Universal Super – No steps forward. Two steps back?

By   /   June 16, 2018  /   18 Comments

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Better off people can simply save less in other funds if they are forced to contribute more, while the poor just get poorer. On retirement, low income workers may get little advantage from their forced saving as they will need a top-up to get just to the level of NZ Super.

I was so alarmed to read this article Retirement’s not something to put off – neither is retirement policy.  Granted, the lack of debate about New Zealand Superannuation policies is deplorable, there is something disingenuous about a director of a KiwiSaver fund arguing for a compulsory KiwiSaver at a much higher rate of contribution than today, with tax-funded subsidies.

The alarm bells further ring when Shamubeel Eaqub describes NZ Super as a welfare benefit.

 Universal super is simple to administer, but expensive. By means testing, as we do for most other types of welfare, we could target aged welfare for a smaller group of people and make them more generous. It would need to test assets and would be a natural complement to a tax regime that taxes capital as well as income and spending.

The income test we have for welfare is draconian and if applied to NZ Super would hugely disincentivise saving.  Jenny Shipley and Ruth Richardson tried to do this in 1991 in one of the most disgracefully ill thought out retirement policy moves in modern times.  Covering themselves in ignominy, they had to reverse the legislation making super a welfare benefit such was the outrage. But Equab would go even further and include assets, as they do in Australia. There, the means test is also a joint one for couples assuming a financial dependency for women that seems quaintly outdated.  Yikes.

The justification Eaqub uses is that means testing would enable the pension to be more generous and this would help old age poverty. Using that argument, we ought to have benefits such as for sickness at a level that prevents poverty by now. Sadly as history shows, welfare only for the poor becomes poor welfare, unsupported by the smug higher income group who can save for themselves, stigmatising, complex to access and thoroughly miserable.

He argues that tax cuts should be channelled into compulsory KiwiSaver taking no account of the vast number of struggling working poor on low wages who may need those tax cuts to survive.  

We should direct any future income tax cuts to KiwiSaver contributions. Australia did that when they abolished the payroll tax and directed it to superannuation contributions.

Better off people can simply save less in other funds if they are forced to contribute more, while the poor just get poorer. On retirement, low income workers may get little advantage from their forced saving as they will need a top-up to get just to the level of NZ Super.

The Australian model is scarcely a guide for New Zealand. It is widely criticised as far too complex, expensive, disincentivising and pro rich. Over time, as more emphasis is placed on private saving as the source of retirement income, women and others who don’t have a full working lifetime contribution fall relatively further behind.

Recent statistics for Australian superannuation (ASFA)  show

 

  • average superannuation balances at the time of retirement in 2015-16 were $270,710 for men and $157,050 for women.
  • Medians (the amount at which 50 per cent of the population surveyed have less than the amount) are somewhat lower for those aged 60-64, with a median of $110,000 for men and $36,000 for women.
  • Many recent retirees will need to substantially rely on the Age Pension in their retirement.

 

Yes that’s right. Despite compulsion and a much higher contribution rate than we have for KiwiSaver, the median balance for women at retirement is one third of that for men.

Eaqub is has a point that annuitisation “needs attention to help the growing KiwiSaver balances turn into what retirees want: income in retirement”. He is also right that current policies for NZ Super are unduly expensive. But lets have a full debate on design issues and mechanisms to rein in that cost without throwing the baby out with the bath water.  Our world class system of a simple basic taxable state pension supplemented by an opt-out KiwiSaver with minimal tax incentives and other unsubsidised voluntary saving is not to be discarded lightly.

Eaqub favours a return to tax favoured treatment:

New Zealand’s odd stance of taxing savings before contributions rather than when savings are unlocked, unlike most other OECD countries, means that we are penalising those who save and reducing their retirement savings

NZ’s taxation of retirement saving is based on the sound economic principle of treating all income from saving the same.  OECD countries like the UK and Ireland are struggling with their traditional mode of superannuation tax breaks as they benefit the rich much more than low income savers and create distortions in the flow of capital. These countries are in thrall to powerful financial sector lobbies and their reformists look enviously at what we have done in New Zealand.  

Reading Eaqub’ s article I was also reminded of the Affording our Future conference in Wellington.  At that conference Michael Cullen gave this paper: The Political Economy of Long-Term Fiscal Planning from a Social Democratic Perspective.

