• Jenny Shipley
Prime Minister

Stamford Plaza, Auckland

The 1st of July 1998 will see either the introduction of a compulsory retirement savings scheme or a package of tax cuts.

Under the retirement savings scheme you will be required to save up to the full amount of your own retirement income, continue to pay the cost of New Zealand Superannuation for this generation of retirees, and commit to contributing to the top-up required for those in your generation who do not achieve the target savings.

If there is a no vote in September you will face tax cuts which will allow you to consider what you will do with your own money, as you take care of yourselves and your own now, and as you plan for your future, including your retirement savings requirements.

I have actively worked with my colleagues to assist in the design of the compulsory scheme to see that it overcame as many concerns as possible, but I continue to strongly oppose compulsory retirement savings on behalf of those who I came into politics to serve.

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.
Let me go through the reasons for my opposition.

Women and low income people will continue to be disadvantaged by the compulsory retirement savings scheme.

Only 15 per cent of women are likely to reach the savings target so that anything over and above the $120,000 they save will be theirs.
The other 85 per cent of all women will in their retirement have to live off $8,352 after tax with very little likelihood of having any other additional income saved.

Today many women who are retired have small savings available to them over and above New Zealand Superannuation.

In the future, those savings will have only 'bought' this group their basic pension.

It will lower the living standards of many women compared with today.

Secondly, 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.

Thirdly, because women on average earn 80 per cent of the male wage throughout their lifetime, in real terms the eight per cent of their income that they are forced to save by the retirement savings scheme will have a greater impact on them as they will have less disposable income once essentials are paid for.

Fourthly, while the retirement savings scheme has sought to deal with the fact that women on average live longer, it is dependent on governments of the future retaining the savings target and the top-up as proposed.
While some claim this scheme will be less prone to political interference, in terms of their private savings account, there is nothing to prevent those who haven't fully saved the $120,000 being exposed to the whim of future governments.

Women remain very vulnerable to these changes.

Fifthly, the scheme will interfere with marital and inheritance arrangements, which will disadvantage many women.
Under the retirement savings scheme, if your husband dies before 10 years of retirement half the value of his savings will go to his estate.

If your husband dies after 10 years of retirement none of his retirement savings scheme savings will go to his estate.

The sixth reason I oppose the scheme is that it will hurt workers with a broken work history, part-time workers and those on benefits.
A disproportionate amount of their savings will be eroded away by financial management fees.

Financial planners advise that those earning only $5,000 a year will be hardest hit.

They earn $96 a week.

To illustrate, over five years they must save eight per cent a year, equalling $1,450.

But with administrative costs it is estimated their fund may be worth only $94 more than they've saved.

Those promoting the retirement savings scheme claim the funds will make on average three per cent return a year.

In fact, the low income worker is likely to only make one per cent return on savings a year, because of the administration costs.

The benefit these savers get from the scheme is minimal compared with the cost of foregoing that income to these families.

The seventh reason for great concern is the inequity it will lead to for those in retirement.
Under the compulsory savings scheme your 65th birthday will take on a whole new meaning.

On that day your savings, plus the Government's top-up, will be your nest egg for your retirement, set at a level that will deliver a weekly income of 33 per cent of wages at that time.

The problem is that your neighbour, or even your spouse, might be younger or older than you and their amount of money they will get will be determined by what value 33 per cent of wages has at the time of their retirement.

In other words, even with the Government top-up, two people in the same house, or neighbours in the same street, may well be getting very different amounts of retirement savings scheme payments each week in the future.

Many believe this is very inequitable, will cause discontent and is politically unsustainable.

The eighth concern I have is over the fate of employer contributions to retirement schemes.
I have already heard a large employer say that his company will close off its scheme, thus saving his company its share of contributions.

The implication that because Government is making people save, an employer no longer needs to assist, is a great worry and will disadvantage many workers if this is the outcome of the introduction of compulsory superannuation.

Workers in their individual and collective employment negotiations should see that this issue is dealt with and that their employer contribution savings are not eroded away.

Finally, the retirement savings scheme is likely to affect the amount of home ownership in New Zealand.
For many young couples, many of whom will be repaying student loans, saving for a deposit on a home and servicing a mortgage will be increasingly difficult and for many, impossible.

The social cost will be enormous.

Many of the issues I have highlighted will increase the gap between rich and poor.

There are far fairer ways of planning for the challenge the aging population poses than the extreme consequences compulsory savings will have for women and low income people.

Another major reason for my opposition is that all New Zealanders personal savings choices will be limited by the compulsory retirement savings scheme.

Many New Zealanders use their savings to make lifestyle choices, investment choices and personal choices.
Under the compulsory retirement savings scheme a farming family won't be able to use their farm as a bank for their retirement, nor manage issues of succession as they currently do.

Private farm forestry blocks won't count for compulsory savings purposes in the future if they remain in the farmer's private ownership.

Many families put their savings into a second home, a bach, or boat.
For compulsory savings scheme purposes these arrangements won't count, even though many families sell these assets in later life to fund retirement requirements.

