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Growth the answer to providing for our elderly

Posted on 22 Jul 2005

Address to ASFONZ Conference; Te Papa, Wellington; Thursday, 21 July 2005.

Panel members, delegates, ladies and gentlemen.  
ACT has the clearest and least complicated policy answer to the challenge; how do we best care for our elderly now and in the future?
That policy is Growth. 
The best policy for caring for our elderly is strong and consistent growth.  The more prosperous we are as a nation, the better we will be able to look after our elderly and indeed every New Zealander.
Averaging 5% growth a year instead of 2% would make us four times richer in 50 years.  Being four times richer would leave us easily able to look after the retired.  We can care for our elderly – even the growing number of them – if we have good, strong growth.  The best way to achieve this is to cut taxes.
We have an unprecedented opportunity to cut taxes, thereby lifting growth and incomes.
Since I spoke to this conference last year, the Budget has confirmed that we have record OBERAC surpluses – over $7 billion last year, forecasts of  $6.7 billion this year and $5.3 billion next year. 
But are we sure cutting taxes will lift growth?  I mean, Labour says it doesn’t.
Well apart from the fact that every credible economist confirms so, and the international evidence is overwhelming, ACT took the unusual step this year through the Finance Select Committee of allowing its policy of tax cuts costing around $5 billion to be analysed by Treasury.
In short, Dr Cullen was most displeased. Treasury concluded that ACT’s tax cuts of around $5 billion would lift growth by between 1 and 1.5% a year.
With a surplus of $6.7 billion this year, the growth needed to produce higher incomes can be delivered by tax cuts funded from the record surpluses.
This extra growth, and higher real incomes, including the opportunities provided by lower taxes, would better enable New Zealanders to save for their retirement, and government to fund its superannuation policies.
Growth is the goal that all relevant government policies should be focussed on; in terms of controlling its spending, and providing the best environment for business to prosper.
That, ladies and gentleman, at a high level is ACT’s view of the way forward for superannuation.
Conference Questions:
There is however a number of lower level issues I have been asked to comment on.
In relation to the married couple and single rates.
Super policy in New Zealand has overwhelmingly focussed on the percentage of the average wage government is paying retired people.  But some or other fraction of the average wage doesn’t ensure an adequate standard of living.  Our prime concern should be focussed on the lifting of our growth rates, and thereby of our standard of living that retired people actually enjoy.
For example, if wages are low then pensioners won’t be well off.  Sixty-five percent of the average wage, say in Fiji, would drop the pension to a fifth of what it is.  Sixty-five percent of the US average wage would see the pension here doubled.  The focus shouldn’t be on the percentage, but how well we are actually looking after our elderly.
I would rather have a pension 50% of the US average wage than one 65% of the New Zealand average wage, or indeed 100% of the Fijian average wage.  Growth matters.
The best solution to the problem of providing for our retired is prosperity and the best super policy is to promote prosperity.  That means low taxes, a free economy and a minimum of red tape.
Politicians have an appalling track record on superannuation.  The reason is simple.  They make promises in the here and now for votes but they are never around when the growing number of elderly overwhelms their promises.
The famous example is Sir Robert Muldoon.  He promised in 1975 that everyone could retire at 60 with a pension of 80% of the average wage.  He declared it sustainable.  Well, it wasn’t.  The number of over 60s has almost doubled and the value of the pension entitlement has been almost halved.  It was halved by shifting the age out to 65 and by dropping the pension to 65% for a married couple.
Now note this: The number of over 65s is set to more than double over the next 40 years.  The workforce is projected to grow by only 10%.
There are five workers per retiree now.  The projection is for there to be only two workers per retiree in 2050.
That means the cost of providing for super at the present rate is going to more than double.  Providing for the pension now costs 4% of everything we produce.  That is the net cost.  That cost is projected to rise to 9% by 2050.
What we don’t see is politicians promising to increase income tax by 25%.  But that’s the arithmetic of the number of elderly more than doubling.
It doesn’t matter what politicians promise: they can’t beat arithmetic.
The Cullen Fund:
The Cullen Fund is only a cost-smoothing exercise
It doesn’t change the cost.
It puts some $42 billion of taxpayers’ money into a big state-run fund over the next 20 years and then pays it out plus interest to cover some of the future cost of super.
