Money: Cullen's super: is it a winner?

By PHILIP MACALISTER

The immediate reaction to the name Cullen is often big, powerful and a winner. Think of All Black fullback Christian Cullen: fast, powerful and a match-winner. Think of his namesake, the famous trotter. Again fast and a winner.

Now think of the Cullen superannuation fund: big, powerful, but is it a winner?

The jury is still out on this one, mainly because so little detail is known about the fund. However, Finance Minister Michael Cullen confirmed his commitment to the scheme in last week's Budget.

Because superannuation affects every New Zealander, it is imperative that there is public participation in the development of a new scheme.

So far the Labour/Alliance Government has scored high points from the savings industry for its willingness to discuss possible solutions to the super problem.

Vance Arkinstall, Investment Savings and Insurance Association chief executive, says the Government has shown through its actions, and dialogue with the industry that it is serious about tackling the superannuation issue. Likewise Kevin Casey, AMP manager of superannuation strategy, gives the Government six out of 10 for its efforts in trying to find a super solution.

Says BT Funds Management vice-president Myles Baron-Hay:"I get the sense that, for the first time in a long time, we are making real progress."

Not bad considering the previous Government's efforts on superannuation amounted to forming another taskforce (abandoned after the election).

Before delving into the issues of the Big Fund, it is worth outlining how New Zealand's superannuation regime works.

First, we are unique in the developed world in that we have a two-tiered system which offers no carrot to save, such as tax incentives, nor does it take the big stick approach of compulsion (if you ignore the fact that paying taxes is compulsory).

At the first level there is the state pension, New Zealand Superannuation, which all New Zealanders over the qualifying age are entitled to no matter what their level of income.

This is funded by taxpayers on a pay-as-you-go basis. NZ Super is the Government's biggest item of annual expenditure.

The second tier in the structure is the voluntary private provision element. That is, if you want a lifestyle in retirement better than what you can have through NZ Super you better save for it now.

One of the first things the Labour/Alliance Government did when it won power was to restore the level of NZ Super back to its previous rate of 65 per cent of the average weekly wage.

The concept behind the Big Fund is nothing magic. What Dr Cullen is planning to do is siphon off 8 per cent of taxation revenue each year and put it into a dedicated fund.

The Budget shows that the dedicated fund would need annual injections of $2 billion after an initial input of $3.6 billion spread over the three years from 2001.

The earnings from this fund, which would be managed by private sector businesses, would later be used to help pay for NZ Super.

Research by sharebrokers JB Were shows that it could grow to between $80 billion and $130 billion in size.

Prudent asset allocation models suggest that more than half of this money should be invested overseas. However, many billions of dollars would be feed into the New Zealand economy which in turn would fuel growth and the local sharemarket.

One of the big concerns raised by the opponents of the scheme is that there is a risk future politicians may plunder the fund for other purposes. To counter that, the Government has talked about introducing a mechanism to protect the fund. Research by Victoria University's Institute of Policy Studies shows that entrenching would be "unusual" and difficult to achieve.

While Labour believes it has the super solution, it is unclear how much support it has from other political parties. Alliance leader Jim Anderton has always been cool on the Big Fund idea and Labour has yet to discuss it with other parties such as the Greens, New Zealand First and National.

There are a number of other issues which need to be discussed and decided by the community. Two of the biggest are:

Should NZ Super continue to be a universal entitlement or should it be a benefit which is either means or asset tested?

What rate should NZ Super be set at?

The Government has said that it sees NZ Super remaining a universal entitlement which would not be means-tested.

Despite this there is a strong view in the savings industry, and among economists, that even with pre-funding, as Dr Cullen proposes, NZ Super will become unaffordable in future years.

"It might be what we believe we are entitled to," Mr Baron-Hay says, "but something's got to give in the future."

Mr Casey says setting the pension at 65 per cent is generous. He says an individual would have to save 15 per cent of total earnings during his or her working life to have sufficient capital to provide a pension at that level.

The saviour for future governments in this area may be the different generational attitudes to NZ Super. Current retirees will not entertain the idea that NZ Super is anything but a universal entitlement and they have flexed their political muscle to enforce this view. Witness the abolition of the superannuation surcharge two elections ago and the increase in NZ Super last election.

However, the younger generation have been conditioned to believe that the state will not provide them with an adequate pension.

In the latest SaverPulse survey of attitudes to retirement savings, 84 per cent of respondents disagreed with the statement that they expect the Government will provide them with an adequate pension in retirement.

And 70 per cent favour some form of compulsory savings scheme so that people provide for themselves in retirement.

This contrasts sharply with the 1997 referendum on a compulsory scheme promoted by former Treasurer and New Zealand First leader Winston Peters. When put to the vote, New Zealanders overwhelmingly rejected the idea.

So far, little has been said about what will happen at the second-tier level of private provision.

The current setup is a paradox. The Government promotes the need to save, principally through the Office of the Retirement Commissioner, while at the same time it disadvantages savings through managed funds by bad tax law.

One of the rare exceptions to this is the introduction of the 39c tax rate on earnings over $60,000. Dr Cullen has introduced tax changes which allow high-income earners the opportunity of avoiding the higher tax rate if they direct some of their pay into registered super funds.

Dr Cullen has talked about changing the tax system so earnings on savings are tax exempt until they are spent.

The two key messages for New Zealanders in the super debate are:

Don't stop saving for your own retirement. While this Government may be generous, there is nothing to suggest that future governments will be so benevolent.

Pressure politicians to tell them how you want superannuation to be run.

There are plenty of options to discuss, such as establishing a system similar to what the Australians have. Individuals pre-fund their pension through compulsion and the money is owned by the individuals, rather than the Government.

As Mr Baron-Hay says, the decision lies with the public. "New Zealanders will get the superannuation system they deserve."

Philip Macalister is the editor of SuperTalk, a website where people can learn, discuss and debate issues surrounding superannuation.