Association of Superannuation Funds of New Zealand

Breakfast Meeting The Northern Club, Auckland

It gives me great pleasure, in this the International Year of Older Persons, to be able to address you on retirement income matters. The International Year is an opportunity to celebrate older people, and a range of activities are being carried out around the country with this in mind.

Today I want to briefly address issues your association has raised including the defeated Tolis Bill, the Government's stance on compulsory superannuation, the involvement of the private sector in superannuation and funding for the Retirement Commissioner. 

As well I would like to outline recent approaches to superannuation, the political constraints of work in this area, the 1998 change in national superannuation and the demographic pressures we face. I'd welcome any questions at the end. 

There is growing concern in most developed countries as to how to adequately provide income security in retirement for an increasingly ageing population.

New Zealand is not alone in its position of having to rethink its retirement income strategy after a period of rather prolonged policy turbulence but little resolution.

We've had some very generous, universal schemes set at unsustainable rates such as the 1975 superannuation rate of 80 percent of the average wage for a married couple. But in many respects the difficulties New Zealand faces in its retirement income strategy are political ones rather than ones of design or technical parameters.

Recognising this, the primary effort of the Government in recent years has been towards depoliticising the issue and seeking to build a constituency for change. The demise of the Accord graphically illustrated just how great a challenge this is.

While that failure may be seen, to a significant degree, to be a consequence of MMP, it is important to consider some of the underlying factors which have given rise to the difficulties experienced in obtaining a political consensus for change. Undoubtedly the very substantial voting public that might be influenced by the attractiveness of rates of superannuation, is an appealing target group when framing political manifestos. Clearly the voting capacity of those at or approaching retirement, challenges the development of an approach to retirement income which crosses party political lines. Another major complicating factor in planning for future retirement provision is the sensitivity of older people themselves to the discussion.

One of the difficulties experienced in securing a robust public debate on an appropriate future retirement scheme, has been the tendency for older

people to see the public airing of issues, as devaluing themselves as people We have not been very successful in isolating the debate from the tendency for many older people to see those changes, which may impact, on only a small percentage of their age group, as a negative reflection on older people as a whole.

Nor have we been very successful at explaining the reasons behind the changes which have been made and which impact on present superannuitants.

Consequently even the precise application of the legislation to the adjustment of New Zealand Superannuation from 1 April 1999, which, because of the July 1998 tax cuts, meant a nil increase for single pensioners, is seen by many older people as part of a conspiracy against them.

It is useful at this point to look at the changes to New Zealand Superannuation which have occurred over the last year and the factors underlying them.

My reason for spelling this out fully is to illustrate the complexity and sensitivity of the process of changing New Zealand Superannuation In 1998, concerned about prevailing economic conditions, including the downturn in trading, the Government reviewed the linkage between the rates of New Zealand Superannuation and wages.

This mechanism ensures that, while the rates are indexed to consumer prices, they are also fixed within a band of the average ordinary weekly wage. They therefore will not become disproportionate to wages. This mechanism fixed the married rate as between 65 percent and 72.5 percent of the average ordinary-time weekly wage. Following that review, the Government took the decision to decrease from 65 percent to 60 percent, the floor to which the married couple rate can fall, relative to the average wage.

This decision was taken in light of the prevailing economic indicators from which the Government considered it irresponsible to award additional increases, over and above, the CPI based adjustment because of the link to wages. 

However in setting the new relationship to wages the Government did not reduce the existing rates. It would impact on future adjustments only.

The Government review of the link between superannuation and wages also improved the sustainability of the present system.

The country has to be able to afford its publicly provided superannuation scheme and as increasing numbers of people retire this is going to be even more important.

As your organisations will be well aware, the demographic pressure is building. By about the year 2015, the number of working people compared to retirees will decrease rapidly. In 2030, there will be over twice as many people aged over 65 for every person of working age as there are now. By the middle of the next century an ageing population could require 22 percent of the country's yearly wealth to be spent on super and health. That is nearly twice as much as we currently spend on health and superannuation combined. In essence future taxpayers will be forced to bear the financial burden of a much older population as well as making financial provision for their own old age. 

Despite the widespread acceptance of the demographic facts, the Government change to the link between superannuation and wages received considerable negative publicity. This was despite the fact that no retirees received a cut in their super payments. As well the change meant the purchasing power of their super payments was maintained whilst moving superannuation on to a more sound footing.

The other advantage of the change is that it freed wage increases to more closely reflect improved productivity. This is especially relevant when the Government is applying sound economic management to control inflation to negligible levels. In this environment, the people who should most benefit from working harder, smarter and more innovatively, to add value to their products and services, reap the most rewards.

