"SUPERANNUATION AND COMPULSION"Prime Minister
When I came into politics I was determined to serve three constituencies:
Those who passionately believe in private enterprise and who create wealth so we have jobs and social services.
Those whose interests are not easily heard in the corridors of power and in particular, women.
Those who cherish freedom and believe in taking personal responsibility for themselves and their own before looking to others.
Those are the people who amongst others have contributed so much to the New Zealand we enjoy today.
I also strongly believe the values those people share will secure a successful future for New Zealand families well into the next century.
It's in this context that I wish to address the proposed compulsory savings scheme this morning.
For the record, I strongly oppose compulsory retirement savings schemes because overwhelmingly:
they are unfair and treat women unequally;
they interfere with people's personal savings options;
and they are a clumsy and potentially damaging economic and social response to a controversial political issue.
Let me run through the reasons for my opposition.
I strongly oppose a compulsory savings scheme because it will impact on women unequally:
The first disadvantage women face is that to save an adequate retirement income they really need to be saving between 11 and 14 per cent of their current income. The same can be said for men.
In Singapore the required compulsory savings scheme is 21 per cent of current income.
In Chile the required compulsory savings scheme is 14 per cent.
In Australia the required compulsory savings is currently 6 per cent, rising to 15 per cent by 2002.
In New Zealand the proposed compulsory requirement is 8 per cent.
In theory this will provide a savings pool of $160,000 per person and provide an annuity yielding income in retirement.
Because of the different life and work experience of New Zealand men and women it is important that you understand that under the proposal, as announced by the Treasurer some weeks ago, only 10 per cent of all New Zealand women and 50 per cent of all New Zealand men, will have savings of $160,000 by retirement age of 65 years.
Despite claims by some to the contrary, the proposed compulsory savings scheme will not solve the problem of achieving independence in retirement for the majority of New Zealanders.
Indeed far from it!
Ninety per cent of New Zealand women will not make it.
As a result it will continue to leave women very exposed to the whims of governments of the future, upon whom they will still rely to provide a full pension or part pension top-up.
The second concern women must consider is the argument that 8 per cent compulsory savings can be funded out of 'tax cuts', thus not affecting New Zealanders' disposable income.
This is heroic to say the least.
If our income continues to exceed our spending as a country these surpluses will all but be taken up by the tax cuts necessary to fund people's compulsory savings contributions.
New Zealanders will have to get used to the annual budget not including new spending initiatives on education, health and welfare, as has been the case in recent years, as the revenue will already be fully committed to the compulsory savings scheme.
The alternative, which will be of equal concern to women, is to cut welfare and other social spending.
While we were compelled to do that in 1991 because of the serious economic crisis we faced, in fact that total Welfare Reform programme saved the equivalent of a 3 per cent tax cut.
The benefits of cutting another billion dollars out of welfare would need to be carefully weighed up in terms of what government services, benefits or programmes would be altered up against the alleged benefits of compulsory saving.
In my view there is no case for such radical action.
The other option of course is that of tax increases to fund the compulsory scheme.
That has a potential to reduce jobs in the short-term and impact negatively on New Zealand's debt levels in the medium-term.
The claim that compulsory superannuation can be funded by individuals without affecting their disposable income and without other significant negative results is not borne out by the facts.
Spending the surplus, cutting social spending or increasing taxes will all have a negative impact on the issues that most concern women.
The third worry for women is that the proposed compulsory savings scheme does not guarantee an equitable retirement for men and women as a $160,000 annuity from a private annuity provider will buy a lower level of annual income for women than men.
Women, on average, live longer than men and therefore their money will need to stretch further.
To solve this women will have to either save more or accept less in terms of income for each year of their retirement.
The proposed compulsory scheme is clearly unfair to women, compared to the current arrangements which deliver equity and fairness regardless of the years lived by either men or women.
The fourth issue women will want to consider is that the compulsory savings scheme could potentially interfere with marital and inheritance issues.
Under the proposed scheme if a person has bought an annuity worth $160,000 and dies within 10 years of retiring, a proportion of that annuity will be an asset to that person's estate.
However, if that person dies after 10 years in retirement the asset funding the annuity will be foregone and the surviving spouse or family will get nothing.
This will disadvantage the surviving partner, who is currently entitled to enjoy the benefits of his or her partner's investment savings.
In future this will not be the case.
This will have a significant impact on the quality of life for women in retirement, as they are more likely to outlive their spouse than men and their partner's estate often ensures comfort in those latter years.
The fifth concern for women is that the compulsory savings scheme is likely to be particularly hard on part-time workers and people who have broken periods of attachment to the workforce.
Again these people are much more likely to be women than men.
Over a lifetime they will only accumulate very small levels of savings, even if there is an exemption level in place.
