Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: Costing the benefits shows we're sinking

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The land of the long white cloud is a long way from the euro-zone but if New Zealanders keep on putting their hands out we could find international lenders treating us as another Greece or Italy. Photo / APN
The land of the long white cloud is a long way from the euro-zone but if New Zealanders keep on putting their hands out we could find international lenders treating us as another Greece or Italy. Photo / APN

The response to last week's column, which argued that our universal New Zealand Superannuation is not sustainable in its present form, indicates New Zealand is heading down the same route as Greece, Italy, Portugal, Spain and France.

The basic problem is that successive governments, National and Labour, have introduced a plethora of welfare-entitlements financed through current taxation or borrowings.

Many argue that they have an absolute right to these entitlements and have established legal structures, particularly family trusts, to ensure that they can take full advantage of these benefits.

NZ Super is by far the largest entitlement scheme and it will create a huge conflict between the older and younger generation in years to come.

Responses show that the older generation believes that it has an unequivocal right to full, non-means tested, NZ Super at 65, whereas the younger generation is appalled that it will have to pay for this burgeoning benefit through higher taxes.

The problem is that the younger generation, particularly the highly skilled, can vote with their feet and emigrate to countries where welfare-entitlement is less entrenched.

The elderly have little option but to stay put and hope there are enough young people willing to pay high taxes to support them.

Prime Minister John Key made an astute political decision when he declared there would be no change to NZ Super under a National government.

This was a clever move because one of the features of a welfare state is that it creates powerful interests that will fight to the bitter end for their benefits. This includes voting for political parties that protect their interests.

This is the problem in Europe today, as the welfare state has hit the wall because international lenders will no longer supply the money to maintain overly generous welfare systems.

We should be learning from these developments instead of continuing to fool ourselves that Crown benefits are costless.

One of the problems with the welfare state is that it gets abused because a high percentage of individuals believe that they are entitled to most allowances.

This is based on the belief that they have paid their taxes and others, who are no worse off than them, are recipients of these benefits.

As a result there has been a proliferation of family trusts which can be used to shield income and assets and enable individuals to apply for several government welfare schemes. These include:

•A residential care subsidy, under which the Government provides assistance for elderly people who need long-term residential care in a rest home or hospital.

•A student allowance if parental income is under a certain level. This allowance, which does not have to be repaid, seems to be available to many children of wealthy parents.

•Legal aid. Former Bridgecorp boss Rod Petricevic failed in his attempt to receive legal aid because he is a trustee of a trust with substantial assets but other defendants, who appear to be quite wealthy, have obtained Government assistance in other court cases.

Many said in their responses this week that they would use a family trust to shield income and assets if NZ Super were means tested.

Another argument is that all individuals are entitled to a full state pension no matter how wealthy they are because the richer they are the more tax they have paid during their working life.

The problem with that argument is that New Zealand governments have spent more than they have collected in tax over the past 30 to 40 years and there is no large dedicated fund to pay for NZ Super. Most of it has to be paid out of current taxation or borrowed.

The clear message from Europe is that international lenders are reluctant to continue supplying countries with unlimited amounts of money to fund their overly generous welfare-entitlement schemes.

New Zealand has a good basic system that aims to look after individuals who are not able to look after themselves. However, our social security and welfare system is being abused and this occurs in Auckland's wealthy eastern suburbs as well as South Auckland.

The biggest gripe comes from individuals with overseas pensions who believe they are subject to unfair means testing under NZ Super.

Under section 70 of the Social Security Act 1964 the Ministry of Social Development can deduct from NZ Super any income that individuals receive from overseas pensions. More than 50,000 people are in this group.

The deductions apply even if the immigrant has fulfilled the 10-year New Zealand residency requirement. Section 70 has been included in the act to ensure that individuals do not receive two state pensions even though they may have fully contributed to the overseas pension.

Under section 70, spouses may also lose some or all of their NZ Super if their partner's overseas pension income is greater than the spouse's NZ Super entitlement.

Immigrants - the majority from the United Kingdom - argue that income from their overseas pensions is deducted from NZ Super but New Zealanders with contributory pensions do not have their income deducted from NZ Super.

The answer to this issue is quite simple. If NZ Super is an absolute entitlement, then overseas pension benefits should not be deducted from it.

But if it is it is a scheme to help those with insufficient retirement funds, it should be means tested for all recipients. However, this means testing should be at a level that does not penalise individuals who have participated in a contributory scheme.

The Government's financial statement for the three months to September, issued on Thursday, shows why this is such an important issue.

Crown revenue was $1.4 billion lower than it was three years ago while Crown expenses were $2.2 billion higher.

Gross Crown debt has blown out from $31.9 billion to $76.3 billion over the same three-year period.

The operating balance before gains and losses deficit of $2.5 billion was lower than the same period last year because the 2010 figures include a loss from state-owned-enterprises and Crown entities. This was mainly due to EQC losses associated with the first Christchurch earthquake.

The largest expenditure item was social security and welfare, which accounted for $5.5 billion or 31.9 per cent of total Crown spending in the latest three-month period.

The largest items in this group were NZ Super, $2.4 billion, the family tax credit, $600 million, the domestic purposes benefit, $500 million, and the invalid benefit, $300 million.

The first of the post-World War II baby boomers were born in 1946 and reach 65 this year. There will be a huge increase in the number of retirees over the next few decades and NZ Super expenditure will increase dramatically.

NZ Super is forecast to cost $9.9 billion in the current fiscal year, and a long-term forecast by the Treasury predicts that it will cost $14.9 billion in 2020, $28.1 billion in 2030 and $47.0 billion in 2040.

The New Zealand Government is living beyond its means and its debt is rising rapidly.

The situation is not yet critical because government debt is only 38 per cent of GDP compared with more than 100 per cent for many European countries.

However, New Zealand's population is aging rapidly and the country is not generating enough economic growth and tax revenue to pay for all of the government entitlements.

The obvious solution is that these entitlements will have to be reduced but with individuals given plenty of time to plan for these changes.

The other options are either far higher economic growth or we just keep on trucking down the same road as Greece and the other troubled European countries.

Brian Gaynor is an executive director of Milford Asset Management. gaynor@milfordasset.com

- NZ Herald

Brian Gaynor

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the Financial Markets Authority (FMA) in 2011. He is also a Portfolio Manager at Milford Asset Management.

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