Michael Littlewood Writes To PM About Super

So, the Greens have said “no” and, unless the government can convince New Zealand First to back the New Zealand Superannuation Bill, it might not have the numbers to pass the New Zealand Superannuation Bill. The Minister of Finance is seemingly defiant. He intends to set up the Big Cullen Fund anyway; running it informally within the Treasury without enabling legislation. If there's nothing to stop such a genetically re-engineered clone (the "Big Cullen Demi-Fund"?) it makes a bit of a mockery of the need for the New Zealand Superannuation Bill in the first place, n’est ce pas?

Anyway, such a fund may not be consistent with the Fiscal Responsibility Act. That requires the government to reduce Crown debt to a prudent level and then maintain it at that level. Would it be prudent for the government to have debt at a higher level than needs be so the government can invest in “risky” assets? Possibly not.

Voters could be excused being deeply cynical about the surreal position the government finds itself in. It’s now completely dependent on Winston Peters’ support. And he wants a scheme that was rejected by 92% of voters less than four years ago. Somehow, the government has to look as though it goes along with Mr Peters without agreeing with him. Is this consensus or what? Why is superannuation seemingly such an intractable subject?

What’s wrong with the Bill?

I don’t want to go on too much about what’s wrong with the Bill but those who haven’t been following the argument might appreciate a crash course, just to set the scene for the real point of this piece.

The future cost of New Zealand Superannuation is the pensions that will be paid. In general terms, that future cost has nothing to do with the way the pension is financed but with the amount that is paid. This Bill and all the debate that has gone on over the last 25 years have not addressed one single aspect of the design elements that drive the benefit design of New Zealand Superannuation. Specifically, we have never had a properly researched discussion on the:

- state pension age;
- dollar amount paid;
- inflation linkage;
- qualifications for payment, including income and/or asset tests;
- relationship between the married and two different single rates.

That just about covers every single important part of the design.

The baby boomers aren’t the very long-term problem either though they will cause relatively short-term pressures over the next 50 or so years. Superannuation costs won’t reduce once the baby boomers are all dead, say, by 2060. The costs increase steadily over the period after 2050 and top out at about a gross 12% of GDP by 2100 (about a net 10%) ¨C see the chart.

Chart
Note: source ¨C PRISM, a modelling tool developed by the Super 2000 Taskforce.

The government justifies the Big Cullen Fund by focussing on the cost between 2030 and 2050 by which time the net cost will reach about 9% of GDP. The government apparently isn’t concerned about the generations of taxpayers after 2050 and, particularly after 2100 when the last dollar will have been paid from the Big Cullen Fund.

My main gripe with the Bill is that we haven’t debated any of the design elements of New Zealand Superannuation. The government is actively discouraging discussion on the real issues. Why don’t we talk about what we have to pay for before we discuss how to pay for it, never mind whether we can pay for it in the first place?

The most the Big Cullen Fund can hope to achieve is a minor contribution to inter-generational smoothing of cash flows. That doesn’t make New Zealand Superannuation more sustainable as the government claims.

When the Bill is reported back to Parliament by the Select Committee on 12 June, it should be defeated.

So what happens next?

The last National government fell flat on its face with its attempt to lower the married couple’s New Zealand Superannuation from 65% of the national average wage to 60%. However, it had already shamefully neglected the Superannuation Accord and so had lost its credibility on superannuation policy.

Now, there is some prospect of the present government’s dropping this ultimate political football. The poor pollies must be wondering what to do next. How can they get this vexatious superannuation monkey off their backs?

I want to make a few suggestions and that’s what this article is really about.

I was part of the first Todd Task Force that recommended establishing the Retirement Commissioner’s Office. The role of that Office was described in our final report - it was mostly about informing and educating the public on issues related only to private provision for retirement.

I think it’s time to revisit the Retirement Commissioner’s role and status. That’s also appropriate because, apart from the coming roadblock in the debate on public provision, we now have the unseemly spectacle of the private sector’s withdrawing financial support from the Retirement Commissioner while at the same time, the government is apparently saying there’s no more money from the taxpayers. I think some in the government would actually prefer the Office of the Retirement Commissioner to wither and die. They’re not the only politicians who think that. They just don’t like any sunlight being shone on the issues ¨C it makes their policies look a bit threadbare.

I want to suggest a new, wider role for the Office.

None of the pollies now has any credibility with the public on superannuation issues. So why not literally shift the ground on which the debate takes place to outside the mucky political trenches? We need a proper national debate on New Zealand Superannuation’s key design issues. We’ve never had one before. But before that debate can start, there’s a lot of information we need so that we’re all at the same starting gate.