Many New Zealanders currently have savings arrangements which minimise their costs.
Under the retirement savings scheme even people who run their own businesses are not 'trusted' to manage their savings for their retirement.

Their savings must be deducted by the Inland Revenue Department - at a cost to these small businesses and the Inland Revenue Department.

Transferred to a fund manager of some type - at a cost to the saver.

Managed by the funds manager - at a cost to the saver.

Registered and monitored by Government - at a cost to all taxpayers.

Eventually transferred to an annuity provider - at a cost to the saver, and managed by the annuity provider, again - at a cost to the saver.

It seems rather extreme when many New Zealanders demonstrate that they are capable of making their own decisions and taking personal responsibility for administering their retirement savings at a far cheaper cost than the retirement savings scheme proposes.

Most of the savings options I have mentioned have a variety of tax implications - almost all of them less onerous than the tax treatment proposed under the retirement savings scheme.
Currently, registered retirement savings schemes are taxed at 33 cents for every dollar saved, which is clearly unfair to middle and low income workers.

The remedy proposed under the retirement savings scheme is still a tax grab by stealth in my opinion.

Even though they say your savings under the compulsory savings scheme will be taxed at your personal rate, you will not see that money, because it will be required to be credited to your retirement savings account.

In other words, your account will grow by the difference between your tax rate and the current 33 per cent level, with the result of reducing the amount governments in the future will have to pay in terms of top-up.


Self-employed, or independent workers, as they're called in Chile, have not been given the option of opting out of the New Zealand scheme.
In Chile if you think you can fund your own retirement because you have business assets and income, there is the freedom to do so.

If you fail you can apply for a very meagre income tested benefit to support you in retirement.

Many self-employed people in New Zealand would prefer the choice of making their own decisions about the management of their capital and income in full knowledge of the consequences.

The last matter which deserves consideration is the economic impact of this proposal.

The cost to Government will continue to be very significant during the early stage of the compulsory savings scheme up until 2020.
The White Paper quotes New Zealand Superannuation costs in gross terms and retirement savings scheme superannuation in net terms, thus wildly understating the implications of the cost to the economy overall, to taxpayers and to savers, of the early years of the scheme.

People need to consider whether the economy is likely to perform well enough in terms of projected economic growth to allow these costs to be funded by tax cuts, from surplus, or whether current Government programmes will need to be reduced to fund the payments necessary.

There is significant political uncertainty around this issue and indeed a good deal of suspicion.

There have been suggestions that if we can't fund the tax cuts for superannuation contributions in a fiscally sustainable way, then the rise towards eight per cent of income will be deferred, bringing a whole new meaning to pausing to have a 'cup of tea'!

If New Zealanders are to vote for a compulsory savings scheme they must be assured it will deliver the benefits to individuals and reduce the costs of national superannuation to the taxpayer, as claimed.

Voters know you can't have it both ways.

The cost to jobs of taking this money out of the economy can't be under-estimated.
New Zealand has 328,000 people who are self-employed.

They are major wealth creators and they employ many New Zealanders.

Many of these people use their business as their private savings scheme.

Under the compulsory scheme they are going to be required to put eight per cent income into their retirement savings scheme, money which in many instances will currently be going into their business.

This will cost existing jobs, and also certainly limit ability for further expansion.

The risks around the design of the scheme on statistical and cost grounds adds to the economic uncertainty overall.
Other features of the scheme that may cause other irritations and that you should know about, include:

You can't withdraw funds before you're 65 unless you've saved more than 110 per cent of target.

The target will be reviewed periodically to ensure that it is sufficient to purchase a guaranteed income. This adds uncertainty and provides opportunity for profit taking by annuity providers.

Payments are required from income on investments, including dividends, interest, rentals etc, as well as wages.

Funds cannot be used for security for borrowing.

Children will have to contribute if they earn more than $5,000 per

There are no refunds for savers if they over-pay.

All under-payments will be reconciled at the end of the year and the saver must make up the difference.

The Government will not guarantee any individual fund.

Over the next eight weeks New Zealanders must weigh up whether the size of the retirement savings problem is such that it warrants all the costs that the compulsory scheme will impose against the claimed benefits.

Whichever you choose there are a few final facts which are important and must not be overlooked.

Firstly, the current retirement savings scheme can be afforded by New Zealand for the current group of retired people.

It is wrong to frighten this generation of retired New Zealanders with the claim that superannuation is somehow or other not affordable, given the major changes that we made in the early part of the 1990s.

Those changes brought the cost of superannuation down from 7.4 per cent of GDP in 1991 to five per cent of GDP today.

It will fall to 4.5 per cent GDP in the near future before rising again.

Secondly, it is also clear that anyone who is my age or younger is part of the generation which sees New Zealand's population age at the fastest rate.

In order to manage the health care costs and the retirement savings costs of this generation we must discuss now how we can plan ahead to meet those needs.

Changes will be necessary for our generation.

