Labour and New Zealand Superannuation

By   /   August 29, 2014  /   19 Comments

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The kerfuffle in the wake of Nicky Hager’s Dirty Politics has had a detrimental impact on our discussion of economic policies.

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The kerfuffle in the wake of Nicky Hager’s Dirty Politics has had a detrimental impact on our discussion of economic policies. Signs are that the main beneficiaries of the dirty politics revelations will be Winston Peters and Colin Craig; certainly National suffered more than Labour in 2002, the ‘Corngate’ election. Nevertheless, Labour’s economic strategy must be examined closely as the election outcome is looking more like a lottery (based on whether or not certain parties achieve five percent) than an exercise in policy-based politics.

Maybe the biggest casualty is the absence of debate about the various parties’ retirement income policies? Indeed I could not contemplate voting Labour because I think their policy on raising the age of NZ Superannuation is completely wrong.

Further, Labour has become THE party of austerity. Only Labour could regard running Budget surpluses every year as an electoral plus. (This is worse than the balanced Budget mentality of Great Depression governments in the 1930s.) New Zealand has a problem of private debt, not public debt. Only Labour wants to advertise its puritanism, devaluing its own policies by sacrificing them on the sacred altar of miserliness. This is the exact opposite of everything the first Labour Government stood for. (I refer, once again, to Florian Schui’s recently published book Austerity, The Great Failure.)

On searching The Daily Blog for commentary on Labour’s policies on retirement income, I could only find two press releases: One pot of gold gone, Labour will create a new one and Super Fund contributions must restart on surplus. These only emphasise the miserliness of present-day Labour. David Parker sees money much as squirrels are alleged to see acorns; not as a social technology that works by constantly moving (as in “my spending is your income”), but as something that must be stored like jars of preserved fruit. (See my 2013 article Acornomics.) There is a long literature on the ‘Paradox of Thrift’.

 

Economic Cycles

Capitalist economies are cyclical. Cycles are not necessarily regular, but, looking back, there is a surprising amount of regularity. Indeed one cycle that affects New Zealand seems to recur every 10 years. (In the 1930s Joseph Schumpeter acknowledged this as the Juglar Cycle, in recognition of Clement Juglar’s analysis of nineteenth century macroeconomic data.) Since 1900, how often has the year ending in a ‘7’ and/or an ‘8’ been a crisis year? (1900s, 1920s, 1950s, 1960s, 1970s, 1980s, 1990s, 2000s. The years 1918 and 1948 weren’t flash either.) Which years have been the best years? Consistently the years ending with a ‘4’ or ‘5’.

If the pattern is maintained, then this year and maybe next year will provide the best opportunities in the decade for the young to get a foot on the employment ladder. So how do we do help our young people (say born after 1990) to become an economically active generation? Certainly not by sending really strong messages to older people that they should not contemplate retirement until they are aged 67, or 70 for that matter.

Through most of the economic cycle, it is insufficient aggregate demand – insufficient spending – that constrains employment growth. In New Zealand it is only massive amounts of private debt that sustain aggregate demand. Outside of the few free-spending ‘rock star’ years (such as this year), the route to young people becoming employed is the emergence of vacancies arising from older people moving through the employment ‘pipe-line’. In the capitalist game of musical chairs, the young have a better chance if the old withdraw from the game and make their chairs available.

 

Retirement, Labour Supply and the End of Universalism

Retirement is a benefit, not a cost. It is one of the reasons why past economic growth was a good thing. We – including economists – understood this in the period from 1850 to 1950. Hours of work per person dramatically declined over that century. Shorter working weeks, shorter working years, and shorter working lives were the dividends of economic growth. Now, in the twenty-first century, we espouse growth while despising any dividend that growth might give us. We want the pain without the gain.

The problem has arisen because we, including professional economists, have come to regardincreased labour supply (ie increased labour force participation) as a critical economic objective, as a means to economic growth. Growth has become an end in itself; an end without purpose. By contrast, from 1850 to 1950, we regarded decreased labour supply as a critical economic objective, as a desired consequence of economic growth. Today most tax economists actually use increased labour supply as a criterion for the virtue of a tax reform, and decreased labour supply incentives as a mark of a proposed policy’s inefficiency.

