Brian Fallow: Super policy offers goodies for all

Credit where it is due. Whether from political expediency or some more statesmanlike motive, the National Party has done the right thing in opting to leave the Cullen fund alone.

Hopefully that will put the battered political football of superannuation on the shelf, if not for good (too much to expect) then for a good few years.

"If ever we are going to give New Zealanders the greater certainty they deserve about retirement savings, a Leader of the Opposition is going to have to declare the game over," Don Brash said.

So he did.

This is not a small decision. Brash and his colleagues are well aware of the cost of continuing to peel off a couple of billion dollars a year of tax revenues and entrust it to a bunch of fund managers to invest, much of it inevitably overseas.

Those are billions not then available for tax cuts or new prisons.

National's finance spokesman, John Key, insists there will still be money for tax cuts.

"But if you accept the parameters of NZ Super [universal entitlement at 65 and linked to the average wage] you have got to pay the piper. It is always a question of when you do it," he says.

"We could have gone out and splurged $2 billion more, but I don't think that would necessarily have been accepted by the electorate if they thought it came at the cost of their pensions."

Baby-boomers' sheer numbers make them the "sandwich generation".

They have to honour the longstanding compact underpinning the national pension - that each generation pays its parents' super through the tax system - and they have to make at least some provision for their own pensions.

And there is no time to lose. The baby-boomers are already in their peak earning years.

NZ Super payments will double as a share of GDP over the next 35 years.

What the fund does is smooth the effect of that on taxpayers by putting away extra cash over the next 20 years, then drawing on it.

The net cost to taxpayers will still rise, but much more gently.

And in the meantime, the national savings rate will be boosted and, for a country up to its neck in debt to the rest of the world, that can't be bad.

Brash addressed three audiences in his Monday speech to North Shore Rotarians.

He assured those already drawing NZ Super that a National Government would not change the way their pensions were calculated - 65 per cent of the average wage for a couple from the age of 65, and just over half of that for a single person.

He assured those "within a decade or two of retirement" - the baby-boom generation - that under National, NZ Super would be there for them as well, on the same terms and with no income test or asset test.

And he gave a measure of assurance for those younger than that, but of a different kind.

"Small evolutionary" changes to the scheme might be needed, but the demographic pressures were manageable, he said.

Brash, who last year said it was "well-nigh inevitable" that the eligibility age would have to be raised, now emphatically denies that National has a plan to change the rules, such as the age of eligibility, in ways that will affect young people.

He said the widespread belief among the young that New Zealand superannuation would not be there for them was not correct.

In any case, people retiring in 20 or 40 years would have been earning much higher incomes than those retiring now.

They would not only be wealthier at 65 but healthier and likely to have a significantly higher life expectancy than their parents.

Unfortunately, economic growth and the march of medical science are not the only long-term trends relevant to this issue.

The level of the pension assumes that by the time people retire, they at least own the roof over their heads.

That assumption becomes less safe with each passing year.

Would you like to pay rent out of an income of $13,000 a year, which is what a single superannuitant gets?

The other underlying assumption behind the pay-as-you-go system is that people don't mind paying taxes that provide pensions and healthcare for their parents.

But an increasing proportion of taxpayers are immigrants whose parents are in another country. Will they feel the same obligation to pay for their elderly neighbours, especially if their neighbours' children are overseas and contributing nothing through the tax system to their parents' superannuation?

That may pose a more insidious threat to the intergenerational understanding which has underpinned the state pension since the 19th century.

But the state pension is only the first tier of retirement income provision. Workplace schemes and individual savings are the others.

In the past couple of months, there have been signs of progress on those fronts, too.

The workplace superannuation system proposed by a group headed by Peter Harris aims to lift membership from the present 14 per cent of the employed workforce.

The Harris group has sought to overcome as many as possible of the psychological - as opposed to financial - barriers to joining such schemes.

People will be automatically enrolled if they change employer, provided the new employer has more than five employees.

Employees will be free to opt out. American experience is that schemes which people have to opt out of do better than those which people have to opt into. Procrastination becomes an ally, not an enemy.

Although existing employees will be free to opt in, they will not be automatically enrolled. So no one's take-home pay drops as a result of the scheme coming into force.

To avoid the off-putting effect of being spoiled for choice, the employer will choose the fund manager.

And the designers of the scheme have tried to minimise compliance costs to employers by using the tax collection system used to gather PAYE, ACC levies and student loan repayments.

All that is required is a different tax code for the employee.

The money would be passed on by the Inland Revenue Department to a central scheme administrator, which would pass it on to the chosen fund manager.

The plan won Finance Minister Michael Cullen's approval but we may have to wait for next year's Budget for moves to implement it, and particularly for any fiscal sweeteners to smooth its path.

Cullen is also favourably disposed towards removing a significant tax disadvantage suffered by actively managed savings schemes, whether workplace or individual.

Scrapping the capital gains tax on share trading profits made by savings schemes would remove one of the anomalies that has tended to encourage investment in rental property over financial assets.

That would cost about $250 million a year, further reducing the scope for across-the-board tax cuts.