KEY POINTS:
Somebody , Bill English said, should stand back and say, "What's going on here with retirement income?"
He wasn't saying it himself, mind you, but somebody needed to put together the three elements of the latest version of our retirement income policy.
"If you compare ourselves with Australia - and it's not too much different with any other developed country - we are starting to look pretty heavily committed to retirement income."
First, the basic pension, NZ Superannuation. "The Australian pension is tightly income- and asset-tested and at a lower income," he said. "Ours is the highest level of the public pension that you will find anywhere, and paid to everybody."
Second, the so-called "Cullen Fund", which is sinking $2.1 billion of taxpayers' money this year into investments which will be drawn down to fund about 30 per cent of the cost of NZ Super for retired people at its peak 40 years from now.
"There are a few other pensions that are pre-funded, but none as generously as us," said English.
And now third, hatched in secret until it was sprung on the public in the May 17 Budget, a dramatic new version of the KiwiSaver scheme in which employees can save either 4 per cent or 8 per cent of their incomes towards their retirement.
Suddenly employers will have to contribute too, starting small but matching the employee's 4 per cent from April 2011.
And the Government is also chipping in 4 per cent, up to a limit of $20 a week, and paying the employer's 4 per cent as well in the form of a tax credit up to another $20 a week, on top of "sweeteners" of a $1000 one-off "kick-start" for every saver, plus up to a further $5000 towards a deposit on a first house after five years.
For someone on a low wage, that's total contributions of 12 per cent. In Australia it's 9 per cent, all from employers. There's no direct government subsidy there, but there is a low 15 per cent tax rate on both employer contributions and super fund earnings.
"The public subsidy [in KiwiSaver] is the biggest savings incentive we can find anywhere in the world," English said. "So we have swung from what was a pretty clear, simple system to one of heavy budgetary commitment to retirement saving. Yet we can't find enough money to teach kids to read and write and make sure their house is warm."
There was more, but you get the picture. It was a plea from the National Party's shadow finance minister for the media - somebody, anybody - to wake New Zealanders from our pleasant dreams about KiwiSaver.
Ever since KiwiSaver Mark II was unveiled in the Budget, the pundits' advice has been unanimous - go for it, because it's money for nothing. Put 4 per cent in yourself, and triple your money. You can't lose.
But of course that's only in dreamland. In the real world, someone has to pay . It's partly employers, but most of their costs will be met by their new $20-a-week tax credit. So in the end it's mainly the taxpayers who will pay higher tax rates for the money in the subsidies to KiwiSavers.
The total cost to taxpayers will rise to around $2 billion a year by the time half of all working-aged adults have joined, some time in the next five to 10 years. That's about 1 per cent of our national income.
For comparison, we currently spend 4.3 per cent of the national income on NZ Super, 5.1 per cent on education and 5.9 per cent on health.
That may sound manageable, but the nightmare is demographic. From the next decade onwards, as the postwar baby boom generation reaches retirement, the ratio of those aged 65 and over to those of working age will more than double from 18 elderly to every 100 of working age now, to 43 by 2051.
The cost of national super will double too, from a net 3.6 per cent of national income after taxes now to 8 per cent. Health costs will increase, as the elderly consume most of our healthcare dollars.
Most countries are responding to similar pressures by scaling back. An OECD report last month reported "a clear underlying trend towards a reduced pension promise for today's workers when compared with past generations".
The pension age is rising (to 67 in the United States), and many countries are letting the value of their pensions erode gradually by tying them to prices rather than wages.
"We are now among the few [Britain and Hungary are the two others] who are actually increasing the pension promise. Do we know why?" asks economist Dr Susan St John, co-director of Auckland University's Retirement Policy and Research Centre.
The answer, of course, is political. KiwiSaver is a gamble by a Government trailing in the polls and willing to ditch its historic opposition to tax breaks for saving in order to cling on to power.
For similar political reasons, English dares not oppose the new scheme outright. When he suggested someone should investigate, all he would say was: "We are looking at a more balanced approach that focuses on growth prospects for our economy in the next five to 10 years, not solely on saving."