In the past our thinking was muddled about some things. But it is in the present – not the past – that we have become comprehensively muddled on the matter of labour supply. We see the issue in our increasingly unrelenting belief – a belief promoted by Roger Douglas (especially in 1973-75), Margaret Thatcher, Ruth Richardson, Jenny Shipley, Helen Clark, Angela Merkel, Paula Bennett, David Parker – that a virtuous person (indeed a deserving person) is an employed person.

It was this belief that underpinned the recent welfare ‘reforms’ that required young people to compete more than ever with both single mothers and older people for what is, in most years, a small pool of available jobs. It was this belief that underpinned the introduction by Labour of ‘In Work Tax Credits’, a payment that serves as a reward to persons (or partners of persons) deemed to be employed, and explicitly withheld from those who are not employed or who are underemployed.

Sir Robert Muldoon would never have stood for that kind of thinking. He believed in a comprehensive universal welfare state. Taxes would be high enough to ensure that everyone got something back.

Muldoon introduced a system of retirement income provision that – for its simplicity, fairness, and economic soundness – remains arguably the best in the world. Further, by choosing the age of 60, he signalled that it was time to pay all of our older people a growth dividend, and to enable the young to build their careers.

(For those retired persons with other sources of income, their Superannuation from 1976 was taxed at up to 60 cents in the dollar. After 1982, while the average rate at which income tax clawed back Superannuation was reduced, the top marginal rate of income tax was raised to 66 cents in the dollar as a way of making the 1982 tax cuts more palatable to those on lower incomes.)

Women were the equal of men to Muldoon, but not to Roger Douglas who devised a superannuation fund in 1973 that vastly favoured those for whom employment (rather than motherhood or other useful non-commercial activities) was the principal productive activity of their lives. Douglas promoted a ‘live to work’ philosophy; Muldoon’s philosophy was ‘work to live’. For people in their 60s in particular, retirement wasn’t the knackers yard; it was a chance to live. It was the point of all that work, paid and unpaid.

It was no coincidence that it was from the mid-1980s in New Zealand that inequality dramatically increased. The shift from higher taxes and universal benefits began in 1984 with Family Care – a targeted family benefit – and was pretty much complete in 1994 after the 1989 Reserve Bank Act, the 1991 Employment Contracts Act, the 1991 benefit cuts, the abolition of the universal family benefit, and the 1994 Fiscal Responsibility Act. New Zealand had moved onto a permanent plateau of high inequality. Young people in particular were cast to the vagaries of the business cycle.

Only New Zealand Superannuation survived as a universal benefit. And that was a near-run thing. After being degraded by Roger Douglas in the mid-1980s, it was only restored as a universal benefit by Jim Bolger in 1998, under pressure from Winston Peters. But only after Bolger had raised the age of entitlement. And only after the 60 percent top rate of income tax had well and truly bitten the dust (down to 33 percent, under Labour, in 1988).

 

An Affordable Future?

The most prominent concern about New Zealand Superannuation is that it will mean that older people will take too great a piece of the future economic cake, especially in the event of a recession when the cake is shrinking. But that’s exactly the problem that will occur if older people are prevented or otherwise discouraged from retiring. It is not the taxes that pay for NZ Super that will impoverish the young. Rather it’s the wages in an employment-constrained future that will be disproportionately paid to those older persons who least need those wages; to those who will least spend their salaries.

In a world in which most people in their 60s are still in substantial paid employment – indeed the best paid jobs – the only way that the economy as a whole will retain traction will be through the overemployed 60-somethings lending their wages to the underemployed 20-somethings. This policy of Labour’s to raise the age of qualification for New Zealand Superannuation will, at best, aggravate the debt problem that our young adults already face.

And then, when the mainly white oldies get really old, we will expect the inexperienced, indebted and impoverished (yes, today’s victims of child poverty) young brown New Zealanders to take over, and provide high quality professional services to their grandparents’ generation, while practicing austerity for themselves. Fat chance! The 30-50 year-olds in 2030 are more likely to support the legalisation of euthanasia.

We cannot afford to impoverish and disaffect our young today by minimising their opportunities to become the productive citizens that we desperately need them to become.

Affordability is not about how much money a society or polity has hoarded or is hoarding. Affordability is about how many goods and services people are capable of producing at times when they need to be productive. The 2030s will be one of those times.

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19 Comments

  1. Nic the NZer says:

    Thanks Keith.

    Somebody, including Martin, should make sure Martin reads this article. There is no point in progressive governments being elected if they become the party of Austerity by trying to run budget surpluses. This will only have the effect of further tainting the progressive brand.

    Given the current discussion over Labours election policy (even going on elsewhere on this blog) we might only be spared if they lose the election. If you want to see how this turns out in practice look to France where the ‘Socialist’ government is falling apart (the finance minister quit) due to their governments insistence on harming the French economy.

    http://bilbo.economicoutlook.net/blog/?p=28785

  2. Korakys says:

    Just reduce the working week by 4hrs every 5 years or so until we hit 20hr work weeks while paying everyone roughly the same amount per week over that period.

    You economists are always trying to overcomplicate things.

    • Alan says:

      Actually economics is extremely simple – though the implications less so.

      Love to hear the logic behind your suggestion – or are you just trolling?

      • Korakys says:

        Well the first sentence is not a troll comment at least.

        It will force a decrease in unemployment; this will increase “labour force participation”. Productivity will also shoot through the roof (see France).

        Together with changing to full-reserve banking to handle the debt issue this solves the problems Keith Rankin is worrying about.

    • Dennis Dorney says:

      Reducing the working week does make sense since it addresses the issue of total consumption. We live in a world which has finite resources, yet we want ‘full’ employment indefinitely, which means forty-hour weeks of an ever-expanding work force. Clearly that is impossible, so reducing the working week is an obvious way of cutting consumption (and the side issue raised earlier about euthanasia really needs to be addressed as well. I say that although I am 74 and I know what my prospects are if we start culling population).
      However there is a problem. The issue of total debt raises its head again. Our total debt rises inexorably and always must since the interest on debt always exceeds the rise in productivity. If you try to reduce working hours, and therefore reduce income, debt repayments rise proportionately and will crash the economy very quickly.
      Also the reduction in production will be uneven, because our service industries will still be needed at much the same level as now, so all the work reduction must be from the productive sector.
      Even it that were technically possible, it would mean a large overhead loading on all our produced goods, which would be uncompetitive against foreign competition.
      In summary, the reduced production that is badly needed is only possible if we change the present debt-creating monetary system, and change the present free-trade system. Neither of these issues have been addressed here.

      • Korakys says:

        I think you missed my point. Simplistically: reduce hours by half, increase wages by double. Employment theoretically should double too, but wont because of inevitable productivity (efficiency) gains. Consumption is not affected.

        • Con says:

          Believe this if you will.
          I worked through a time when we were told
          job sharing and increased recreational time
          for the work force would become the norm
          and because of the technological advances
          and improved work methods etc no difference
          in living standards would result.
          It was to be a better time for everyone.
          This was just prior to computerisation and
          the huge advances in technology in the last
          thirty years or so. It made sense and we
          thought at long last the 40 hr work.week would
          be shortened. Of course there is no change
          Unbelievable increases in profits have evolved
          during this period but people are being
          compelled to work harder than ever.
          Funny though we are told 40 hrs it has to be.
          The rates being paid to skilled tradesmen
          in the late 1970s was close to that paid today.
          for the unskilled worker pay doesn’t seem to have
          changed at all.
          Clearly standards of living have gone down
          for the working class all this cloaked in the myth
          of a brave new global village of free trade
          humanism and we must have growth and now
          we want to keep the oldies working till they
          drop what a hoot.

  3. Joe Moses says:

    Too right. Cunliffe/Parker are just the ACT Party of Prebble and Douglas. I wish the Greens would break free of Labour, the Greens should be open to John Key who is Left of Labour in 2014…

  4. Brigid says:

    Actually Norman Kirk’s New Zealand Superannuation Act, which came into effect on 1 April 1975 was the best scheme that has ever been passed. This was short lived however by Muldoon’s promise to replace it with a tax-funded National Superannuation scheme, which of course won him the 1975 election.

    • Wayne McIndoe says:

      And in retrospect it was one of the worse political actions by a Government in the past 40 years, had Kirk’s scheme carries on there is no doubt we would be a wealthy country.

    • Marcus says:

      Yes. Did you see the figures that came out a while ago which showed how much less debt ridden New Zealand would be if the original scheme had been allowed to continue? Labour’s original scheme, although perhaps a little flawed, was ahead of its time and should have been continued, with some adjustments. Sadly National axed it out of sheer spite, just because they hadn’t thought of it first.

