Peter Whitmore: State assets needed to fund National Super

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The three state owned power companies are on National's asset sales list. File photo / NZ Herald
The three state owned power companies are on National's asset sales list. File photo / NZ Herald

Like all of us, governments sometimes make good decisions and sometimes bad ones.

The move to develop our renewable energy resources under public ownership was a really powerful one. It gave New Zealand access to large amounts of low cost electricity, making a very important contribution to our standard of living and to our economy in general.

This process started with the opening of Canterbury's Coleridge hydro station in 1915 and has continued under various governments ever since. Some of the assets were sold when Contact Energy was split off from the old Electricity Corporation in 1999 but most of the remainder effectively stayed in public ownership, being divided between the newly created state-owned power companies, Genesis, Meridian and Mighty River.

In contrast, the decision to introduce our National Superannuation in the form we have inherited was an extraordinarily bad one.

In the run-up to the 1975 election, Labour's proposal had individuals making compulsory contributions to fund their future superannuation payments. National counter-proposed that everyone over 60 start receiving super immediately, regardless of their income, with no funds whatsoever set aside to meet future commitments. National won the election and their proposal was implemented.

Like a ponzi scheme, this way of funding works as long as there are sufficient people "investing" through their taxes to meet the needs of those qualifying to receive payments. The problems come when more people start qualifying for payments in relation to the number who are working and paying the taxes to support them.

The reason this was such a bad decision is that it was already well understood before National Super was introduced that the proportion of older people was going to increase rapidly once the baby-boom generation reached retirement age, as is now happening, and that the increasing demands this would put on tax revenue almost certainly meant that the proposed scheme was unsustainable.

The severity of this problem is driven home by the demographic data. While there were around 5 workers supporting each retiree in 2001, we can expect that to drop to around 2 workers per retiree by 2050. Since the scheme was introduced, we have already seen the age of eligibility increased from 60 to 65, and the rate of payment for a married couple reduced from 80 per cent to 66 per cent of the average national wage, but these measures are still highly unlikely to keep our super system viable in its current form.

If we had, from day one, set aside funds to meet future superannuation commitments, New Zealand would be in a much healthier position today. Our savings rate over the intervening years would have been much stronger, we would have been accumulating assets rather than selling them off, and our government would not currently need to be running such large deficits.

In a belated attempt to address these issues, in 2001 the last Labour Government set up the New Zealand Superannuation Fund, often referred to as the Cullen Fund, and made payments into it for several years. The current government suspended these in 2009. In the medium term, the fund will not assist in helping meet super payments because the present intention is not to make use of it until 2031.

But all is not lost. The government is fortuitously still holding the three state-owned power companies, together with Solid Energy and around 75% of Air New Zealand, all of which are on National's asset sale list. Recent dividends from these companies have been sufficient to cover about 10% of the over $7 billion current annual cost of providing National Super. While not nearly sufficient, this is still a major contribution.

John Key's Government doesn't want to raise taxes, reduce super payments or raise the age of super eligibility. This is almost certainly an untenable position except in the very short term. If National wins the election and proceeds with its state asset sales then we can expect the longer term picture to deteriorate further because the associated dividend revenue will be lost as an ongoing funding source.

And what will happen if these assets are partially sold? Going by past experience the proceeds are likely to be largely dissipated over a relatively short period supporting government over-spending. If this happens, in ten years time we are likely to look back and see very little in terms of enduring benefits, while the government will be facing even more severe super funding problems than it is today.

To be able to keep funding National Super the government and the NZ Superannuation Fund between them need to be holding more income-earning assets, not less. If National is truly committed to preserving this scheme then it needs to act accordingly.

* Peter Whitmore is a former Auckland publisher with a background in engineering and economics.

- NZ Herald

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