I listened with increasing dismay as Cullen expounded a model for changing New Zealand’s superannuation policies in ways that would import some of the worst features of Australian policies. His vision was of a compulsory scheme with a much higher rate of contribution. One half of the resulting lumpsum would be used to buy an annuity and then be used to reduce (means test) New Zealand Superannuation.

Did Equab stumble upon Cullen’s paper I wonder?  Equab is a director of the Simplicity KiwiSaver scheme who advises that “The Tax Working Group should make [tax subsidies for KiwiSaver] a key recommendation”. Cullen is the head of the Tax Working Group, and the director of a firm that sells annuities (Lifetime income). Isn’t there a conflict of interest somewhere here?

In the referendum of 1997, 91.8% of us rejected the similar proposal for compulsory saving and NZ Super offsets from Winston Peters, for very good reasons. New Zealand has a world leading model, so much better for women and so much more progressive. Yes, superannuation policy needs tweaking; residency is far too low, the wealthy pay too little tax on their NZ Super, rates based on marital status are outmoded; the kickstart for Kiwisaver needs to be re-instated etc.  As I have argued here are ways to retain the universal character of the state pension while reducing its cost though the tax system. Please let’s not be fooled into resuscitating Winston’s model, or the Australian one or the one Cullen floated in 2012.

 

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About the author

Co-director retirement policy and Research Centre, CPAG management committee

18 Comments

  1. Afewknowthetruth says:

    Those who discuss the merits or otherwise of current financial arrangements and their future never acknowledge that ALL financial arrangements are dependent on resources which are now in terminal decline.

    Rather than address the terminal decline of resources (and energy), they continue to pretend that resources are infinite and can be extracted from the Earth at ever-increasing rates: mathematically impossible.

    The crash of 2008 (when Brent oil hit $147) was a graphic warning that was generally ignored: massive amounts of Ponzi money was injected to failing institutions to prop them up in the short term; nothing was done to address the fundamental flaws in the system. So now we are in a worse mess than ever, awaiting the next crash.

    Until the next crash does arrive, those with vested interests in current arrangements continue to promote the infinite-growth-on-a-finite-planet narrative (which KiwiSaver is dependent on), and in doing so promote faster planetary meltdown.

    Nothing adds up anymore (not that it has made any sense for several decades).

    We are told we must increase our emissions to keep business-as-usual going and at the same time we must drastically reduce them to save ourselves from annihilation.

    https://www.theguardian.com/environment/2018/jun/15/leaked-un-draft-report-warns-of-urgent-need-to-cut-global-warming

    • Susan says:

      Agree It is all about the real resources not about accumulating pots of money. If changing retirement policies themselves increase real output of the economy to cope with ageing then ok but there is no evidence that will happen. If the intent of the changes is to make NZ Super less costly there are far better ways to do that are fairer especially for women

    • Marc says:

      Fossil fuel exploitation basically underwrites all present day economic and social activity, and with that social plans for retirement and other safeguards. Once that is undermined and collapses, we will have thousands of elderly and sick and disabled beg in the streets.

  2. Sam Sam says:

    Let’s not beat around the bush. Consider a Ponzi scheme where the greater fool, or the last one in pays out the first one in.

  3. cleangreen says:

    We are headed down the slippery slope now, and Government both past or present does not have the will to act desisively it seems.

    Here is the proof;

    Two days ago our ommunity submission to the “Zero Carbon policy Bill” group

    https://beehive.govt.nz/speech/zero-carbon-bill-consultation-launch

    In our submission we asked for this group to consider using rail to lower the carbon emissions as the former climate change minister did in 2004 as Pete Hodgson did

    In 2004 Pete put together “National Rail Stategy” to combat rising carbon emissions from transport, as he was alarmed at the incease to 43% of our total carbon emissions then.

    Our response was very disapointing; – and the climate change group (a lady named Christine called me and said they dont have a focus on rail or the issues we submitted to them with so i have since then been stunned like a mullet; here is our submission to the climate change panel for you viewing.

    Protecting our environment & health.
    In association with other Community Groups, NHTCF and all Government Agencies since 2001.
    Public & media submission – Zero carbon bill – submission & on the re-opening of the Napier – Wairoa – Gisborne rail services.

