PLYMOUTH INTERNATIONAL HOTELDeputy Prime Minister
THE NEW PLYMOUTH CHAMBER OF COMMERCE
COURTENAY STREET, NEW PLYMOUTH
Chairman Peter Horton, Chief executive Neil Campbell, ladies and gentlemen.
The Great Super Debate is now firmly under way.
On Monday night a colleague of mine, the Minister of State Services, took a firm position against the proposed Retirement Savings Scheme. She argued instead for income testing coupled with the current New Zealand Super scheme and private savings.
Yesterday ACT joined the debate in support of the Retirement Savings Scheme, saying the proposed scheme would be, and I quote their founding father Sir Roger Douglas ``would be a thousand times better'' than the present pay-as-you-go tax-based system.
Today the Independent Referendum Panel will mark the opening of their Referendum Centre. And next week they will begin their nation-wide information campaign.
Superannuation touches all of us, young and old, and it has been an issue under debate for some time.
Debate is healthy, nevertheless, as it lies at the heart of our democracy, but it must be honest and it must be open. Campaigns based on misinformation and disinformation are neither a credit to those involved nor of benefit to the over all argument.
A key element in the Great Super Debate is whether New Zealand Super is sustainable.
We say it is not.
Critics of the proposed Retirement Savings Scheme say New Zealand Super is sustainable, but then they add a string of qualifications. These include lifting the retiring age still further - some have even said to age 70 - reducing the payout still further, raising taxes still further, or running up greater government debt.
The track record of New Zealand Super speaks volumes. When it was first introduced in 1977, the age of entitlement was 60. Now it is 63.
And by the year 2001 it will be 65. How much higher will it go when the ``baby boom'' generation begins to retire early next century?
In 1978 New Zealand Super was worth 80 per cent of the gross average wage. By 1 July 1998 it will be worth 66 per cent of the net average wage, and under the Accord, it can fall to 65 percent.
And then there is the surtax, the much debated and much despised extra tax on savings which will finally go on 1 April next year.
Superannuation must be placed beyond the reach of politicians. Those approaching retirement deserve security and certainty. These are hallmarks of the proposed Retirement Savings Scheme.
Other key elements include:
shared responsibility between individuals and the Government
tax cuts to broadly match contributions, and as mentioned before,
On Monday Jenny Shipley restated her case against the proposed Retirement Savings Scheme, but in doing so she agreed on a fundamental truth: that the present New Zealand Super scheme is not sustainable.
The Minister is to be congratulated, for she is the first of those opposing the RSS to break ranks and tell the truth. We have been arguing this for some time. Now we know that she agrees as well.
The Minister also made a number of assertions, which require a response in the name of a balanced and fair debate. Please bear with me.
Assertion 1.``The RSS will lower the living standards of many women compared with today.''
Not so. A great number of women are expected to reach the savings target. Sir Roger Douglas yesterday put that figure at 85 percent. Once those women reach the savings target, they will not have to contribute further, but will still enjoy the tax cuts, to do with as they will.
Under NZS, those tax cuts would not be possible, because the taxes would be needed to fund the retirement incomes of future generations. All women will clearly be better off voting Yes.
The other percentage of women, who are not expected to reach the savings target, will have their retirement income guaranteed at the point of retirement, at the 1998 level of NZS.
Under the Retirement Savings Scheme, though, they will get something they do not get today under NZS. They will accumulate a nest-egg of savings - a life insurance policy. Every woman's nest-egg will be protected from the prying hands of government and will pass to her estate if she dies before age 65.
If she dies after purchasing her annuity at age 65, but before age 75, the remainder of the first ten years' annuity income from her nest-egg, that would have been paid to her, will go to her estate. This contrasts with NZS, under which her estate gets absolutely nothing in return for her lifetime of paying taxes. Those women who are not expected to reach the savings target will still be better off by voting Yes.
Assertion 2. ``Women and men who are on benefits will have their benefit cut in order to save for their retirement pension. A benefit cut to them will seem a great deal more than foregoing a tax cut to others.''
Benefits are not going to be cut under the Retirement Savings Scheme. Rather, a percentage of beneficiary income will go towards the beneficiary's retirement income. The exemption on the first $5,000 of income means that the amount saved will not be onerous: at most, $2.60 per week, or less than half a packet of cigarettes per week!
Assertion 3. ``Because women on average earn 80 percent of the male wage, the 8 percent of income that women are forced to save by the RSS will have a greater impact on them.''
Remember, they will get the tax cuts first. The exemption on the first $5,000 of income means that only the highest income earners will have to contribute close to 8 percent of total income.
An earner on $10,000 will contribute $400 per annum - that's 8% of the $5,000 earned over the threshold - which is only 4% of total income.
An earner on $20,000 will contribute $1200, for example, which is equal to 6% of total income. Someone on $40,000 will contribute $2800, or 7% of income.
The $5000 exemption means that lower income earners contribute a smaller percentage of their total income than higher income earners - therefore RSS will have a smaller, not greater, impact on them.
Assertion 4.``The RSS has sought to deal with the fact that women on average live longer, but is dependent on governments of the future retaining the savings target and the top-up as proposed.''
Anything involving Government provision is prone to political interference. The question is, how to minimise the vulnerability of Government commitments to fiddling by future Governments.
Top-ups and savings targets under the RSS will be less vulnerable to future fiddling for two reasons. First, retirement income will be a matter of contract between private annuity providers and private individuals.
The Government will provide assistance in the form of a top-up to new retirees, which they will use to purchase a private annuity to provide retirement income. The Government will then be out of the picture as far as those retirees are concerned.
Second, the White Paper says the savings target will be reviewed at most, once every six years, in the year after an election. The RSS rules will be distanced from the political cycle as far as practicable.
