Speech to Grey PowerRevenue
Thank you for inviting me to speak with you today. I have enjoyed working with Grey Power board members over the past two years and I have welcomed their partnership approach to addressing common issues with the Government.
I am very proud to have passed the legislation establishing the New Zealand Superannuation Fund.
I have been disheartened, but unfortunately not surprised, by some of the more outrageous claims that have grown up around the Fund over the past year.
Superannuation has been this country’s favourite political football for too many years. The new Super Fund will finally provide New Zealanders with certainty about retirement provisions.
It is a simple fact that New Zealand's population is ageing. Now 12 percent of us is aged 65 or over. Within the next 50 years, that ratio will have risen to 25 percent.
Not only will the proportion of retired people to workers increase but, as life expectancies continue to grow, the average period spent in retirement will also increase.
The cost of providing New Zealand Superannuation will make a much bigger claim on the public purse in the future than it does now.
Now it commands about 4 percent of all activity in the economy. By 2050, it will command around 9 percent.
Clearly, we have to have a convincing answer to this question as to how we are going to cover this increase in cost.
Simply relying entirely on the good will of future tax payers, particularly if they may be also promised a lower pension, is not good enough. And since our present position, with a relatively low cost of New Zealand Superannuation, is a favourable one it makes sense to start building up a fund out of operating surpluses now to reduce the future tax requirements to pay for the pension.
Not to make any forward preparations when we can see these big retirement costs coming would be imprudent and irresponsible in the extreme. It would also be unfair to the generations coming after the baby boomers.
It would mean that they would have to pay much higher taxes than the workers of today are paying.
If we start putting money aside now, we can use that money to make money by investing it. If we don't start saving now as a nation, we are saying that future generations of taxpayers will be left to pick up the tab by themselves.
The entitlements contained in Part One of the New Zealand Superannuation Act are, we believe, the minimum necessary to allow superannuitants an adequate standard of living and the opportunity to participate in their community.
National had reduced the wage floor from 65 percent to 60 percent of the average, after tax, ordinary time weekly wage. We have taken it back to 65 percent.
But it is important to remember that the 65 percent is calculated for the married rate. A single pensioner gets around 60 percent of that, or around 40 percent of the average wage.
You cannot cut that without forcing people into hardship and this Government will not do that,
especially as between 60 and 70 percent of retired people currently depend on the pension as their only source of income. And frankly, there is no reason to expect that ratio will change significantly in the next few years.
The Government acted with integrity in, having committed ourselves to maintaining the pension at current entitlements; we then found a mechanism to pay for that commitment.
The New Zealand Superannuation Fund does that. Our political opponents - and particularly Mr English - attack the plan, not because they think it will fail but because they are scared it will succeed. They simply cannot allow the Labour-Alliance coalition to pull off an achievement of that size.
The Treasury has done excellent work in designing the structure and governance arrangements for the Fund. These are incorporated in Part Two of the Act and were recently described by a leading international expert in superannuation funds as "a world-class solution."
Let me now go through the legislation in some detail.
It is important to remember that the Act is in three parts; it is not just about establishing a new fund.
Part one cements in the entitlements to super that the Labour Alliance Coalition announced shortly after the election.
Part two establishes the fund and part three defines a process by which political parties can commit to the scheme so that there can be more confidence in its political sustainability.
The government set aside $600 million for the Fund in the 2001 budget and since July 1, this money has been transferred over in payments of $26 million every fortnight.
There will be no change to current New Zealand Superannuation entitlements.
Existing legislation relating to NZS entitlements has been taken out of the Social Welfare Transitional Provisions Act and placed alongside the funding elements in the New Zealand Superannuation Bill.
Part 2 of the Act establishes the New Zealand Superannuation Fund and sets out how it will be financed.
The contribution to the fund will be assessed annually as part of the Budget process. The calculation for the contribution is specified in the legislation. It adopts a forty-year rolling horizon – roughly equivalent to the length of a person’s working life.
This means that the annual rate is 1/40th of the amount needed to fund 40 years of New Zealand Super. And each year the rate will be recalculated and will exclude the past year and include the next year 40 years in the future.
A Fund will be established that will receive payments from the government. A Crown entity Board called the Guardians of New Zealand Superannuation will be set up to invest the assets of the Fund.
Last month I announced the membership of an independent committee to nominate people for appointment to the Board of Guardians. The committee, chaired by Vance Arkinstall, the Chief Executive of the Investment Savings and Insurance Association, has very experienced and able members with a good mix of skills and attributes.
I hope that we may be in a position to finally name the Guardians of the Fund by February.
The Fund will be an asset of the Crown managed by the Board, which will be a Crown entity. The Board will be subject to the standard Crown entity accountability requirements. It will be required to prepare a Statement of Intent and report against this in its annual report and quarterly reports.
The Board will be responsible for determining the investment strategy of the Fund, allocating portfolios to fund managers to invest, monitoring the performance of these portfolios and amending allocations if necessary. They will do all this independently of the government.
