• Simon Upton
Foreign Affairs and Trade


Last week was a bad week for the Compulsory Savings Scheme on which we are to vote in September.

Not only were politicians like myself weighing in against it. The Consumers Institute was less than charitable. And, most importantly, the Todd Taskforce Interim Report gave it no comfort at all.

We are finally getting some of the facts on the table and I expect the debate to become livelier in the weeks ahead. As long as it stays focussed on the facts and remains good humoured none of us have anything to be frightened of.

Earlier this week the Treasurer responded to the Todd Report and made a number of criticisms. In doing so, he correctly identified me as one of those who advocate the sort of adjustments to present arrangements that were outlined in the Taskforce's recent report. So I thought it would not be inappropriate for me to respond to some of those criticisms since they go to the heart of what this referendum debate is and isn't about.

In the first place, the Treasurer has criticised the Todd Taskforce's report as having done only "half the job" and delivered a promise of uncertainty if the Compulsory Savings Scheme is rejected. That is unfair. The Todd Taskforce was asked to review the conclusions it drew five years ago - and that is precisely what it has done. It drew on the same expert advice within the Treasury that was available to the Government in drawing up the compulsory scheme. So it is an absolutely authoritative piece of analysis. Its alternative proposal was not a rejection of savings. Rather, it was an endorsement of voluntary savings coupled with the existing taxpayer funded scheme, appropriately amended in the light of demographic and economic circumstances.

The 1992 report of the Todd Taskforce outlined a compulsory savings option that bears more than a passing resemblance to the Compulsory Savings Scheme proposed in this year's referendum. It went through the pros and cons in some detail and found, on balance, that the compulsory option was wanting. It stated that "this option would be an over-reaction to averting a future fiscal problem which can be solved by other less direct and less distortionary means."

It's worth going back to Todd's earlier report. It listed, by my count, at least 11 reasons why a compulsory savings approach to retirement should not be preferred. It found that a compulsory savings scheme would lead to:

the less efficient operation of financial markets;
the risk of political interference in private savings plans;
high administrative costs;
economic contraction during the early years of the scheme;
lower returns to savers;
the undermining of any long-run political consensus on superannuation arrangements: the Task force came to the view that the most elegant and theoretically rigorous scheme in the world was worthless if it wasn't politically sustainable;
no greater degree of economic security than voluntary savings;
the least likelihood of a strong future economy;
diminished political will to support public education about and interest in the importance of savings;
low income earners being worse off given the impact of high administrative costs on small savings accounts;
the least flexibility of all possible schemes.
On the last point, the Taskforce noted that it had listened to - and sympathised with - many submissions that complained that "compulsion seems like a good idea if only it could be made more flexible." There's more than an echo of ACT's preposterous position that it supports the compulsory scheme provided it's made voluntary.

I think Todd's latest report does the whole job, and does it rather well. But what of the charge of uncertainty? Todd makes the obvious point that if present arrangements are unchanged, the cost of superannuation will drive public expenditure - and hence taxes - up. He notes that if New Zealand wants to reduce or even avoid that possibility then we will have to consider raising the age of entitlement and/or reducing the value of the pension. The fact that he doesn't nominate a preferred option flows from the fact that, consistent with his earlier report, he has stressed the importance of a solid political consensus as the basis for any durable scheme. In other words, it's up to political parties to reach a consensus as we did in 1993, not for him to impose one.

There sure as eggs isn't a consensus. An absolutely decisive positive referendum outcome could be the basis of one. But there's little likelihood of that. And in any case, does the proposed Compulsory Savings Scheme offer any more of a guarantee than alternatives? The answer, clearly, is no. We don't know what the shape of the economy will be like in five years let alone 25 years. We don't know what coalition of voters or MPs will gang up to change the rules then.

The Treasurer also asks what the Todd Taskforce has in mind when it talks of an income test. Does it have a surtax in mind? There is a rich irony in this since the Compulsory Savings Scheme is the surtax of all surtaxes. Every dollar saved compulsorily is a dollar of future top-up denied. It's effectively a 100 percent abatement rate - of the sort we backed off in 1991 - cutting in at very low income levels. The only difference between applying an income test to the existing taxpayer-funded pension and abating a taxpayer top-up is that the former approach provides, at the margin, a disincentive to save while the latter makes it illegal to be discouraged.

Todd himself, in 1992, noted that compulsion is in this respect alone, fairer: there is no incentive to 'free ride' on other taxpayers. What you have to decide is whether the other unfairnesses of compulsion outweigh that advantage. I'm in no doubt that the balance lies heavily against compulsion. Very low income earners will have their incomes cut throughout their working lifetimes so they can help contribute towards a pension they would have received anyway.

It has to be stressed that making savings compulsory won't of itself change attitudes or incentives. As Roger Kerr has noted, low income earners would need rocks in their heads not to avoid declaring income that would otherwise be tagged for savings, thereby reducing their final top-ups. That is especially so when we know that administrative costs will hit those with very modest savings the hardest.