Instead of the cost of super going from 4 to 9% of GDP the Fund bumps it up to 6% now to knock it down to 8% in the future.
The Fund itself peaks at 40% of GDP – 20% larger than the market capitalisation of the entire New Zealand share market.  That’s a big fund – and it represents a considerable financial and political risk.
Already politicians want to invest it in their pet projects and the government’s balance sheet is going to get knocked around as the Fund’s value fluctuates.
The Fund sucks in 2% of GDP and does nothing to address the real problem: The need for strong, consistent growth.  The Fund does nothing to grow the economy – indeed, in sucking an extra 2% of GDP up through the tax system, it’s a negative for growth.
The marginal deadweight cost is estimated to be 50% in New Zealand. That means raising that extra $2 billion in tax costs us probably a $1 billion in lost opportunity.
The Cullen Fund is a huge drain on our economy.  Don Brash was right when it called the Cullen Fund “financial smoke and mirrors”.  He was wrong when he signed up to it.
Long-term Provision From 2025?
Some people suggest that we divide pension policy from today versus tomorrow and suggest that tomorrow starts in the year 2025.  I don’t think that’s particularly smart.  There’s nothing magical about the year 2025.  The numbers of elderly climb steadily and proper pension policy should be looking out 50 years rather than just a few years ahead.
Politicians like to promise today and not worry about tomorrow.  But it’s that political expediency that has seen our elderly hoaxed with unsustainable super promises.  That’s what causes so much grief and upset.
The best guide to the future is our history.  The number of over 60s has doubled since 1975. 
Since then the pension entitlement has been halved through a combination of shifting out the age of retirement and dropping the pension.
Pension Age:
No political party is promising to increase income taxes by 25% to maintain the pension.
That means that overtime the age of the pension will be shifted out to 67 or 68 and it’s inevitable that the pension’s value as a percentage of the average wage will be dropped, just like it has been in the past.
Inflation Linkage:
The way to preserve the purchasing power of the pension in the future is to link it to inflation with periodic review as to its value.  Once again, that’s the promise for the future that all parties are making because it simply isn’t possible to increase income tax across the board by 25% to maintain the relativity of the pension with wages.
The best security is to make the decisions now to have a strong and prosperous economy in the future to better provide for the elderly in the future.  It’s the size of our economy in 20, 30 and 40 years ahead that will determine the standard of living of our elderly – not the nonsense promises of politicians in the run-up to this election.
Income & Asset Testing:
Income testing and asset testing has been hotly debated in New Zealand.  There is now no testing.  So MPs passed their 65th birthday can pick up their wages, accumulate cash in the MPs’ pension fund, and pick up national super from hardworking taxpayers.  Likewise multi-millionaires can retire in the lap of luxury and again be entitled to a pension at the expense of all taxpayers.
It seems to me we need to consider whether that is fair.
How Paid For?  The Mechanics:
The taxpayer always pays for the pension.  The mechanics of how it is paid makes no impact on the cost overall.  The Cullen Fund gives a false sense of security and only smoothes the costs a little.
In short, a dumb idea.
Low-income earners will struggle to find the minimum 4% contribution from their wages.
Those who could afford to save, but are buying new cars or going on holiday instead, are unlikely to be tempted by a $1000 bonus.  How smart is it for workers with a mortgage to be sticking 4 or 8% into KiwiSaver?  Not smart at all.
The Government’s contribution of  $1,000, and the potential of another $5,000 if a person stays in the scheme for 5 years are near irrelevant to getting a home deposit.
KiwiSaver fails to target poor savers, and fund managers fear first-home buyers will abandon it once they have extracted the Government subsidy.
First-home buyers are also likely to withdraw their contributions to take up their entitlement for up to $5,000 toward a deposit for a house after as little as three years.
Nowhere is there the sort of incentive that would allow the scheme to play a significant role in lifting New Zealanders' level of savings.  Employers will "be able" to make top-ups – as is the case with the state superannuation fund – but they are given no reason to do so.  Missing is the encouragement that would have been provided, most logically, by a cut in the company tax rate from 33 to 25%.
In short, KiwiSaver is a poll-driven initiative, damned by Dr Cullen’s own forecasts that only 265,000 employees will be in the scheme in 2008 – a dismally low figure, especially given the small number involved in today's workplace schemes.