    17th June 2018.
    Subject; public community submission to; https://beehive.govt.nz/speech/zero-carbon-bill-consultation-launch Introducing the Zero Carbon Bill – June 2018 James Shaw. – Climate change minister.

    Point 1/

    Please re-introduce and incorporate MP Pete Hodgson’s “National Rail Strategy” as part of his climate change policy he produced as the former Minister of Transport and “Ministerial group on Climate change” under the previous Helen Clark Government.

    https://www.parliament.nz/en/mps-and-electorates/former-members-of-parliament/hodgson-pete/
    • Minister of Research, Science and Technology: 10 December 1999 – 21 December 2004
    • Associate Minister for Industry and Regional Development: 10 December 1999 – 19 October 2005
    • Convenor, Ministerial Group on Climate Change: 14 August 2002 – 19 October 2005
    • Associate Minister of Foreign Affairs and Trade: 13 November 2000 – 26 February 2004
    • Acting Minister of the Environment: 23 February 2001 – 27 March 2001

    Pete Hodgson produced the excellent policy of using rail under the “National Rail strategy” – 2005 “To ensure environmental sustainability”.

    • Here is the references in this document from the Ministry of Transport.
    https://www.transport.govt.nz/assets/Import/Documents/nationalrailstrategy.pdf

    Quote;
    Pete Hodgson’s forward in this “ National Rail Strategy” policy paper;

    National Rail Strategy to 2015 May 2005 ISBN 0-478-10005-1

    “ It is my pleasure to present the Government’s new National Rail Strategy.

    When this Government came to office in 1999, we had already made a very firm commitment to give clear directions to the New Zealand transport system that would reflect the realities we shall face in the 21st century.

    This commitment led to the New Zealand Transport Strategy being released in December 2002.

    The New Zealand Transport Strategy states that ‘by 2010 New Zealand will have an affordable, integrated, safe, responsive, and sustainable transport system’.

    To achieve this we have set five objectives, all equally important:
    • To assist economic development
    • To assist safety and personal security
    • To improve access and mobility
    • To protect and promote public health
    • To ensure environmental sustainability

    Another driver of this process has been the Kyoto Protocol, which the Government agreed to ratify three years ago, and which came into force in February 2005.

    In order to meet our protocol commitments we shall need to focus on reducing transport energy use in particular.

    Under the right conditions, rail is a very energy-efficient transporter of both passengers and freight, and we look forward to seeing better use of New Zealand’s rail network.

    Now we have brought New Zealand’s rail infrastructure back into public ownership, and the vision and objectives of the New Zealand Transport Strategy will be applied to New Zealand’s railway network.

    Through the National Rail Strategy, the Government is demonstrating its commitment to retaining the existing network; to investigating the development of a number of new railway lines; and to maximising the use of rail transport.

    The aim is to move people out of cars for urban journeys, and freight off roads, wherever possible.

    For freight this means a focus on bulk or containerised loads, including traffic such as milk or logs. For passengers it means a focus on busy urban corridors in the larger centres, and using smart thinking to manage congestion.

    This is an exciting time in New Zealand transport, with a dynamic vision beginning to achieve real results, working towards an affordable, integrated, safe, responsive, and sustainable transport system.

    The Labour Progressive government acknowledges the contribution of the Green Party to the development of this Strategy, and both the Green Party and the United Party’s support of the government’s transport policy.”

    Hon Pete Hodgson Minister of Transport

    End – of quote;

    Pete Hodgson refers to the transport emissions as being a major issue, and that half of our climate change emissions come from transport (over 46%).

    Pete Hodgson produced a ‘dedicated rail policy’ to lower the increasing transport emissions.

    By reducing road freight use was a positive goal, as road freight uses over five times the energy to transport the same amount of freight as rail does per tonne per km.

    Point 2/

    http://www.kiwirail.co.nz/uploads/Publications/The%20Value%20of%20the%20Rail%20in%20New%20Zealand.pdf

    This year in February 2018 the new Labour coalition Government revealed a hidden recently discovered important rail policy document that the last government produced under National’s Bill English in 2017 but failed to release.

    http://www.kiwirail.co.nz/uploads/Publications/The%20Value%20of%20the%20Rail%20in%20New%20Zealand.pdf

    But this vitally important rail policy document was never released, under the last National Government, and should now be used also as the report clearly showed that Rail in NZ was of a great economic and environmental benefit that saved $1.5 Billion Dolllars per year already and there is potential that using far more rail will benefit our climate and environment and economy if used in a more regional planned policy.

    4.3

    Safety benefits Another important benefit of rail is the safety benefits of moving both freight and passengers by rail instead of roads. The safety benefit of rail is estimated to be approximately $68.78m to $60.21m. This study has calculated benefits by transferring rail passengers and freight to light vehicles and trucks and applying factors from Ministry of Transport (MoT) to estimate the extra safety incident costs and subtracting the costs of existing safety incidents on the rail network. This represents the avoided safety cost of the rail network. The net safety benefit (avoided cost) of passenger rail is $8.28m to $3.97m and for freight rail it is $60.50m to $56.24m, even though the number of incidents is similar showing that transporting goods using heavy vehicles is more dangerous than rail.

    4.4

    Emissions benefits The total emission cost figure represents avoided costs from transporting freight and passengers by rail and hence for this study it also represents the value of emission benefits. The estimated extra avoided cost (therefore benefits) of emissions created from moving Auckland and Wellington rail passengers and rail freight to road is $9.27m to $8.45m. This is a net figure and the emission savings arising from discontinued use of freight trains locomotives have been subtracted from the gross total. A modest proportion of the emission benefits is from the transfer of passenger services from road to rail with the largest amount of this net extra avoided cost arising from rail freight.

    https://beehive.govt.nz/speech/zero-carbon-bill-consultation-launch

    SHARE THIS
    Twitter Facebook Linkedin Email
    7 JUNE 2018
    Zero Carbon Bill Consultation Launch

    HON JAMES SHAW

    Climate Change
    Let’s Talk About The Weather

    Introducing the Zero Carbon Bill
    The Zero Carbon bill is designed to create certainty.
    It is intended to provide a long-term and stable policy environment, with a clear emissions target and a guided pathway to get us there.
    It does this in four ways:
    First, it sets in law the target for 2050 so we know where we’re going.
    In this consultation, we’re going to be asking New Zealanders whether they think that target should mean,
    1. Net-zero carbon dioxide – only – and not other gases;
    2. Net-zero long-lived gases, like carbon dioxide, and stabilised short-lived gases, like methane; or
    3. Net-zero emissions of all gases.
    Second, the Zero Carbon Bill puts in place the stepping stones along the way – our ‘emissions budgets’.
    We’re going to ask New Zealanders what their views are of how those should be set.
    Third, it establishes the institutions we need to get there, particularly a politically independent Climate Change Commission.
    The consultation will be asking for your views on what powers and functions the Commission should have and the degree to which it can make key decisions, or simply offer advice to Parliament to make those decisions.
    And finally, the Zero Carbon Bill ensures the country has a plan for how we adapt to the effects of climate change.
    This includes having a national risk assessment, a national adaption plan, and possibly some powers to ensure key organisations are managing risks to the economy.

    Warmest regards,

  4. Terry Coggan says:

    Congratulations to Susan St. John for defending universal welfare entitlements. I’ve never forgotten hearing a young Jim Anderton eloquently advocating the idea that all good social democrat used to hold – that we are all obliged simply as members of a community and as human beings to support each other if any of us is unable to work through age or infirmity. I also remember Anderton on TV in later life betraying this principle by saying people like him on large salaries shouldn’t claim welfare benefits. But those demagogues who say the rich don’t need social welfare just want to return to the nineteenth century when our betters dispensed charity to the poor, or to those they considered the deserving poor. As Ms St. John accurately observes,”welfare only for the poor becomes poor welfare”, with demeaning means tests and all the rest. The working class is generous – let Eric Watson or the Queen draw their pensions like anyone else. (This doesn’t exclude also having a steeply progressive tax system, of course.)

    • Susan says:

      Yes we already tax NZ super so the rich get a bit less. We can tweak those arrangements to increase the tax offset and save a useful amount with out hurting anyone- Eric Watson wouldnt even notice

  5. Mike the Lefty says:

    Susan didn’t mention that National Super was the brainchild of Muldoon’s National government. Scrapping the Third Labour’s government’s progressive and unaffordable, but outwardly unattractive NZ Super with the more outwardly attractive but ultimately unaffordable National Super was amongst the dumbest things National has ever done.
    And we are still paying the price.

    • Mike the Lefty says:

      The second line should read “affordable”
      My typing error.

    • Susan says:

      Don’t forget that Labour’s scheme did nothing for the currently retired of the day. One way or another we have the excellent simple framework of NZ Super and KiwiSaver. That can be improved but why don’t we celebrate that NZ is leading the way. Other countries are stymied by expensive and pro-rich tax breaks for private superannuation and poor basic incomes. In Ireland only 16% of women get a full basic pension- do we know how lucky we are?

      • Sam Sam says:

        You could take Labour and / or National out of the equation and life expectancy will still rise past the useful age of retirement.

        When I look at the stable of New Zealand’s fund managers they’re not idiots. They know enough to call bullshit (and yes bullshit is a technical term) and keep out of it while maintaining a steady return.

        And when I see the NZX board coming up with proposals to stream line the main trading boards that just makes complicated things easier.

        When I hear about Police Commisioner Mike Bush early in the week at the justice select do committee say his staff will not only go after brown traffic and drug offences but the white collar crime that enables brown crime ie money laundering then I know regulators are doing something useful.

        There’s $40bln low balled of pension fund money looking for a home and a Reserve Bank Govenor who understands that it has to go into something more than toll boths.

        So over all I think New Zealand’s finance sector is healthy. I don’t think they’ll go back to the bad old days where South Cantabury finance was leveraged 20/25 to one. So if you’re looking for a retirement plane ask them what there leverage is, anything over 14/1 look for some one else.

        When I first started saving for retirement I had to pay for all this myself. So if some one offers you a teaser rate ie no upfront costs to sing up, that just means they’ll smash your face in 3 years down the track by locking you into a really really low risk retirement plan, so it won’t matter if your savings double you’ll only get 5% if your lucky. So it pays to learn about as much as you can about this stuff and if anything makes you feel uncomfortable then don’t be afraid to be the first to pull out. Switching super can be done online now a days and getting easier. I think it’s best to spend at least five minutes to half an hour going through your weekly and monthly statements then look outside and see if the numbers add up real quick.

        So yeah. Over all I think NZ is better than it was yesterday and better than it was on the 27th of September 2017. And there’s lots of unique opportunities been created to park all that cash just sitting there.

        Iv every confidence the cash will be paired with entrepreneurs who’ve got a deep concern for the beauty and splendour of Aotearoa-New Zealand and the people in it.

        • Sam Sam says:

          Well the The Reserve Bank still has a few bullets to go until zero percent interest rates. The Reserve Bank tried to raise rates a few years ago and I said at the time as the messages started to filter out over a number of months that “raising rates” will raise the cost of borrowing and pop the housing bubble. So rates went up a bit and went back down (don’t remember exact number) and that had the effect of pumping extra money into the economy through borrowing, so new money just through a couple point move so we could sell houses to each other.

          Ultimately Fractional Reserve banking allows banks to lend to one and other, and they lend magic fairy dust (and yes that’s a technical term for killing the kiwi dream) to speculators. And this has to stop, which is difficult because you’re not only contending with the reserve bank act and banks the TPP11 financial chapter specifically prevents these kinds of changes or we will pay a premium. So I suggest just leaving them alone and telling every one that if they want this to continue then continue banking with a big four bank. If not consider switching to kiwi bank / kiwi fund ect. Or one of them community banks like Credit union or Community Bank Botany.

          I truly believe that the power to change this paradigm rests solely in the hands of consumers. It’s my belief that if they’re given half decent information they’ll be able to make decent decisions.

      • Mike the Lefty says:

        Labour’s NZ Super scheme didn’t do anything directly for the retired of the day – that is true. But it wasn’t designed to do that – it was a scheme for the future retired and the existing “old age pension” still operated for current retirees. That was why it was such an easy target and made National’s super scheme look so much better than it actually was. Instant gratification nearly always wins out over long term pragmatism in New Zealand – we all know that. Also the high inflation in New Zealand at the time made it look even worse.