Finally, and most unkindly, the Treasurer has said that the Todd Report perpetuates "an attitude that is morally corrupt" in not addressing the issue of self-reliance. Given Todd's strong endorsement of voluntary savings and the prudence of shifting more of the future retirement income burden to private provision, this could not be further from the mark. The Todd Taskforce has consistently supported the value of savings and indeed argued for a much clearer communication of their value.

I accept that there are those who believe savings are good for people, like dietary fibre and plenty of exercise. But the moral value of self-reliance is, surely, dependent on the conviction of the saver. It's voluntary savings that are good for attitudes. Saving because the government makes you has no greater value than paying your taxes - and the avoidance incentives are pretty much the same.

Worst of all though, Todd, the Treasury and just about every private commentator has concluded that a compulsory scheme will not lead to a higher level of savings. It would simply see a shift in the form in which savings are made. And that's one of the main reasons I oppose the scheme so vehemently. It will simply see efficient, voluntary, private savings plans exchanged for inefficient, state-regulated plans. Not only will certain types of investment be off limits. Fund managers will be under less pressure to perform. The taxpayer top-up is effectively a guarantee against mismanagement by fund managers. That's not good for the economy - and it's not good for future fiscal risks.

There are no perfect answers available for dealing with security of income in retirement. It's a question of balancing up competing risks. The Coalition Agreement pledged the new Government to place before voters the best possible retirement savings scheme "drawing on the superannuation policy announced by New Zealand First and the principles outlined by the Todd Taskforce on private provision for retirement."

New Zealand First's interest in a compulsory savings scheme was driven by a belief that enforced domestic savings would secure stronger economic growth and secure a larger share of New Zealand's industrial capacity in domestic ownership. That rationale has of course not survived. That leaves Todd's principles which, as we have seen, provided the basis for what Todd saw as a second-best solution. The Coalition partners have worked hard to see that the proposal is as good as it can be. And in one important respect, the scheme is absolutely stunning - and that's its fiscal ambition.

The Retirement Savings Scheme was designed to minimise the amount future taxpayers (taxpayers not yet born incidentally) will have to spend on pensions. Currently New Zealand superannuation net of tax is consuming 4 percent of GDP. In 1990 it was 5 percent. Now I could understand a scheme that sought to stabilise things at around current levels on the basis that we should spread our risks between public and private provision. But the proposed scheme would reduce taxpayers' contributions to around 2 percent of GDP by shifting the public liability largely into the private sector. The only justification for that truly dramatic retreat is a desire to privatise superannuation to the maximum extent possible.

What you have to decide is whether this particular privatisation is worth the rules and regulations that have not had to accompany other transfers from the public to the private sector. As Bankers Trust Chief Economist, David Plank, said recently, we need to shift away from a narrow focus on government expenditure to one which addresses the wider issues of what is economically sustainable for the economy as a whole.

I have estimated the dead weight costs of administering the compulsory scheme to be in the region of $400-800 million a year. That would cover the cost of collection, reconciliation, management and reporting. It would be on top of the dead weight costs that still have to be incurred raising taxes to fund the top-ups. It is almost universally agreed that this would be a much more costly scheme to administer than a scheme that left private provision flexible and voluntary.

So much for dead weight costs to the economy. But there would also be costs to individuals forced to mess around with their existing plans. There are 287,000 self-employed people who are perfectly capable of managing their retirement affairs without assistance or direction from the government.

Can New Zealand really afford these dead weight costs and the economic costs of misallocated resources? It seems to me plain crazy to embark on a scheme that will not add to the stock of savings but simply lead to a deterioration in the quality of those savings. The quality of any savings made is of cardinal importance because whether we can afford anything worthwhile in retirement depends on how well we invest over the next 25 years. What the 'no' campaign will be stressing over and over again in the coming weeks is the fact that the income available to babyboomers like me in retirement depends on the size of the economic cake at the time we retire. Whether we seek to carve out our slice through taxes or through dividends is irrelevant. If the cake hasn't grown there will only be small slices available. New Zealand will either be productive enough to maintain living standards for its retirees or it won't. But the compulsory scheme, if adopted, could place at risk the very wealth creation process that is needed to secure the retirement of New Zealanders a generation hence.

As you will be aware, I believe the arguments in favour of a 'no' vote are overwhelming. Adjustments to the present scheme should be negotiated, along the lines Todd recommends, through an accord style mechanism. There is plenty of time to do so. Confirming it by way of a further referendum would not be a bad idea.

I for one think it would be prudent to signal a rather less valuable universal pension 20 years or more from now, to balance better the risks being carried through future taxes and future dividends. If it was properly explained to them, people who are under the age of 40 today could get on with saving the gap in their own way and at their own pace. There will always be a need for means tested top-ups under any system. The proposed compulsory scheme does just that. How valuable any top-up will need to be decades from now is, however, beyond our forecasting ability or our political mandate. All we can do is be honest about future uncertainties and get on with building a strong, productive economy in the meantime. The Retirement Savings Scheme is a very bad way of trying to achieve either of those objectives.