He could not say more because the politics of ageing run directly counter to the economics. While the economics argue for scaling back, the politics mean that a growing number of voters are now retired or nearing retirement, with a direct interest in grabbing a bigger share of the cake.
THE hard facts are more or less as English stated. Last month's OECD report found that NZ Super, currently a net 43 per cent of the net average wage for a single person living alone, was paid at a higher proportion of the average wage than any other universal pension in the 30 OECD countries. The next highest was the Netherlands, paying pensioners 31 per cent of their average wage.
Australia has no universal pension. Its age pension is worth only 25 per cent of its average wage and is clawed back at 40c for every $1 earned above just 6.5 per cent of the average wage. Only 53 per cent of Australians of qualifying age get the full pension and another 27 per cent get a partial pension.
However, this is only part of the picture because, as the table on this page shows, every OECD country except Ireland, and until now New Zealand, also has a "second tier" of compulsory contributory superannuation based on money paid in by individuals and their employers.
Since 2002 even Ireland has required employers to give workers access to "personal retirement savings accounts" on request if they do not have company-based super schemes. Savers receive age-related tax breaks ranging from 15 per cent of their contributions if they are under 30, and up to 30 per cent if aged 50 or over, but the scheme is not counted in the table because it is purely voluntary.
When the second tier is added in and tax is deducted, New Zealand drops to fifth-lowest in the OECD with average-wage earners retiring on a net pension of only 41.7 per cent of their previous net income.
Overall across the OECD, average-wage earners retire on total net pensions worth 70 per cent of their previous net incomes, with a maximum of 110 per cent in Greece.
English's second point, about pre-funding, also tells only part of the story. It's true New Zealand is one of only a handful of OECD countries that partially pre-funds its basic pension, but other countries pre-fund far more when second-tier and private super funds are included.
Our total pension funds represented only 11 per cent of our annual income in 2005 (excluding the Cullen Fund), compared with an OECD average of 88 per cent.
The evidence on his third point, about KiwiSaver contribution rates and subsidies, is mixed.
On one hand, total employee and employer contribution rates in public pension schemes (excluding private schemes) range from 9 per cent in South Korea to 33 per cent in Italy, with an OECD average of 20 per cent. So KiwiSaver's 8 per cent (4 per cent each from employees and employers) looks minimal.
On the other hand, tax breaks for super contributions in a 2004 report ranged from near-zero in New Zealand up to only 41 per cent in the Czech Republic, with an OECD average of 22 per cent.
KiwiSaver now offers a taxpayer subsidy of 100 per cent-plus on contributions of up to $20 a week (a matching $20 subsidy plus the annual fee subsidy, the $1000 kickstart and housing subsidies). Even on the average wage of $868 a week, English is right: the taxpayer subsidy is high.
Michael Littlewood, co-director of the Retirement Policy and Research Centre and a consultant whose company manages the SuperLife KiwiSaver scheme, calculates that average-wage earners who pay 4 per cent into KiwiSaver for 40 years and retire at 65 with a lump sum of $320,300 in today's money could buy an inflation-proofed annuity paying out $22,000 a year after tax until they died.
Add net national super of $14,407 a year, and a single person living alone would retire on a total net income of $36,407 a year. That's 105 per cent of what the person earned after tax on the average wage.
As a KiwiSaver provider, Littlewood is delighted. "The providers can't believe their luck," he says. "It [the Budget] has turned what previously was a bit of a dog into a raging commercial success."
But he agrees with English's implication that the KiwiSaver II scheme is so generous it "cannot survive". He advises people to get in now before English or another future Finance Minister withdraws the subsidies.
Littlewood and St John believe there was no need for KiwiSaver II. An official living standards survey published last year found much lower levels of hardship in the 65-plus age group than in any younger group, even though many depend solely on NZ Super.
Waikato University economist John Gibson estimates more than 80 per cent of the 45-65 pre-retirement group are saving enough already to maintain at least their current living standards when they retire, assuming NZ Super holds its value.