Meanwhile retirees are fairly treated with their super payments maintaining their purchasing power. You can be assured the Government is committed to the recent changes it has made. It will not be considering any pre-election bribes on superannuation as our competitors are doing.

A complicating factor in the changes was that the April 1999 adjustment had to take account of the increases in the after-tax rates of pension arising from the July 1998 tax cuts. The tax cuts from July 1998 increased the after tax rate of New Zealand Superannuation by $0.25 for a married person but by $2.17 for a single person living alone and by $1.51 for a single person sharing accommodation Under the Social Welfare (Transitional Provision) Act 1990, the legislation which covers the conditions for New Zealand Superannuation, the after-tax rates a re adjusted each year from 1 April based on the movement in the Consumers Price Index over the previous year.

The base rate is the rate for a married couple and the rates for a single person are set as a percentage of that. During 1998 the increase in the CPI was 0.37 percent. This gave married superannuitants an increase of 60 cents a week each. As the single rate is 60%, 65% if living alone, of the married rate, taking account of the tax cuts already received, the single rates were already higher than those that would have resulted from the application of this

years CPI adjustment. The legislation provides that in this situation the rates are not reduced but are held at their existing levels until relativities are restored with the married couple rate. 

While I am aware your essential concern is with superannuation opportunities for present members of the workforce, it is important that that we manage the expectations of the current generation of older people. In the 1997 report on retirement income. the Periodic Report Group placed considerable emphasis on the need for inter-generational consensus. I certainly agree with that emphasis. 

As that report emphasises, people of different generations view retirement income policy based on their own experiences of working life

and public policies. Different age groups respond differently. While all generations are seeking stability and long-term assurance, the ecent history of change and the prospect of social change continuing, challenges the process of managing change as never before. The complexities I have outlined also serve to highlight the need for political consensus to be the first step in developing a comprehensive retirement income strategy for the future. 

It was with these issues firmly in mind that the Government established the Superannuation 2000 Task Force. That Task Force is broadly representative across the range of expertise required for the examination of the critical issues and to encourage the development of a widespread consensus.

The Task Force has been structured so as to provide for and encourage the participation of all parliamentary political parties that can be represented on the Task Force. Those that chose not to be represented will be consulted on issues and proposals. Unfortunately the political temptations to try to make mileage from superannuation mean that at present only National, Act, Mauri-Pacific and United are involved. Labour, the Alliance and NZ First are not.

I am aware that in your letter of invitation you asked that I cover issues relevant to the superannuation funds industry. While acknowledging your wish to secure the commitment of the Government on these specific points, in this an election year, I am concerned that in responding I protect the integrity of the Task Force and the process that has been set up to develop a retirement income strategy for all New Zealanders of present and future generations.

However it is clear that the Government is very strongly supporting private provision for retirement income. The support given to the establishment of a statutory Retirement Commissioner, and the annual financial allocation from Vote Social Welfare, demonstrates the Government's commitment to promoting

private retirement income arrangements. In the 1998/99 year the funding for the Retirement Commissioner was $3.662 million and that figure has increased to $4.450 million for this financial year. Obviously employer /employee relationships are a critical interface in the

furthering of private arrangements. However, what direction that might take in the future, and what incentives a Government may most appropriately provide, is something which is best left to the Task Force to consider. So also should any administrative and compliance costs that might result from the proposals the Government expects the Task Force to bring forward.

I have no doubt your Association will be addressing those points in its submissions to the Task Force. While I can understand your wish to secure firm and specific commitments at this time, it is not, I believe, a time to make any commitment which might undermine the work of the Task Force.

In more general terms the Government has already very clearly signalled its commitment to private retirement income provision. One practical example of that commitment was the Tax Credit System (Tolis) Bill which we worked with your industry on, for three years, only to have Labour, the Alliance, New Zealand First, and ACT derail it. Despite the defeat on the Tolis Bill in the House, National remains committed to the principle of it because it is a fairer deal for New Zealanders. Its introduction would have meant a tax credit for low and middle income savers in superannuation funds and life office schemes.

The current system is an injustice which is only perpetuating because the Opposition took a political rather than a practical stance on the Tolis Bill. The defeat of the Bill is estimated to leave up to 600,000 of your clients who are low or middle income earners worse off.

Tolis remains on National's agenda for progress when practicable. The Government decided against a proxy rate of 27c as a long term solution since it offers a major tax privilege to the most wealthy savers while at the same time overcharging low income savers by 6c in the dollar.

On the issue of compulsory superannuation, I think it is enough to say the Government took note of the resounding defeat of the Winston Peters option.

So in conclusion, I believe the Government and private providers of superannuation must work together towards a common goal of a more secure and assured financial future for New Zealand's ageing population. I wish you well in your work to improve the retirement savings options

for New Zealanders. 

Thank you for the opportunity to speak to you.