These savings are likely to have a disproportionate amount of their value eroded away by the financial management fees.
The finance companies will win.
Those with small savings will gain little or no advantage for foregoing their income which they could clearly benefit from if it was available.
The final risk that women will hold strong views on is that the compulsory savings scheme is very likely to have a dramatic impact on the quality and values of family life in New Zealand as we know it today.
It will be increasingly difficult for young families to save for a deposit on a home, particularly if they are also repaying a student loan, let alone service a mortgage.
A result of this could be a significant drop in the level of home ownership in New Zealand.
It is worth noting that overseas it has been shown that there is a direct correlation between social dysfunction and the levels of home ownership.
It is not in the interest of women, men or their families to see a reduction in home ownership as a result of compulsory savings being introduced and yet this is very likely to be the result.
The second major reason I strongly oppose compulsory retirement savings is that it interferes with people's personal savings options in investment type, in income and tax treatment:
New Zealanders need to know that a compulsory savings scheme picks winners in terms of the approved savings products.
I don't believe that any case has been made which justifies government forcing people by law to pay up to 5 per cent of the value of their investments to independent savings advisors to monitor, certify, advise and manage people's money, rather than allowing those people to manage this investment themselves.
Further, a compulsory savings scheme rules out people being able to invest in some savings options such as property, and in particular residential houses, as a major form of savings.
This is a very common form of savings for many New Zealand families.
It also rules out the forestry option for farmers and other landowners planning for their retirement, by planting trees on their own property.
These plantings are common in rural New Zealand and are usually designed to mature to coincide with retirement age.
The proposed retirement savings scheme is unlikely to recognise this approach as an approved retirement savings option.
I believe it is wrong that a government, and particularly a National Government, will by law require people to invest with fund managers in a defined range of options, rather than allowing New Zealanders to use their own resources and judgement to make the most appropriate and practical decisions concerning their retirement savings requirements.
Such a programme interferes with people exercising personal responsibility.
It interferes with the free flow of capital in private enterprise and it interferes with economic investment into the productive areas of the economy.
Many New Zealanders also suspect that the compulsory savings scheme will be much more administratively costly to run than the current New Zealand Superannuation programme.
Currently it is estimated that Social Welfare's and Inland Revenue's administrative costs are approximately 0.31 per cent of taxpayers' money spent.
Most fund managers in New Zealand charge between 0.5 and 5 per cent on investors' personal funds.
While investment companies will profit greatly, I would argue such charges are an unjustifiable erosion of people's savings.
And in addition to the direct charge, government will still have to face the very significant administrative costs of monitoring individual saving habits, regulating the financial advisors and savings options and administering a default fund which will be required for those who refuse to actively invest their own money.
Undoubtedly the compulsory savings scheme has significant additional cost to individuals and the taxpayer as a whole, compared with current arrangements.
Thirdly, New Zealanders are entitled to know that the compulsory savings scheme is unfair in tax terms.
The current tax rate on registered retirement savings funds is 33 cents in the dollar on capital gains and on interest, regardless of the taxpayer's personal tax rate.
Most other investment types are taxed at the same rate as their personal tax.
The government may gain a significant increase in tax revenue as a result of forcing people to save in a compulsory fashion. In my opinion it is quite unacceptable that the compulsory savings law should be used to increase the tax take by stealth.
The fourth concern is that there is significant evidence that has been produced by Treasury that the compulsory savings scheme may well have a major impact on New Zealand's economic indicators.
Before voting for a scheme people are entitled to know what impact the scheme will have on the current account and also the debt levels that New Zealand will incur over the next 50 years, compared with the risks posed by the existing scheme.
There is also some concern that a compulsory savings scheme may not in fact increase New Zealand's net savings overall.
If this proves to be the case then all New Zealanders will lose from the introduction of a compulsory savings regime.
It will be a costly and bureaucratic imposition with little benefit.
The fifth and final worry is that the economic impact of the proposed compulsory savings scheme may well be far more significant than has been predicted at a time when the economy is only experiencing modest levels of growth.
If New Zealand's 328,000 self-employed people, who are so very important as employers in the agricultural, manufacturing, tourism and service sectors, are forced to put 8 per cent of their income into registered savings schemes as opposed to reinvesting their profits into their businesses, existing jobs would be put under threat and further job growth will be unlikely.
The uncertain social and economic consequences of the introduction of compulsory savings does not warrant the risk at this time in New Zealand's development.
The last major reason I oppose compulsory superannuation is that it is a clumsy and potentially damaging economic and social response to a controversial political question:
Over the last 25 years New Zealanders have struggled to understand that the welfare state was never intended for the middle class.
The first thing all New Zealanders must do politically is accept that our recent political history shows that successive political parties have been unwilling to say to retired New Zealanders that we cannot guarantee to them a full universal pension right into the future, particularly through the years 2011-2050, as the population ages.