There are only three ways to achieve this:

to privatise superannuation with some public top-up as the compulsory retirement savings scheme proposes;

to retain full New Zealand Superannuation as we currently know it, with no change, but with significant tax increases;

or to retain some form of New Zealand Superannuation with private voluntary savings top-ups and tighter income testing.

A compulsory retirement savings scheme as announced by the Treasurer effectively aims to privatise New Zealand Superannuation.
Today we spend five per cent of GDP on superannuation.

If we do nothing New Zealand Superannuation will cost us 10 per cent of our GDP at the height of our aging population.

The compulsory savings scheme proposal will result in the taxpayer eventually only paying two per cent of our GDP.

The balance has been saved by the retired person.

It's a clever privatisation strategy if you seriously believe it will work.

Those who promote the scheme claim it will provide certainty on political and financial grounds.

In fact the only certainty it really produces is that you will be required to pay twice, if you were born after 1938, for the cost of retirement.

Interestingly, many who promote this solution are not or are barely going to have to be in this pay twice group.

Other major problems with the compulsory savings scheme is that it's very easy to avoid if you can afford a decent accountant.

The definition of taxable income for the purposes of the retirement savings scheme is, in fact, the Inland Revenue definition.

The same definition which has proved difficult to police in the case of student loans, the community services card and child support payments.

The second problem that some people will have is that their savings, which they are by law required to make, will be providing a profit firstly for the financial planning companies who manage their funds and secondly for the annuity provider who manages the annuity once you are 65.

It is quite fascinating that some politicians who currently promote the compulsory savings scheme were adamantly opposed to other 'for profit' regimes in other parts of the economy, like health, housing, and State owned enterprises, yet claim this is a good idea.

Many New Zealanders will resent their savings being used for profit by others while still only buying them a pension of $8,352 a year.

Thirdly, there will be high administration costs because there are so many transactions involved.

Clearly the $120,000 savings target may rise at any time, as has been conceded in the White Paper.

$120,000 is only enough today because interest rates are high.

If interest rates drop in future, as they are sure to do, as New Zealand repays its debt, the savings target will need to be a good deal higher than $120,000.

The eight per cent of income may also rise if a future government felt that too few people were reaching the savings target.

Current estimates are that 60 per cent of men but only 15 per cent of women will make it.

Many people argue that saving eight per cent of income is an unrealistically low figure compared with many other international compulsory savings schemes which tend to vary between 11 per cent and 21 per cent of income, not the eight per cent proposed.

Compulsion does not solve the political or the financial problems of saving for retirement.

The second option some people propose is to retain the full New Zealand Superannuation as we currently know it.
This is clearly not a realistic proposal unless you are prepared to significantly increase taxes over time in order to fund the costs required.

Those who argue that we can do nothing other than to raise taxes assume that people will be willing to do so and that the economy will be able to bear that imposition without creating significant unemployment or going into debt as we did during the seventies and eighties.

While New Zealand Superannuation is sustainable at present, it will not be from 2014 onward.

We must plan ahead.

The third option is that New Zealand Superannuation could be altered for future generations, while remaining fair and affordable, by a combination of New Zealand Superannuation, private savings and income testing.
I believe New Zealanders need to agree what percentage of GDP we can realistically hope to spend on retirement savings now and in the future.

Many people argue that a figure of around five per cent of GDP is a realistic target.

We must seek to get accord across the Parliament.

Today's politicians should easily be able to negotiate a retirement savings scheme that gives certainty to current New Zealanders, as the current scheme does, which is fair to future generations, which is adequate and which is affordable, balancing the interests of the retired, those in work and those yet to come.

This could be through a universal element being available to all and a tightly income tested top-up for those who have no other sources of income.

This would leave an opportunity for those who wanted to save during their lifetime to be rewarded for doing so, without disadvantaging those who had not.

Such a scheme could provide clear messages to future retirees about what they can expect and what they must do for themselves without being asked to pay twice.

Since the Todd Taskforce, New Zealand has experienced greater confidence and less political interference in New Zealand Superannuation.

The Todd Taskforce is due to report later this month on their opinion on the affordability of the current scheme.

I hope many New Zealanders will consider those findings carefully as they consider their vote in September.

From all that I have seen in my various Ministerial roles since 1990, nothing has convinced me that a compulsory retirement savings scheme is either necessary or desirable, in terms of individual savings, or New Zealand's future economic opportunity.

New Zealanders now have the White Paper with some details of the scheme.

There will be a $5 million 'education' programme on that option.

I hope people will consider the claims made by those who support compulsion and as well the arguments put up against compulsion and for other alternatives.

Since there is no $5 million budget it will have to be several speeches a week over the next eight weeks by those who wish to put the other side.

Beware of those who try to dismiss the 'no' arguments as something other than a desire to see both sides of the issue debated.

This is one of the most important economic and social questions New Zealanders have faced in many years.

The National Party supporters and the people I came to Parliament to represent, expect to hear the substantive issues put forward.

Each New Zealander has the right to decide on the merits of the arguments and cast their vote.

As a politician I will accept whatever the voters decide, but in the interests of our country's future I will be urging other New Zealanders to vote 'no' in September.