Budget 09: Super burden shifts to next generation

Taxpayers will pay more than $1 billion a year more for pensions from 2020 into the indefinite future as a result of the Government's decision to stop paying into the NZ Superannuation Fund for the next 11 years.

Background papers published by the Treasury yesterday show that if payments to the fund resume in 2020-21, the payment in that year will have to be $2.8 billion, compared with only $1.6 billion payable if there had not been a break in payments.

The 11-year break means net payments into the fund will then have to continue until 2030, compared with 2027 under the pre-Budget scheme.

Labour leader Phil Goff said yesterday that the Government had chosen to fix a short-term deficit problem at the expense of a much bigger long-term problem paying for the ageing population.

"Effectively what they will be doing is killing the Superannuation Fund," he said.

But Prime Minister John Key reiterated at a business lunch in Manukau that he was committed to keeping the pension for everyone from age 65 at a married rate of 66 per cent of the net average wage.

"I have made a commitment that if we raise the age or lower the pension payment, I would personally resign as Prime Minister," he said.

The Super Fund, or "Cullen Fund", was set up by law in 2001 to lower the future cost of pensions for the growing number of old people by putting money aside in each year up to about 2027 - effectively smoothing out the rising cost of the elderly.

Without the fund, the cost of Super would have risen from 3.62 per cent of gross domestic product (GDP) at present to 4.49 per cent in 2020 and 6.50 per cent in 2050. Because of the fund, we actually paid 4.68 per cent of GDP for super in the past year, including just over 1 per cent of GDP salted away in the Cullen Fund.

Under the original Cullen scheme, we got the payoff for that investment from 2027 onwards until by 2050 we would have only had to pay in 5.73 per cent of GDP - almost 1 per cent of GDP less than what we will then pay to the elderly. The law requires the Treasury to recalculate the required contributions each year to achieve smooth contributions for 40 years ahead.

This year, because of the 11-year break in contributions, it says payments in 2050 will have to be 5.99 per cent of GDP, wiping out about a third of the benefit that the fund could have given us.

www.treasury.govt.nz/releases/2009-05-29i