Why not ask (OK, tell) the Retirement Commissioner to run the research and the required debate? The pollies can take part if they wish and they should be encouraged to do so (OK, publicly humiliated if they don’t). Anyone can contribute and the Retirement Commissioner should aim to hear everyone’s views, no matter how nutty. If someone really believes that forced private saving is the answer to all our retirement income ills, give him his time in the sun and answer the proposal with researched responses. That kind of individual attention is now practicable through Web site technology - the research, the proposals and the responses all need to be in the public arena.

This will be quite a long process because there’s such a lot that we just don’t know. However, we’ve got nowhere in the last 25 years so another couple of years won’t matter too much.

Here are just a few questions about New Zealand Superannuation that I want to see answered with some proper research, before the debate can begin, not, as has been customary, after the pollies have made their decisions:

- What might be the economic, welfare and labour market consequences of changing the state pension age from 65 to, say, 68 or 70? What if we allowed some choice about the starting age with actuarial adjustments for early and late starts? We really haven’t a clue about any of this at present. We can all make educated guesses but no-one really knows.

- What are all the implications of changing the relationship between the married and single pensions? Why is the single person’s pension set at 60% of the married couple’s? What’s the basis for the extra amount paid to single people who live alone? Is it enough/too much?

- Should New Zealand Superannuation be the same in Auckland (where housing costs are high) as in Invercargill (where housing costs are so much lower)? Why is it linked to the national average wage? Are there alternative, fairer ways of protecting its purchasing power?

- What are the implications (social, welfare and economic) of having New Zealand Superannuation set at something other than a net 65% of the net national average wage? What is the pension amount trying to achieve? We don’t know other than it’s set at a level that doesn’t seem to provoke too many complaints and so might not lose the next election. Is that a reasonable test of reasonableness? It might be but who knows?

- What are the implications of income and/or asset tests for New Zealand Superannuation? Can we design an arrangement that is simple to administer, fair and has popular support? The pollies will run a mile from that suggestion but the Retirement Commissioner should at least try. We should certainly debate the arguments for and against rather than consign the issue to the opaque business of coalition compromises (as happened in 1997).

One of the major problems all the political parties face is that even asking questions about any of this stuff is a potential admission to the others that they may be thinking of change, even 20-30 years down the track. So the questions don’t get asked and we get dopey “solutions” like the New Zealand Superannuation Bill as the answer to all our problems.

Changing the ORC’s structure

The Retirement Commissioner’s role can’t be widened in the way I suggest without some changes to the Office’s structure and financial support. I think the Retirement Commissioner should be made an Officer of Parliament and should not have to go down on his knees for money from the savings industry. Apart from anything else, there’s a lot wrong with the way some parts of the finance and financial planning industries work. The Retirement Commissioner should be able to slap wrists and publish league tables without the risk of having his funds cut off.

If he’s going to lead a properly researched debate then the Retirement Commissioner will need a decent dollop of public money to do that. And that’s OK because remember that New Zealand Superannuation now takes about $5 billion of our tax money and is the largest single item of expenditure in the government’s budget. That will become about $10 billion of today’s money in the next 30 years. Even if the Retirement Commissioner’s budget were as much as $10 million a year for the next few years, that’s still only 0.2% of each year’s New Zealand Superannuation payments. Surely we should be happy about spending that so that we know whether the other 99.8% of that huge expenditure achieves its objectives, whatever they might be.

Having got the debate going and having become the source of credible information on the whole issue, the Retirement Commissioner can knock a few political heads together from time to time. I want him to be pro-active on this front. In today’s environment, for example:

- He should tell Labour that the Big Cullen Fund won’t work; that Michael Cullen’s TEt proposal probably won’t work either.

- National should be asked to justify its proposed tax incentives (What will they achieve? How much will they cost? What’s wrong with what we do?).

- He should ask ACT to explain, in detail, how its “savings-based” solutions will work. Does ACT really want an income and asset test?

- He should ask the Greens why they support “65 at 65” (65% of the national average wage from age 65) and what alternatives the Greens have considered in coming to that conclusion.

- We could have saved $20 million or so if he had been able to say to the last government that the referendum on the Compulsory Retirement Saving Scheme was a waste of time.

And so on.

The pollies won’t like this kind of attention but the quid pro quo will be that political parties should be able to put forward suggestions about policy changes without the opprobrium they currently risk gathering. It will also probably lift the quality of the suggestions made by our elected leaders (Pavlov’s dogs and all that).

There is an alternative

In my view, the 1993 Superannuation Accord happened because Jeff Todd had gained credibility through his leadership of the Task Force and because he knew so much more about the issues than the then crop of politicians. His patient insistence on dealing with the things that really mattered meant that MPs had to answer the important questions and not be diverted by issues that might frighten the political horses. In this business, Jeff showed again that knowledge is the real key to quality decisions.

New Zealand has made practically no progress on public provision for retirement over the last 25 years, mainly because low-grade policies have been developed by people who don’t know what they’re talking about. I’ve now seen that process at work close up and that really is what actually happens. It isn’t a pretty sight.