St John says KiwiSaver will exacerbate the future burden of the ageing population by raising the relative incomes of the retired. Giving more to the elderly means less for younger age groups.
In the meantime, she says, the cost of the KiwiSaver subsidies for those who can afford to save will keep tax rates higher for everyone else. In effect, those who can't afford to save will pay higher taxes to subsidise those who can.
Littlewood says that extra $2 billion a year in taxes will cost about $400 million a year in the "deadweight" costs of any tax, such as people shuffling their money out of productive taxable activities into tax-free capital gains or offshore. New Zealand's economic growth will be slower than it could have been.
IT all adds up to a strong case against KiwiSaver II. Yet its author, Finance Minister Michael Cullen, is undaunted.
The case for KiwiSaver starts with the problem it was designed to address: our low savings rate. In the year to March 2006, New Zealand invested $11 billion but saved only $2 billion. The difference of $9 billion was funded from overseas through either borrowing or asset sales.
That means 9/11ths of the returns on that investment - essentially, our economic growth - flowed overseas to the people who supplied the capital.
There is a difference between an acknowledged national saving problem and a focus on saving specifically for retirement and it's not just an economic issue. At workplace level, Council of Trade Unions economist Peter Conway says the unions have fought for decades for employer-subsidised super on top of basic NZ Super to get workers a better deal in retirement.
"We don't necessarily accept the argument that because you're low-paid when you work, it's fine to be low-paid in retirement," he says.
And at a personal level the New Zealand Institute has pointed out that, just as debt is often a factor in depression and marital discord, so owning a house and other assets is linked with better physical and mental health, less drinking, stronger marriages and better educated children.
The institute's chief executive, Dr David Skilling, says KiwiSaver has already started changing our culture away from reckless spending towards more focus on building up assets.
"I've been quite struck by the change in media content since the Budget in column inches on financial products, investment choices, financial columns and the like," he says.
A major reason why so few elderly people suffer hardship at present is that most own their own homes so their housing costs are low. Skilling warns that could change, with home ownership dropping from 74 per cent in 1991 to 67 per cent last year.
KiwiSaver will not only help young people buy their first homes with its housing subsidies, but should also help older non-homeowners to cope in retirement.
Cullen disputes Littlewood's calculation that average-wage earners could end up earning 105 per cent of their pre-retirement wages after retirement.
"That assumes 40 years of unbroken contributions with no broken employment, no mortgage diversion, no contribution holidays, starting from the age of 25," he says. "Change any of those assumptions and you immediately fall below 100 per cent."
And unlike contributory schemes in the other countries in the table, KiwiSaver is voluntary. The Budget assumes that only about half the working-aged population will join it.
Cullen says Littlewood and St John also fall into a "closed-economy fallacy" by assuming there are only so many goods and services to go round at any point in the future.
Both the Cullen Fund and KiwiSaver funds are investing substantially in overseas shares and other assets so that the future retired will be able to buy goods and services from abroad. They are easing, rather than exacerbating, the burden of the future elderly for future taxpayers.
"We are not simply relying on the performance of the New Zealand economy for our future retirement income levels. We are placing a much wider investment in the world at large," Cullen says.
For the unions, Conway suggests one way to make KiwiSaver more sustainable would be to let workers pay in only 2 per cent of their incomes if they can't afford 4 per cent.
Cullen rejects this, saying: "Two per cent is just too small to make it worthwhile. By the time you take fees out you are not going to be accumulating much."
A more likely change, with hardly any political cost, would be to simply leave the current $20 cap on the taxpayer subsidies unchanged. The KiwiSaver legislation does not index the cap, and over 40 years inflation could reduce the real value of the subsidies to almost nothing.
Although Cullen has said this will be up to future governments, he says the subsidy is needed right at the start.
"It's quite important to give a very significant boost in these early stages of KiwiSaver to change our national habits on this," he says.
English's strong hints suggest the subsidy may not stay as attractive for very long.
