Former Economics Editor of the NZ Herald

Brian Fallow: More for kids, less for the elderly

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Families with a child under three would get $200 a week under the Opportunities Party's policy. Picture / 123RF
Families with a child under three would get $200 a week under the Opportunities Party's policy. Picture / 123RF

Redistribution from the old and rich to the young and poor is the aim of the latest radical policy proposal from Gareth Morgan's Opportunities Party.

It would means test New Zealand Superannuation - above an "unconditional basic income" (UBI) level of $10,000 a year - and also drop the indexation to the average wage.

It would apply the money that saves towards a UBI for the families of very young children. "New Zealand is a lot richer than it used to be yet we have far more family poverty. We should be ashamed," it says.

What it calls its Thriving Families package includes:

• Paying $200 a week to families while they have one or more children under three years old.

Paid parental leave and the parental tax credit would go. Net cost, the party reckons, would be $1.6 billion a year.

• It would broaden Working for Families (WfF), with a payment to lower-income families with children under 17, based on an income and wealth test - but not a work test. "We don't like the punitive conditions that eligibility for the in-work tax credit requires. It is an awful intrusion, with perverse behavioural consequences." This would increase the cost of WfF by around $500 million.

• It would double spending on early childhood education, at a cost of around $1b.

All up, the party costs its families package at around $3.3b a year, which is about 30 per cent of what we spend on NZ Super (net of income tax).

It is not necessarily expecting to fund all of that by clawbacks to NZ Super.

However, it does say that its policy platform overall is fiscally neutral.

The platform includes a very substantial broadening of the tax base to include a deemed return on forms of capital - including equity in housing - that currently escape the tax net.

"In summary we are investing more in struggling families and in our coming generations while closing the income tax loophole that favours owners of assets."

It sees NZ Super as a benefit, and one that is just too generous.

Opportunities Party founder Gareth Morgan has some bold ideas for benefits. Picture / Nick Reed
Opportunities Party founder Gareth Morgan has some bold ideas for benefits. Picture / Nick Reed

It would shrink the universal pension to an "elders' UBI" of $10,000 a year per person, topped up by a means-tested hardship allowance of up to another $7500 a year for those whose total income is less than $50,000 a year.

Its definition of total income would be broader than the current tax law's, in line with its tax policy.

And it would end the indexation of super to the average wage, linking it instead to the rate at which the cost of living rises for superannuitants as a group, as calculated by Statistics New Zealand. Over the past eight years at least, Statistics NZ reckons that has been somewhat faster than the cost of living for all households, but still substantially less than the rate at which the average wage has risen.

Such a policy would essentially freeze the purchasing power of the pension at its current level.

Over time it would erode the relativity between the incomes of superannuitants and wage-earners.

But it would free up cash to invest in rolling out the UBI more broadly, the party says.

Arguably, the policy fundamentally changes the way we think about the state pension, from being an entitlement earned by a lifetime of paying tax, to a safety net welfare payment.

The remaining universal payment of $10,000 a year is not, of course, enough to live on. Not even close.

It illustrates an essential problem or trade-off with the UBI approach - the need for the fiscal cost to be supportable. The more widespread the universal entitlement, the more basic the income.

The other objection people have is the idea that it is money for nothing and a disincentive to work.

To be fair, the Opportunities Party recognises this: "The major constraints on how high a UBI can be set includes its cost to the taxpayer and its relativity to the rewards for paid work." The fiscal cost indicates it is unrealistic to set it much above $10,000 a year, it concludes. It would not eliminate, but would reduce, the need for targeted benefits, with the indignity, anomalies and administrative cost that go with them.

The party sees this package as a kind of baby (and toddler) step towards a comprehensive UBI, which it regards as the ultimate goal, given the increasingly fluid and precarious nature of paid employment.

Just how daunting the fiscal arithmetic of this limited policy is, however, is instructive.

It is why some economists prefer a negative income tax approach, where income tax kicks in at some minimum level and incomes below that are topped up to that level by a payment.

The policy also suffers from a generic difficulty with means testing super.

The Opportunities Party would reduce the universal component of the pension to the UBI level of $10,000, to anyone over 65 who meets the residency requirements, limit the hardship component to $7500 a year and whittle that down to zero by the time income reaches $50,000.

That may well be lower down the income distribution than many who advocate means testing have in mind. They tend to envisage removing super from those whose incomes are high enough that they pay tax accountants, rather than pay tax.

It means there would be a zone of high effective marginal tax rates on incomes superannuitants earn, whether from their savings or from employment. Discouraging those things does not seems sensible.

An alternative way of dealing with that problem has been proposed by Professor Susan St John of Auckland University. She proposes paying super as a non-taxable grant and putting superannuitants on a separate tax scale for other income, say 15 per cent for the first $15,000 and 39 per cent for income over that. This gets over the additive marginal tax problem while saving useful money, she says.

- NZ Herald

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Former Economics Editor of the NZ Herald

Brian Fallow is a former economics editor for the New Zealand Herald. A Southlander happily transplanted to Wellington, he has been a journalist since 1984 and has covered the economy and related areas of public policy for the Herald since 1995. Why the economy? Because it is where we all live and because the forces at work in it can really mess up people's lives if we are not careful.

Read more by Brian Fallow

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