 billion in taxes help New Zealand grow more?  How does either the New Zealand Superannuation Fund or KiwiSaver increase the probability of New Zealand ’s future economic growth?  Most of the money is likely to be invested in the growth of other countries by being shipped overseas.  That doesn’t mean it is lost to New Zealand but is that really the best use of our savings?  Do we not have confidence in our own economy and trust New Zealanders to decide how best to invest their savings?  Where is the proof that politicians know better than Kiwis how to get the best return on their savings?

I had not heard of National’s reaction to Mike Moore’s signing the 1993 Superannuation Accord.  Apparently National MPs laughed at Mike Moore, saying “gotcha!”  If that’s true, I agree that it represented small-minded, short-term thinking.  Mike Moore seems now to regret his agreement – he should instead be proud of adding his signature to the Accord.  We will have to get back to something like that agreement but it can’t happen with the present government.  It is so confident it knew what needed to be done that consensus would now be impossible.

Regardless of what some National party members thought in 1993, the Superannuation Accord was a statesmanlike gesture from the opposition parties of the time.

Perhaps what all this means is that we can’t leave political parties to resolve a long-term issue like superannuation policy (public or private) on their own.  The main parties each have such an awful record that we need to think of new ways of doing this.  We can if we put our minds to the issue.

If you would like to comment on this issue please click >>>

Send to a friend: