Money: Big super fund likely to give little comfort

By MARK FRYER

Superannuation - the political issue that refuses to die - is again threatening to dominate an election.

If the Government can't get its planned super fund through Parliament, Prime Minister Helen Clark says it will put it to the people in next year's election.

But put aside the political point-scoring and ask a simple question. If you're saving for retirement, does Labour's scheme mean you should change your plans?

In a word, no.

The word "certainty" has taken a thrashing during the debate over the super fund, but anyone who believes the Government's plan means they're certain to enjoy a comfortable old age is asking to be disillusioned.

That plan, as detailed in the New Zealand Superannuation Bill, has two main parts.

The first part would guarantee that:

* Superannuation will continue to be available at 65, to people who meet the residency rules.

* It will rise with inflation.

* The standard weekly payment to a married couple will be at least 65 per cent of the average ordinary-time weekly wage.

The second - more hotly debated - part of the bill aims to make superannuation more affordable for future governments. It would do that by setting up a New Zealand Superannuation Fund, which would be given taxpayers' money to invest, to build up a fund which would help pay for super.

That fund would swallow up a lot of money - a projected $6.1 billion over the next four years alone - and could eventually grow to as much as $75 billion, says a Treasury estimate.

Whether it's a good idea to expect today's taxpayers to help pay the cost of future pensions depends largely on your political leanings, and whether you think there are more pressing uses for the money.

Whether it will guarantee a comfortable retirement for future pensioners is easier to answer. It won't.

Even if the scheme works exactly as envisaged by its architect, Finance Minister Michael Cullen, if future governments stick to the prescription, if the country can afford it, if there are no major economic shocks - and there are plenty more "ifs" where those came from - the best you'll get is the equivalent of today's pension.

For a single person living alone, that's $234.53 a week after tax, assuming you don't have other income. For a married couple, it's $360.82 a week, post-tax.

If you're well-to-do, that's a nice top-up.

But if NZ Super is your only source of income, it may keep the wolf from the door but it doesn't leave much for that dream trip, or buying a reliable car, or repainting the house.

That's the best the Cullen plan offers - and even that modest promise faces plenty of obstacles.

While the bill offers certain "guarantees" about the future of superannuation payments, nothing can stop a future government repealing or amending the law.

The planned Superannuation Fund is not expected to accumulate enough to pay all the cost of future pensions. One Treasury estimate says that, at its peak, the fund will contribute just 14 per cent of the cost of superannuation, leaving the taxpayers of the day to pick up the tab for the other 86 per cent.

So while the fund may help, future pensions will still depend largely on future taxpayers' ability - and willingness - to pay.

And plenty of other perils lie ahead. For example, the fund may fail to live up to the 9 per cent annual return assumed in the Budget.

To meet that ambitious target, it will have to invest a large proportion of its money in shares, which means future returns are likely to be highly variable. In the event of a market crash, there could be pressure for a reduction in pensions.

It will be the same story if future governments decide that tax cuts are more important than pension promises made decades earlier.

In the words of United Future leader Peter Dunne, the Cullen scheme "has been hopelessly oversold as a panacea - which it is not and never was - when all it is, is an exercise in transparency that identifies today some of the costs to be borne in the future."

Given the questions, and the many u-turns which have plagued superannuation policy, anyone who decided to change their savings plans on the strength of the Cullen scheme would be tempting fate.

Nevertheless, the fund may have an impact on savers by boosting the local sharemarket. According to estimates from brokers Credit Suisse First Boston (CSFB), if it invests along the same lines as the average local manager, in the space of 10 years it will own somewhere between 8 and 12 per cent of the local market, and will be pumping in some $500 million a year, significantly boosting the market.

If the fund puts more stress on overseas investments, the local impact is less likely to be noticed.

But from the individual saver's point of view, it's the next step in Dr Cullen's grand scheme that could have more effect.

That is his plan to change the way of taxing some investments.

Dr Cullen has already announced plans for a taskforce to look at ways to lift private savings.

As the minister himself has pointed out, compared with other developed countries we have few incentives to save for retirement. For some forms of saving, the tax system is actually a disincentive.

Dr Cullen has already made it clear that he is leaning towards a change in the tax system for private or work-based super schemes.

Those schemes now pay tax under what is known as the TTE approach - contributions are made out of money that has been taxed (the first T), the fund's earnings are also taxed (the second T) but the payout is tax-exempt (the E).

Dr Cullen has suggested a change that would allow schemes to adopt something called the TEt system - contributions would still be made out of taxed income but the fund's earnings would be tax-exempt and any payout would be only partially taxable.

So far, he is thinking of offering that as a choice, alongside the existing approach.

Because of the potential cost, in the form of lost tax revenue, there would probably be limits.

Such a scheme might involve restrictions on the amount that could be saved under this tax arrangement, require savings to be "locked in" until retirement, or restrict its use to savers in a certain age group.

Whatever the final shape of the tax changes - and they won't be simple - they could have more impact on savers' strategies than Dr Cullen's giant super fund.

* Contact Personal Finance Editor Mark Fryer at: Business Herald, PO Box 32, Auckland. Phone: (09) 373-6400 ext 8833. Fax: (09) 373-6423. e-mail: mark_fryer@herald.co.nz