  5. Mathew says:

    Has anybody considered the amount of tax the govt will be creaming off kiwi saver interest ? If this scheme was run by honest public servants like the Cullen fund, rather than crooked banks the tax rake would be even higher….pardon the language , but fuck shiny arses that think we can work till we are 67. Everyday is in pain after 55 if you have worked in hard productive work all of your life. Call you self Labour……we’ll kiss my none shiny arse.

  6. mikesh says:

    It looks like we need Winston in the coalition to ensure that Labour/Greens’ two bad policies, super age raise and capital gains tax, don’t get enacted.

  7. Wild Katipo says:

    I like it – ‘ Fat chance! – the 30-50 year old’s in 2030 are more likely to support the legalization of euthanasia ‘ .

    Yes, ..but then again,…Muldoon being head of the IMF as well as an accountant schooled in the then prevalent Keynesian economic model would favor that welfare state…

    Apparently it was a continuation of policies that Labour had originally set in place that successive political parties accepted as standard practice in New Zealand.

    And it worked.

    The antithesis of Keynesianism was of course the Mont Pelerin society neo liberal economic model…building on American lazze faire and the earlier Austrian economic schools….

    Simply put , neo liberalism was introduced through stealth , deceit and guile into New Zealand…it is that that is the root cause of the inequality …and , pertaining to this article…destroyed not only the social democratic foundations of NZ…but created the conditions necessary to introduce many of the punitive measures and ACTs you mentioned.

    This ‘ raising the age of retirement ‘…is but a symptom of that….as were all the other destructive measures taken.

    In very very basic forms…neo liberal thought is to ‘hoard , and not spend in times of austerity’ …thus creating the conditions of falling demand/job losses/less liquidity in international/domestic economies…

    Whereas Keynesian economics uses the remedy during economic recession of ‘ spending even more/borrowing -particularly for large public works/industry etc..to stimulate the local domestic economy…and international global economies…ie: trade.

    It was this principle that was used in an effort to reboot after the GFC…whether countries adhered to that was another thing…certainly austerity measures caused mass unemployment and hardship…..however…austerity measures are the opposite of true Keynesian economics.

    I would think…that until this country heads back to a more Keynesian based model…we will continually suffer these vexations.

    • Wild Katipo says:

      I thought it best to include also some of the best models of a type of Keynesian economics are now practiced by the social democracies of Scandinavia …among the most wealthy per capita nations today – who also have extensive welfare states.

    • Nic the NZer says:

      I would say Keynesianism goes further than using stimulus just to respond to recession. A sensible Keysian policy targets full employment at all times using stimulus to compensate for all leakages of spending (not just the private sector hoarding more income, which can cause a recession) this would also include spending to compensate for a trade deficit if the economy is running one.

      • Wild Katipo says:

        Indeed , as was the case in Nz , even with britain accepting much of our agrarian produce…it wasnt until the so called reforms of Douglas and the Lange govt that we experienced neo liberalism and its distatrous affects on large swathes of the populace…in a very negative way.

  8. Brian says:

    Keith, you should explain to your readers how taxes work in a modern monetary economy.Like govt.has to spend first before they tax,or issue debt,etc.That this understanding would go a long way to opening up up the debate on govt.deficits bad and surplus good.The debates in the ’30’s over austerity have been forgotten.Austerity in my opinion is a precursor to war as world war1, and world war 2 would attest.Austerity for the masses,along with a upsurge in money spent on armaments,propaganda ,false flag ops etc.
    Unemployment is always a monetary phenomena. The dollars to pay taxes
    ultimately come from govt. spending or lending.Unemployment can only happen when a govt. fails to spend enough to cover the tax liabilities it imposes, and any desire to save that money, that are created by the tax and other govt. policy.Said another way, unemployment is the evidence of over taxation.Motivation not withstanding Key and his govt.promoting policy that creates and sustains unemployment.Labour would case the economy to collapse if it runs surpluses.History shows that crashes follow.The great depression, and the G.F.C.are prime examples Get rid of the Calvinist streak that runs deep in the N.Z psyche.

  9. seagull says:

    Seems to me it is a bad move to increase the age of super…politically and otherwise….In Europe austerity has not worked

    Does Labour want to really, really maximise its vote?….or let a proportion of older Labour voters cast their vote for Nactional ?

    …inwhich case Labour needs a reality check because it will be Labour Maori and Polynesian older males ( those who work in manual jobs and those who die earliest) who could be swung to Nactional on this issue.

    Can Labour afford to be so wasteful of its vote?