  6. Lois Griffiths says:

    Thank you Susan for pointing out that “Sadly as history shows, welfare only for the poor becomes poor welfare, …”

  7. Marc says:

    “The income test we have for welfare is draconian and if applied to NZ Super would hugely disincentivise saving. Jenny Shipley and Ruth Richardson tried to do this in 1991 in one of the most disgracefully ill thought out retirement policy moves in modern times. Covering themselves in ignominy, they had to reverse the legislation making super a welfare benefit such was the outrage.”

    Welfare benefits are kept low, at poverty level, no matter what any government declares, such as the one we have.

    We are served endless LIES about benefit increases, e.g. the Accommodation Supplement ‘increase’ that was supposed to benefit the poorest from 1 April this year.

    It has NOT assisted the poorest, as MSD and WINZ still use the same abatement regime, to keep benefits low, not going above a certain maximum, so to not make benefits pay you better than working as a low paid slave on the minimum wage.

    Many have told me that their Temporary Additional Support or Special Benefit was reduced at time of review after 1 April, leaving them NO better off than before, while the government boasts itself about ‘helping’ the poor to meet increased accommodation costs in places like Auckland.

    Giving with one hand and taking with the other is the brutal rule, and if you even manage to work a few hours a week, the earnings will also be taken off your benefit, as supplements will be reduced, while you can earn 80 dollars or so more, without only the base benefit being hit. That does not mean the supplements will not be hit.

    MSD and the hopeless government, which is inept, run by ministers who do themselves NOT even understand the benefit system, and may not care anyway, they do NOTHING to improve the lot of those in greatest needs, it is words and little action.

    Benefits are determined at will by any government, and the base benefit itself is insufficient to even survive on, they do NOT care, neither Labour nor National:

    https://nzsocialjusticeblog2013.wordpress.com/2018/05/23/social-security-benefit-rates-in-new-zealand-set-at-will-by-governments-ignoring-socio-economic-realities-and-evidence/
    (published 23 May 2018)

    https://nzsocialjusticeblog2013.files.wordpress.com/2018/05/social-security-benefit-rates-in-n-z-set-at-will-by-govt-ignoring-evidence-nzsjb-23-05-18.pdf
    (as on 23 May 2018)

    Screw them all, unless there is a revolt where state houses and much else is turned into flames, out of protest, they will not care one bit of shit, all of the political players that run the show.

    Talking about Super is just one bit of a worthy discussion, even that is full of flaws and will not be resolved any time soon, as the will is NOT there.

  8. Susan says:

    Lois
    We are not having enough debate about these issues in New Zealand nor are we learning from our history and that of other countries

  9. Marc says:

    “Cullen is the head of the Tax Working Group, and the director of a firm that sells annuities (Lifetime income). Isn’t there a conflict of interest somewhere here?”

    Strange that, I wonder, I wonder, we had the same with ‘experts’ advising the government on welfare reforms.

    http://nzsocialjusticeblog2013.wordpress.com/2013/09/07/the-health-and-disability-panel-and-its-hand-picked-members/

    https://nzsocialjusticeblog2013.wordpress.com/2016/08/16/senior-scientist-and-legal-experts-discredit-evidence-used-by-msd-and-dr-bratt-when-claiming-the-health-benefits-of-work/

    https://nzsocialjusticeblog2013.files.wordpress.com/2016/09/msd-dr-bratt-present-misleading-evidence-on-worklessness-and-health-publ-post-19-09-16.pdf
    (new current PDF with post, 19.09.16)

    ‚In the expectation of recovery’, Faulkner, Centre for Welfare Reform, Scrib
    https://www.scribd.com/doc/308613502/In-the-Expectation-of-Recovery
    (criticism of biopsychosocial model, Aylward et al)

  10. greg says:

    https://www.youtube.com/watch?v=ynimmHpzkiY

    a must watch interview with sam stubbs from simplicity
    its not just about retirement saving

    simplicity is base on vanguard model none profit it gives to charity
    simplicity was started to slash the fees and profits the industry is taking

    the PBS documentary the retirement gamble covers the affect of fees on savings
    the affect is a lot more than you would think the part with john bogle founder of vanguard is a real eye opener its a must watch America has had the 401ks a lot longer and gives us an insight to what is happening very applicable to kiwi saver
    https://www.pbs.org/video/frontline-retirement-gamble/