The ideal undoubtedly is working people taking more responsibility for their own pension.  The difficulty is they have little incentive or opportunity to do so.  The first difficulty is the compliance cost of running workplace savings schemes has just become too large in New Zealand.  We should be working hard to lower these compliance costs.  That would make it much easier for employers to run workplace savings schemes.  That would be a big boost.
Tax Incentives:
The best tax incentive that we can give to people saving is lower taxes.  The more money that working people have in their pockets the more ability they have to save, especially if workplace savings schemes are affordable for employers.
It’s not smart to give particular tax incentives to saving.  People know best how to spend and invest their own money without being shunted down a particular chute by government.  The best tax system is a low, flatter tax system.
Dropping taxes also boosts the incentive to work and to invest, making for a more prosperous future.
Compulsory Savings:
Just forcing people to save doesn’t solve the problem of the number of elderly doubling.  For example, we could force people to save the equivalent value of the pension for when they retire.  That wouldn’t in any way change the cost of the pension, all it would do is bring it forward.
Moreover, the forced savings would depress growth – and the incentive to work and to invest – as taxpayers would lose an additional, say, 7% out of their pay packet each week.
The best thing to spur growth is lower taxes and people being able to keep more of what they earn.  Forced savings actually leaves them with less.
Review Process:
Looked at objectively, the review process in terms of pensions has been a failure.  The Retirement Commission, the Periodic Report Group and the Accord have all been political devices to take the heat off politicians and to shift it somewhere else.  They have not served to stabilise pension policy and while the information generated has been high quality, it hasn’t translated into sound policy for pensions.
The best approach is truth in super. That would require politicians to explain how they propose funding their pension promises over the next 50 years.  Hand in hand with the promise to maintain the pension to 65% should be the recognition that it is also a promise to increase income tax by 25%.
It may be useful to include in the Fiscal Responsibility Act, a longer time horizon to take account of the pension promises that politicians make in the here and now.  We need better to discipline politicians so that they don’t make promises that can’t be sustained.  The review processes set in place have not disciplined politicians.  Far from it, they have allowed politicians to duck accountability.
If we care about the elderly, now and in the future, we need to force accountability on politicians in the here and now for the future cost of their promises.
I think it is a sad reflection on our politicians that New Zealand is seeing a Muldoon-style bidding war for the 485,000 retired votes by Labour and NZ First.
Helen and Winston trip over each other as they race across the nation, passing pleasantries as they push through the revolving entry doors to bid at endless Grey Power meetings.
Labour is horrified that their elderly vote-buying since 1999, including increased pensions at a $200 million a year cost, removal of asset testing at over $100m a year and rates rebates for the elderly, is not being repaid with blind loyalty.  To their horror, Winston is outbidding them, campaigning on lifting the elderly pension to 72.5% at an extra cost of over $650 million a year.
These parties are blatant vote buyers.  This is bad for the nation and unfair on today’s workers who pay for these cynical electioneering bids.
And while National largely resists this, for political reasons, it has signed up to the $2 billion a year Cullen Fund.  This money could be returned to New Zealanders by the way of tax cuts which would stimulate economic growth.
ACT is the only party that stays the course of good policy that will benefit all New Zealanders, and promotes the lower tax and economic policies that credible economists agree will deliver higher growth and living standards for all.
I have been asked to come up with a singular expression that sums up ACT’s position on retirement income.  That policy is growth.
The number one policy priority is to use the $6.7 billion plus surplus to cut personal and company taxes to a top rate of 25%, and the bottom personal rate to 15%, thus lifting growth, incomes and providing greater prosperity for all New Zealanders.  
This can be afforded within the surpluses, and which along with a strategy of prudent government spending, will better enable people to save.
We have in the next eight weeks an election that offers a dramatically different set of visions for New Zealand’s future path.
Do we continue to overtax the current generation, and sap our wealth and industry through bloated government?
Or do we cut taxes to 25 and 15%, and deliver higher growth and incomes that unarguably are the best way to assist individuals and government to provide long term for all New Zealanders including our elderly?
That’s the choice between ACT and all the rest.  That’s the choice that votes will be making this election.
Rodney Hide MP
Phone:            04 470 6630  /  021 772 385
Fax:                 04 473 3532
Scott Dennison, Press Secretary
Phone:            04 470 6622  /  027 450 1407