The Board would invest the Fund on a sound commercial basis. While this means that the Fund will have investments that have financial risks associated with them, it is expected that it would invest in a manner that is prudent.
If the Board makes investments that are not in the best interests of the Fund, or if members behave inappropriately with the Fund’s assets, the Governor-General will be able to dismiss the members of the Board.
The Fund is to be used to meet NZS payments only. It will not be used to meet other government objectives.
Now, let me deal with some of the criticisms of the Fund and the myths that have arisen over the past year.
Opponents of the Fund raise two major criticisms. They say the Fund will only ever supply around 14 percent of New Zealand Super costs. In fact the total share will be closer to 25 percent.
They are counting only the amount that will be directly drawn from the Fund. They are forgetting the further - substantial - revenue stream the Government will receive through the taxes paid on the Fund's earnings.
We have never claimed the Fund would fully meet Super costs and have always been careful for this reason to describe it as a partial pre-funding scheme. But a 25 percent contribution is a lot better than nothing. Without it, a future government would have to cut spending, raise taxes or opt for a combination of the two.
As to the larger debt issue, this Government's objective is to keep net debt below 20 percent of GDP and the budget has us achieving that with room to spare while we simultaneously put savings into the Fund.
The second criticism can be just as easily dismissed. Political opponents argue that, because the dollar level of government debt is rising, the government is borrowing to pay into the New Zealand Superannuation Fund. That is nonsense.
I have always said that the contributions to the Fund will come from the operating balance and the latest budget shows this is achievable. It has operating surpluses of $1.4 billion in fiscal 2002, and $2.4 billion, $3.1 billion and $3.7 billion in subsequent years.
These forecasts are fully adequate; indeed they are 72 percent above on average, projected transfers into the Fund of $600 million in 2002, and $1.2 billion, $1.8 billion and $2.5 billion in the years following.
Now let’s take a look at some of the Super Fund myths.
MYTH: The Fund will be too big to manage
The purpose of the Fund is to smooth out the cost of NZS to the rest of the Crown over time.
The cost of NZS now is less than its expected cost in the future, so the Fund builds up and is drawn back down as the Crown adjusts to the higher ongoing cost of NZS later this century.
At its peak, the Fund is expected to grow to about 50% of New Zealand’s GDP.
MYTH: It is better to pay off debt
This myth sees paying off Crown debt as an equivalent form of public saving that could be used to achieve the same ends of building a more robust Crown financial position to help cope with the increasing demands expected on the public purse later this century.
If the planned savings in the Fund were instead put to paying off debt, net debt would be down to zero before the end of this decade and so it is only a few years until the issue would need to be faced of how to best govern a growing pool of financial assets.
Debt is already down to comfortable levels. Paying down debt is no longer the fiscal imperative it has been in the past. Without a formal process to increase public saving, Budget demands will mean that net debt is unlikely to improve.
And politicians won’t be able to resist the temptation to spend the money elsewhere.
Myth - The Fund will be a brake on the economy.
Wrong. National's preferred solution - tax cuts - will not work. They haven't stimulated the economy in the past. Instead they have made New Zealanders more confident about taking on new debt, pushing up private borrowing and the balance of payments deficit.
The Fund, conversely, will be available as a potential source of investment in the productive sector through the New Zealand stock market. It will also invest overseas, and repatriate to this country the profits from those investments. That will take pressure off the balance of payments.
This argument is related to the Green’s position. While they voted to guarantee Super' at current entitlements they refused to vote for the mechanism to pay for it - and they have not put up a credible alternative.
The solution the Greens offer is vague and optimistic. They talk about creating full employment, preventative health and combating climate change.
Don’t get me wrong - worthy goals each and all being advanced by this Government - but they don’t say how that will help face the problems of an ageing population.
They want to spend the same dollar three times – on social services, on economic development and on holding debt. That is no more credible when they say it, as it is when National says it.
Finally, let me address the criticism that future governments could raid the Fund.
The law will require governments to make sufficient annual contributions to the Fund to meet the annual costs of NZS for at least the next 20 years. The Fund will gradually build up during this time, and its size will be the best indicator of the security of future NZS. Any government that tried to raid the pensions of the next generation would suffer at the court of public opinion.
The experience of successful schemes overseas is that consensus developed, not before, but after the scheme was established. Again, as the fund built, people began to derive a sense of security from it and were anxious to see it protected and maintained.
But, as I have said many times before, the Fund is not intended to be a complete answer to retirement income. It will provide a basic standard of living but all New Zealander should, if at all possible, save to augment their income.
I have established a task force of officials and representatives of the savings industry to explore options to raise savings levels. I look forward to receiving its report before the end of the year.
This Government has taken Superannuation out of the too hard basket. I am confident that the New Zealand Super Fund will remain an enduring legacy of our commitment to the people of New Zealand – both this generation and the next.