Finding cash for the baby boomers

By VERNON SMALL deputy political editor

Labour's 1999 Pledge 4:
Reverse the 1999 cut to superannuation rates. Guarantee superannuation in the future by putting a proportion of all income tax into a separate fund which cannot be used for any other purpose.

Of all the Government's election "pledge card" promises, boosting superannuation was by far the most expensive to implement.

It has also been the least controversial.

The same cannot be said of the Government's parallel "savings" scheme - to set aside cash to partially pre-fund the rising cost of baby boomers' pensions.

Fulfilling its pledge to restore the floor for the State pension to 65 per cent of the average ordinary time weekly wage cost the incoming Government $212 million a year, 40 per cent of the total extra tax gleaned from the new 39c tax step.

National had dropped the payment to 60 per cent of the average wage in 1999 and suffered a strong political backlash.

The pay rise for the 450,000 New Zealanders over 65 took effect on the same day as the tax rises - April 1, 2000 - and lifted the married rate of superannuation by $21.42 a week from $325.58 to $347.

The new rate was initially set at 67 per cent of the average wage - higher than promised during the election campaign.

The top-up was made, in Michael Cullen's words, "to keep faith with the electorate" - shorthand for ensuring the increase was more than $20 a week.

The single living alone rate rose by $12.86 to $225.55 and the single sharing rate was boosted by $12.36 to $208.20.

Since being implemented, the Coalition's new pension rate has won almost universal political approval.

National admitted it erred in cutting the base and agrees with the new "65 per cent at 65" rate.

But it is leaving the door open to change the payment formula in the long-term, guaranteeing the current rate only for those "at or near" retirement age.

It is also considering ways to encourage private savings.

New Zealand First, the Greens, Labour, the Alliance and United have also endorsed the current payment level.

But United's Peter Dunne believes the single rate should eventually rise to 50 per cent of the average wage (from 41 per cent now) and the married rate to 72.5 per cent.

Act is the only party taking a radically different stance on the payout formula, arguing that the current rate is unsustainable.

The party favours gradually raising the age of entitlement to 68, cutting taxes so people can save, and linking the pension to inflation, not wages, to reduce the cost.

If there is near-unanimity around the current pension level, there is no such consensus over the method of meeting the rising cost as the population ages.

Labour's promise to establish a partial pre-funding scheme has now been implemented, though by a narrow majority in the House and under a different formula than first envisaged.

In a compromise with the Alliance, Labour dropped its plan to tie the annual payment into the fund to a set percentage of the tax take.

Instead, it is setting aside up to $2 billion a year from Budget surpluses.

At its peak the fund would be worth about $50 billion in today's dollars.

New Zealand First backed the fund saying it was flawed but "better than nothing" as a step on the road to individualised accounts.

But National, Act and the Greens believe the scheme should be scrapped.

This financial year, the Government is paying about $11.5 million a week into the fund. By 2032 it is estimated there will be 1 million people over the age of 65.

The cost of superannuation is forecast to increase from about 4 per cent of gross domestic product now to 9 per cent by 2050.

Feature: The $1 billion question