Susan St John: Without long-term plans we'll have super problems

COMMENT

Tony Sage's article queried the long-term future of the state pension and worried that middle-income people are not saving enough.

Did anyone notice that we have just had a six-yearly review of New Zealand's policies on superannuation? Wouldn't that have been a good place to discuss the sustainability of the state pensions and saving issues? Unfortunately, we are about to lose even the limited forum provided by the Periodic Report Group process.

When the 2003 Periodic Report Group report was released last December, there was little fanfare and virtually no public comment. A cynic might say that was the way the Government wanted it. This bland report concentrates on the need to improve workplace superannuation while discussing sustainability issues only in broad terms.

It could hardly be said to be the wide-ranging, independent assessment of retirement incomes policies envisaged by the 1993 Retirement Income Act, and provided by the previous two Periodic Report Group reports.

Even so, the report group cautioned that there was "no room for complacency about the current system's ability to provide for future cohorts".

After a cursory mention of the age, rates and targeting issues of NZ Superannuation it is stated: "All these options will require an informed public debate and support before the Government considers changing NZ Superannuation entitlements in the future."

What a missed, once-in-six-years opportunity to provide that informed debate.

Mr Sage is right that there are important issues for middle-income retirees and for the working-age population who must support them. The future is not guaranteed by the NZ Superannuation Fund as he says. Indeed, it may hinge more on whether the working-age population will continue to be willing to pay for pensions for people who are working in well-paid, full-time jobs at 65.

Intergenerational conflict is going to intensify and equity issues should have been an important focus of the Periodic Report Group's review.

Mr Sage sees the problem for middle-income retirees in terms of their poor savings, and suggests tax incentives. But tax incentives were discredited by the previous two Periodic Report Groups. They don't make sense and cannot cure the problems he identifies.

Tax incentives are costly, they don't increase saving and they go to the wrong people, while requiring that taxes on everyone else be higher to pay for them.

The 2003 Periodic Report Group also supported this conclusion but it would have been nice for them to convey that clearly.

The big issue is that $386 a week for a married couple, or $249 if living alone, maintains only a basic lifestyle, not enough for those used to more than a minimum while working.

There has been almost no attention to how middle-income retirees can best translate their limited cash saving and home equity into a stream of income to supplement NZ Superannuation for the rest of their lives.

The baby-boom generation starts to retire in just six years. To begin with, as the ranks of the retired are swollen by young retirees who are relatively fit and active, there may not be much of a problem.

Come 2030, this bulge begins to turn 85 and by mid-century the numbers over 85 are projected to increase sevenfold. Plausible projections suggest there could be 340,000 people over 85, compared with 50,000 today. Thus the future is not just about the cost of pensions. By that stage the extra demands on health services and long-term care facilities will be intense. Someone has to pay.

So why is there no long-term planning? Ironically there is one recommendation from the latest Periodic Report Group report that the Government has seized on with alacrity - that all future six-yearly reports be abandoned.

Legislation to achieve this and to obliterate all references to the 1993 Accord is before Parliament in the NZ Superannuation Amendment Bill. Submissions are due by July 2.

In fairness, the 2003 Periodic Report Group also recommended that a work programme be put in place and that the Retirement Commission do a review at the end of 2007. There is, however, no provision for this in the bill.

Without a process for ongoing apolitical development of policies such as the Accord provided, backed up by regular reviews, we can expect sudden and knee-jerk changes in superannuation policy, examples of which litter our history.

In a fragmented policy environment the Government is also proceeding with the so-called abolition of the asset test for long-term care. The Social Security (Long-term Residential Care) Amendment Bill is an ad hoc response to the pressure to keep an ill-advised election promise.

There is no strategic thinking about the need to provide a fair form of long-term care insurance for older people and how the fiscal pressures of long-term care subsidies might be alleviated.

For instance, there is no provision for a review of the unfair use of family trusts. Another, unanticipated, problem is that new home equity release schemes are likely to be designed to use up home equity down to the new exempt level of the asset test.

We desperately need a royal commission to provide long-term thinking on how the next generation can afford the baby boomers to grow old. Mr Sage's call for stricter controls on investment managers and their reports won't touch the really important issues.

* Dr Susan St John is a senior lecturer in economics at Auckland University, and was deputy chairwoman of the 1997 Periodic Report Group. She is responding to Tony Sage, an Auckland chartered accountant.