Let’s turn the Office of the Retirement Commissioner into a centre of excellence on all retirement income related issues (both public and private). I urge those politicians who are thinking of voting against the New Zealand Superannuation Bill to stick to their guns. There is an alternative.

- AUTHOR NOTE: Michael Littlewood has had a long professional history in the employee benefits industry. He was also a member of the Task Force on Private Provision for Retirement (the first Todd Task Force) and is the author of How to Create a Competitive Market in Pensions - the International Lessons (IEA, London, 1998).

Michael Littlewood
3 Woodley Avenue
Remuera
Auckland, 5
7 June 2001

An open letter
The Right Honourable Helen Clark
Prime Minister
Parliament Buildings
WELLINGTON

The New Zealand Superannuation Bill
Dear Ms Clark

I am taking the slightly unusual step of writing to you directly and also publicly because I think it’s now time for everyone to step back from the current debate to see where we are and where we would like to end up with respect to the New Zealand Superannuation Bill.

It’s clear that your government’s original intention to obtain a broad consensus from MPs on the Bill’s objectives cannot be achieved. There is even the possibility of the Bill’s failing altogether. New Zealand now needs leadership on this issue to avoid our having one person’s view of the world imposed in a way that has re-politicised the whole debate.

New Zealand has one of the best retirement income regimes (public and private) in the developed world. You might not think so from the way the present debate has played out. This does not mean, however, that I agree with all of what we do.

Despite all the rhetoric from all sides, there aren’t large differences between the proponents of various views on retirement income strategy. However, the continued dissension and position taking is very damaging. I probably don’t need to explain how damaging the current debate is politically but my concern is mainly with the damage that the last 25 years has done to the private saving plans of hundreds of thousands of New Zealanders.

What has finally prompted me to write in this way is the prospect of yet another backroom deal being negotiated with Winston Peters less than five years after a similar situation led to the wasteful referendum on his Compulsory Retirement Savings Scheme. Mr Peters must not be misled. There is no way that the New Zealand Superannuation Fund can, in anything like its present form, be converted to individual accounts. I am sure your advisers will have already told you this. That’s why clause 73 (that introduces the sniff of a possibility that this might happen) is so vague. Let me illustrate this point with one just example.

The Fund’s objective is to help future governments pay for New Zealand Superannuation. If the Fund is eventually to be converted into individual accounts, does that mean New Zealand Superannuation will be income and/or asset tested against the money that comes out of those individual accounts? That’s what would have happened with the 1997 CRSS that was so decisively rejected by the referendum. I had understood that Mr Peters was now against income and asset testing. If it’s not to be so tested then we are back discussing the very issue that the Fund was to help out with ¨C how will future governments pay for New Zealand Superannuation? The whole process then becomes an expensive, circuitous and pointless exercise.

It might surprise you to know that New Zealand has never had a properly researched debate on all the major design elements of New Zealand Superannuation. Why, for example, do we pay it from age 65? Should it be earlier or later or even flexible? Why do we pay, in Mr Rod Donald’s words, “65 at 65”? Is that enough, too much or just right? Why is the single person’s pension 60% of the married couple’s amount? Is that enough, too much or just right? I could go on.

If we had a properly researched debate about all this (led by the Retirement Commissioner?), I suspect that the answers that emerge will look quite like what we have but there will probably be some changes in the coming decades particularly as we contemplate the impact of the baby boomers’ retirements. More importantly, however, I am sure that this debate can lead to the lasting consensus on both public and private provision that current strategies have failed to achieve in the more than 25 years since the New Zealand Superannuation Scheme was introduced in 1975.

I agree with The Hon Peter Dunne ¨C the country is really fed up with political antics on superannuation but we part company on his suggested solution. The answer is not to do anything (which seems to be where he is at). We need to change the way we run this kind of discussion, not grab hold of the latest “answer” and hope that it works.

I have been involved in the debate on public and private provision for more than 20 years. My personal experience is that, when all the issues are fully discussed, the answers are reasonably obvious and usually uncontentious. I was privileged to be part of the 1992 Task Force on Private Provision for Retirement. My wish would be that prominent proponents of different views on both public and private provision had a similar experience to mine. It changed my views dramatically (I used to favour both tax incentives and compulsion).

I am absolutely convinced that, with leadership, we can develop a robust regime for both public and private provision for retirement that will be fair and that can survive the coming demographic pressures. Both public and private provision need to be looked at together and both cry out for decent data and a full debate on the things that really matter.

I think it’s now time for the government to step back from the New Zealand Superannuation Bill and not stitch up a deal with New Zealand First. You must know that such a deal cannot last and will become yet another damaging event in the long superannuation saga.

Please let’s instead have a proper, inclusive, national debate.

Yours sincerely

Michael Littlewood

M R Littlewood

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