Between the lines - Crusade for good super continues

By Brian Fallow


For 30 years it has eluded us - the Holy Grail of a good state superannuation policy.

Such a policy needs to:

* Deliver a decent income to retired New Zealanders, yet still encourage private retirement savings.

* Be fiscally sustainable in the face of looming demographic pressures.

* Be politically robust enough to survive changes of Government.

So far we only have a sketch of what Michael Cullen is proposing.

Crucially, we don't know how the super fund, eventually tens of billions, will be managed, except that it will be "at arm's length from the Government and on a commercial basis."

The National Provident Fund, which contracts out the management of its funds to several competing fund managers, is a model of how to do it. The Earthquake Commission, restricted to "investing" in assorted Government IOUs, is a model of how not to.

The basic problem is well-known. Whereas there are now five people of working age for every superannuitant, in 30 years' time, statisticians predict, there will only be 21/2.

Dr Cullen argues that if nothing is done this will present future Governments with three unpalatable options: deep cuts in the relative value of the pension; targeting it by income or asset-testing; burdening the next generation of taxpayers with much higher taxes.

Better, he says, to divert some of the Government's revenue (say 4c in every dollar) into building reserves in a fund that can carry some of the load of funding the baby-boomers' super.

The changes to New Zealand Superannuation are only one side of the policy. The other is reforming the tax treatment of private savings, to remove the anomalies and disincentives that have built up there.

People sometimes say they like employer-sponsored superannuation schemes because the money is automatically deducted and never reaches their pay packet, with all the competing claims on it.

Dr Cullen seems to feel the same way about the public finances.

"If one is projecting substantial surpluses not captured for prefunding [super], sooner or later the pressure will come on to spend them or cut taxes," he says.

"This approach commits the Government to an ongoing stronger fiscal stance than would otherwise be the case."

If the money is not automatically diverted into prefunding NZ Super, in other words, it is liable to be frittered away on more Government spending or given back to taxpayers who, on past performance, are more likely to spend it than invest it.

The history of the last 30 years makes it clear how difficult, and how necessary, it is to make the scheme politically tamper-proof.