Dialogue: A political fix that won't work

By MICHAEL LITTLEWOOD*

Several almost trite facts provide the backdrop to any discussion of public policy on superannuation. New Zealand faces having an ageing population, with fewer workers supporting a growing retired population. After 25 years of instability in public policy, it really is time to address the key issues that affect the design and delivery of superannuation.

Public policy on this most important of the three tiers of retirement income sends very powerful messages to individuals. If we want people to behave sensibly, we must provide a settled framework.

The question we have to consider at the moment is simple: is the Superannuation Bill the answer?

My response is: if something doesn't address the issues, it can't rate consideration as part of the answer. The bill is nothing more than political and economic window dressing.

It fails the stability test because its unintended consequence is likely to be greater, rather than less, instability in public policy.

The system established by the bill won't withstand the impact of the baby-boomers as they sweep through to retirement.

The Superannuation Bill is an attempted political fix to a complex, inter-connected group of economic, fiscal and social issues. Because it's a fix, it can't and won't last.

Before the country discusses how to meet the future cost of superannuation, it must settle the benefit design for people who retire after, say, 2020.

None of the principal elements that define the benefit liability for future generations of taxpayers has been properly analysed, either in the past or in the bill.

The bill papers over this policy chasm by simply shifting the benefit provisions from one act to another.

It tries to lock those provisions in politically without even the pretence of a debate on any key issue.

We must first choose the best design for superannuation. Only then should we turn to cost considerations and how we might meet the expected increase that will follow the growth in numbers of pensioners. No other process will produce a sustainable answer.

The benefit design is the only thing that will affect the cost of super. The proposed fund is irrelevant in this regard. Regardless of the way in which super is financed, the cost of the scheme will be the benefits that are paid. If we are really concerned about the future cost of superannuation, we must at least discuss the benefit design.

Regardless of the possible intervention of the fund, the net cost of super is expected to reach about 10 per cent of GDP by the end of the century. By then, the fund will have been exhausted.

Why don't we start a discussion on whether it's a good idea to have a net one-tenth of the country's output being taken from the working population through taxes and handed over to the retired?

What are the likely pressures on public policy of such a huge transfer, and how will all this affect the saving and retirement decisions of future generations? Are there any alternatives that we should be discussing? Using a modelling tool developed for the Super 2000 Taskforce, I have looked at several possibilities.

Even just increasing the state pension age from 65 to 68 between 2020 and 2026 would make a greater and more immediate contribution to reducing the annual cost of super than the drawdowns from the proposed fund. It may be a good idea as well.

After agreeing on the design of the super scheme and accepting the impact its cost will have on future taxes, practically the only thing that matters then is economic growth. So, how will the proposed fund help the country grow? It can't and it won't.

The proposed fund graphically illustrates the facile political fix that characterises the bill. At best, the fund will be a relatively minor contribution to a partial inter-generational smoothing of cash flows. At worst, it will constrain growth, increase risk, reduce saving and provide governments and the electorate with an enormous distraction to the real issues that we should be debating.

The fund is a cosmetic financial edifice that may win votes from fund managers (or at least buy their silence) and might make some people feel better. But it won't help us with the things that really matter.

It's difficult to imagine a less relevant set of answers than the bill offers. It continues a sorry 25-year history of political opportunism, sudden, undebated policy changes, and a seemingly deliberate lack of information or informed discussion.

The bill fails to address any individual aspect of the single biggest public policy issue that faces the coming generations of voters and retirees. It's an attempted political fix that should fool no one. It should be defeated in all its respects.

Then what should happen?

Because the bill is such a thoroughly bad proposal, I want to end with a series of positive recommendations on what should happen once it is out of the way.

First, let's start a debate on what super might look like from, say, 2020 onward. That leaves it as it is for people who have already retired. We need a properly researched debate on the future annual amount, starting age, purchasing power protection, qualifying conditions and whether it should be paid to everyone, regardless of income and assets.

We need to agree also on the process of future change.

Once we have agreed on the shape, we need to model super's costs (and the costs of other government programmes) to see if tomorrow's economy can afford the scheme and to measure the trade-offs in that process. If we can't afford it, then the benefit coat will have to be cut to fit the likely economic cloth.

What tomorrow's taxpayers might think of today's benefit design is an important part of a secure retirement income arrangement. If tomorrow's taxpayers don't much like what they see, they'll change it.

Then we can discuss how super will be paid for: out of current taxes, totally pre-funded or, as the present Government suggests, partly pre-funded?

Next we need to examine whether the Government should change public policy on private provision. Can tax incentives really contribute in the way their advocates (including the Minister of Finance) claim?

Are there changes, other than tax incentives and compulsion, that governments could make to help private saving schemes?

After that, the state can best assist by concentrating on the things it has a unique capacity to do well. Running a sound economy should be its first priority.

That includes getting inflation down and keeping it down, improving infrastructure, managing the country's finances prudently, getting rid of debt and getting all taxes down. Maintaining consensus on the whole strategy should be the Government's final task. We must never again endure the political huckstering of the last 25 years on retirement income policies.

We really don't need another monument in the superannuation graveyard but, with the New Zealand Superannuation Bill, that's what we're about to get.

* Michael Littlewood, a financial planner, was a member of the Todd Task Force on Private Provision for Retirement. This article is based on his submission to Parliament's finance and expenditure committee on the Superannuation Bill.