This contrasts with the current situation in which the Government is in your lap all the time, changing the rules without warning.
Assertion 5. ``The RSS will interfere with marital and inheritance arrangements.''
RSS savings are assets to be treated under the same marital property and inheritance rules as govern all other assets. No special rules are created for RSS assets and no other assets will be affected by the RSS.
Assertion 6. ``The RSS will hurt workers with a broken work history, part time workers and those on benefits.''
Not so. If they don't reach the savings target, the Government will top them up. Low income people have been catered for with the exemption on the first $5,000 of income. That exemption means low income earners contribute a smaller percentage of their total income to RSS savings than high income earners.
There are a variety of measures to allay the administrative concerns expressed. For example, there is an exemption for contributions less than $2; the IRD will hand over funds to managers only in amounts over $100. And bank accounts can be used as savings vehicles for small balances.
Assertion 7.``The RSS will lead to inequity for those in retirement.''
The question must be asked: what is inequitable about treating people born in the same era, the same way?
The RSS guarantees to every person turning 65 in a particular year, a standard of living equal to 33% of the average wage prevailing that year, for the rest of their lives. And it will be Consumer Price Indexed!
Assertion 8. ``The RSS will limit New Zealanders' personal savings choices.''
On the contrary, RSS will expand personal savings choices for all New Zealanders. First, if they are savers, and second, if they have not been savers.
Those earners who are already saving will be rewarded with a tax cut under the RSS. They can spend or save those tax cut proceeds as they wish - in contrast to the current situation, where taxpayers' money can be used by governments at their whim, with the people given a limited say about the use of their money, and only then at election time.
Those earners who are not saving will be required to save their tax cut for retirement. Even then, they will be given the widest possible range of choices on where to save their funds.
Finally, the savings culture created by the RSS will foster the further development of our already sophisticated financial and capital markets, creating new products and investment opportunities, and thereby enhancing growth.
Assertion 9.``The cost to jobs taking this money out of the economy can't be underestimated.''
Savings for your retirement will not take money out of the economy. The only requirements are, that you can show that savings are diversified and at arm's length.
Savings will be ploughed back into those parts of the economy that will (taking into account risk) that will yield the highest returns for the saver. That will ensure economic and employment growth, not their demise.
Assertion 10.``Many self employed use their business as their private savings scheme.''
Yes, many do use their business as their private savings scheme and many will continue to do so as part of their voluntary savings.
All we are asking is that we take the risk out of the business of retirement savings and get everyone to put aside a small amount broadly matched by tax cuts to save for their retirement.
To say that the RSS will impair the ability of businesses to grow is not true and shows how little faith some have in the New Zealand business sector.
Assertion 11. ``The risks around the design of the scheme on statistical and cost grounds adds to the economic uncertainty overall.''
The design of the RSS is known, unlike the design of those who criticise the Scheme, and its fiscal impact well analysed.
The RSS provides economic certainty, not uncertainty, as it allows for the cost of government spending for retirement income, to fall from in excess of a projected 10 percent of GDP under the status quo, to 2 percent of GDP when the Scheme is fully implemented.
Assertion 12. ``A compulsory retirement scheme effectively aims to privatise New Zealand Super.''
The RSS is not privatisation. The guaranteed Government top-up for those who are unable to make the savings target means the Government is the major partner in the Scheme. This ``partnership'' does not equate to privatisation
Assertion 13. ``You will be required to pay twice, if you were born after 1938, for the cost of retirement.''
The RSS lessens the load on those born after 1938 by getting those who can save, to do so. The fiscal burden for this group would have been considerably higher under the status quo through higher taxes to cope with the increasing costs of the baby boomers reaching retirement.
Assertion 14. `` The RSS is very easy to avoid if you have a decent accountant.''
Contributions are based on taxable income. Accordingly, the RSS will be no more easy to avoid than the current tax system. There are increasingly stiff penalties for those who try to avoid tax, and therefore, RSS contributions.
Assertion 15. ``While New Zealand Super is sustainable at present, it will not be from 2014 onward.''
We agree, but at a much earlier date. The only way it would be sustainable would be to:
increase taxes, or
increase the age of eligibility, or
decrease the amount of New Zealand Super, or
increase public debt, or
a combination of all four.
An option to the Retirement Savings Scheme mooted by some of my colleagues this week would involve a universal payment to all, and a tightly income tested top-up for those who have no other sources of income.
It is not clear what the size of the universal element would be, but you can bet it would be less than the 33 percent current superannuants receive.
This option would be a real worry for women, those people with broken work histories, and the low paid, as they would face a low universal retirement income upon which to survive with no guaranteed government top-up.
Those able to voluntarily save, would be okay. The problem is not enough New Zealanders are saving, and those who are able to do so, are not the low paid and part-time workers, or many women.
The option would, in effect, see the re-introduction of a much worst surtax, which New Zealanders voted out last year!
Unfortunately this option, traps the poor with a meagre universal retirement income, rewards the rich who can voluntarily save to ensure a comfortable retirement income, and income tests middle income New Zealanders.
The latter would need to use all their life savings to raise their standard of living whilst facing a surtax.
In conclusion, people should not view this debate as a contest between one political party or another, or between him and her, men and women, Maori or European.
This issue involves all of us New Zealanders. The debate should be about what New Zealanders get as information, so we can all make a contribution to our future come the referendum in September.
If people think New Zealand Super, with all the attacks it has suffered over the last 20 years, is affordable and sustainable, then they should vote no in September.
And if you think you can trust politicians, then vote no.
But if you don't believe New Zealand Super is affordable and sustainable, and you think there's cause to have a far more secure, certain, fairer and sustainable scheme, then look hard at this one, the Retirement Savings Scheme.