Interestingly in New Zealand's history universal superannuation never meant a full retirement income for all, regardless of wealth, except in the period from 1977 to 1984.
Prior to 1972 it was a mix of 50 per cent universal and 50 per cent targeted pension.
Since 1984 superannuation payments have been subject to a surtax regime.
We should not perpetuate the myth that New Zealand historically has been able to afford a universal retirement scheme, nor should we pretend this is possible right through the period of the ageing population from 2020 onward.
The second political reality that must be acknowledged is that the changes made to National Superannuation in 1991, which raised the age of entitlement and lowered the amount received in relation to wages, had a positive impact on the cost of the scheme.
These two steps now save more than triple the amount the surtax saves each year.
In 1991 that cost was 7.4 per cent of GDP.
Because of the changes it will not reach that percentage of GDP spending again until the year 2020.
Today we spend 5 per cent of our GDP on retirement income.
It is expected to fall to 4.5 per cent of GDP before rising until it levels off around 2038 at approximately 10 per cent of GDP.
Despite all that has been said and because of the changes made in the early 90s, New Zealand Superannuation is affordable for this generation of retirees.
They should not allow others to frighten them into believing otherwise.
Having said that though, we need to be honest and frank with my generation and the successive generations that have come after the 'baby boomers'.
We need to consider what is fair and affordable for these generations, do the work, reach agreement and establish certainty.
The third worrying political argument I hear is that replacing New Zealand Superannuation with a privately funded scheme will eliminate the political problem.
It seems to me that to force the introduction of a compulsory savings scheme is an extreme measure to take, in order to effectively privatise the political risk of superannuation, in the hope that governments of the future can say to New Zealanders 'you have saved for your own retirement, therefore you are on your own'.
Equally unfair is to promote this change as securing a full universal superannuation entitlement for all.
It will be universal private provision not universal public provision.
There is a huge difference.
Those who argue that the introduction of a compulsory savings scheme would provide a full universal superannuation entitlement for all, would almost certainly have to accept that the value of superannuation as a percentage of the average weekly wage would have to fall.
It is wrong in my opinion that the amount of superannuation must fall for those who have no savings because some want to pretend that full universal superannuation for all is either affordable or fair in the long-term.
It is clear we can't have it both ways.
We must choose!
I repeat again, New Zealand Superannuation is affordable for current retirees, if the economy continues to perform as it has in the last seven years.
But because of the ageing population and its impact from 2015 onwards, today's 40 year olds need to be given clear information as to what the age of entitlement will be for retirement income and what level of universal and what level of income tested superannuation, they are likely to receive, so that they can make their savings plans accordingly well ahead of time and with confidence.
In truth we could afford the current New Zealand Superannuation, or a variation of it, at the current cost to the taxpayer of around 5 per cent of GDP, right into the future through the ageing population period if we are prepared to consider such options as raising the age of entitlement to 67 by the time today's 40 year olds are at retirement age.
In addition, we could consider a change early next century where we slowly reduce the amount of universal superannuation to everyone as a percentage of the average wage while still guaranteeing an adequate top-up income-tested pension to an agreed level for those without savings so that all New Zealand men and women can maintain themselves adequately in their retirement.
One would need to ensure that those who have saved during their lifetime can also benefit from those savings to a greater extent to those who have never saved at all.
These savings would be voluntary, not compulsory.
The scheme would be affordable and fair.
The tragedy of this debate is that since the Todd Task Force, New Zealand was experiencing less interference and greater consensus on superannuation.
Due to the Prime Minister's foresight the Superannuation Accord was put in place.
To the credit of a number of opposition parties the Accord has worked until recently.
We must try to regain the stability the Superannuation Accord provided.
I believe it is within the ability and wit of the current New Zealand Parliament, within the framework of the Accord to come up with a scheme that will give confidence to current retired New Zealanders, and certainty to future retired New Zealanders as to what income they will be eligible for, and what they will require of themselves in order to be comfortable in retirement.
For my part, compulsion is not part of this solution.
The inequity, the costs and the economic and social risks are just not warranted.
There are better ways.
I look forward to the next Todd Task Force Report to provide advice on this.
Since NCW was established over 100 years ago, it has actively worked on behalf of New Zealand women as they have sought for themselves greater independence, both socially and financially.
Today another challenge faces you which requires debate, evaluation and in due course, a vote.
Some aspects of the proposal will affect women particularly.
Others affect the whole community and indeed our future prospects as a nation.
NCW has an important role to play in deciding whether a compulsory savings scheme is a 'walk on water' solution or an economic and social quagmire endangering our prospects.
I'll leave you to decide, but in the interests of our country's future I will be urging New Zealanders to vote 'no'.