Keith Rankin's Thursday Column
Super Solution. What's the Problem?
11 October 2000
Michael Cullen's public superannuation scheme is a bit of a worry. Like the self-regulating free-market economy it's an
elegant, indeed clever, solution. One problem, though, is that an elegant solution imposed upon an inelegant world
becomes a straightjacket. Makers of elegant policy (as distinct from elegant policymakers) are apt to try to engineer
worlds that conform with the premises of their solutions. I would rather live in the world as it is, for all its
inelegance and uncertainty.
Among other things, the Cullen Super scheme is supposed to depoliticise a political issue that has festered for
centuries; a means to give us "certainty" at long long last. Fat chance!
It's an inherently political scheme; a repoliticisation rather than a depoliticisation of retirement income. It has not
been conceived through a process of multipartisan consensus. Rather it represents the personal vision of a politician
who has finally attained a position of power. It is to be a political monument to the fifth Labour Government.
An economic critique of such a scheme must go past the politics, and ask two questions: (i) will it achieve its aims?,
and (ii) will it cause harm? A final judgement must go one step further: is its purpose sound; is retirement income
really a problem that needs a final solution?
New Zealand already has an elegant and robust system of publicly sourced retirement income; a system that, despite
tinkering around the margins, has lasted 25 years through governments of every shade of blue. I have heard nothing that
comes close to a coherent argument for replacing New Zealand Superannuation (NZ Super).
The Cullen scheme is, it is claimed, one of prefunding (think of squirrels saving acorns) whereas NZ Super is
'pay-as-you-go'. Pay-as-you-go implies an intergenerational contract which works as follows: generations of working age
collectively support their parents and their children, in the process creating a future obligation for children to
collectively support their children and then to collectively support their parents
In reality all retirement income schemes are pay-as-you-go. Retirement income in 2030 represents claims on a share of
production in the 2030 year, and not acorns or bully-beef put aside from 2001 to 2029.
Whatever system is in place, the total amount of retirement income (publicly and privately sourced) in say 2030 will be
determined by two macroeconomic parameters. The first is the size of the annual 'economic cake', otherwise known as
'real GNP'. The second is the fraction of real GNP that is distributed in the form of public and private retirement
income. (The 'Cullen fund' will become the public subset of the annual 'retirement income fund'.)
There is a third crucial parameter; the degree of equity with which the retirement income fund is distributed.
We must assess the merits of Cullen Super vis-à-vis NZ Super on each of these three parameters.
The size of the 2030 economic cake will be determined by the average rate of GNP growth over the next 30 years. (There
is an important difference between GNP and GDP growth. Over the last 25 years, New Zealand's GNP growth has been much
slower than its slow GDP growth. GNP represents income accruing to New Zealanders rather than production in New
Will Cullen Super cause the GNP growth rate to be higher than under a continuance of NZ Super? Many economists, most of
whom can see through the prefunding concept, nevertheless support any policy that leads to an increase in a nation's
rate of saving. This is because classical economics postulates that the rate of savings is the critical determinant of
investment (in plant, machinery, infrastructure and education) which in turn determines the rate of economic growth.
New Growth Theory, however, suggests that that classical emphasis on savings is bunkum. Rather, historical growth has
depended on knowledge, ideas, innovation and the social willingness to allow creativity to flourish. Future growth -
under the auspices of the global knowledge economy - is even more likely to be a function of cerebral interaction rather
than capital accumulation. We may need more savings to build more factories. But we do not need more savings to build
better factories. The United States' economy in the 1990s completely defies classical notions about savings. It grew
rapidly despite (maybe because of) a very low national savings rate.
Social capital theory also gives a persuasive account of what really determines a society's gross product. It's all
about reciprocity and trust, and not at all about being exclusive and miserly.
Well before the new growth and social capital theories, Keynesian economists suggested that the classical economists
were putting the cart before the horse. At least in the short run, the Keynesians said, it is investment that determines
savings. Increased savings, per se, generate recessions, not expansions. (As economists say, an increased propensity to
save leads to a reduction in aggregate demand.) Further, Keynes said "in the long run we are all dead", meaning that the
long run never actually happens; it's just a succession of short runs. It is a nonsense to claim that a rise in the
savings rate is raising the long run growth rate while simultaneously reducing the short-run growth rate.
All the indications that I, as an economic historian, can see suggest that Cullen Super will reduce the average rate of
GNP growth. The cake in 2030 will be smaller than it would otherwise be on account of the loss of the spending that the
accumulation of the fund prohibits.
What about the second parameter? Will the Cullen fund ensure that a greater proportion of 2030 GNP is distributed as
retirement income? The answer (assuming that the fund grows as envisaged) is a qualified "yes" for the baby boom
generation, and a resounding "yes" for the following generation. (Has Dr Cullen thought how his fund might evolve after
the baby-boomers are dead? Generation Y, who will have paid twice, will be well rewarded in their twilight years; that
is, in the unlikely event that the Cullen fund really does deliver certainty.)
Of course a bigger slice of a smaller pie is no real solution. Rather, it will generate a considerable degree of
inter-generational conflict. Generation Y will be foregoing their needs for the sake of their parents' retirement fund
and their grandparents' retirement. They will have every incentive, and, by the 2020s, much of the political power, to
redirect the proceeds of the fund; for example, to alleviate child and family poverty. Would it really be responsible to
let the children of 2030 get rickets while protecting their grand-parents' Super fund?
In reality, the proportion of GNP in 2030 that will be allocated to retirement income will be determined by today's
children in 2030, and not by Dr Cullen in 2000. We should not try to deny our children the democratic right to set their
own income distribution priorities.
So for the third parameter. Most of the total retirement income fund (of which the proceeds of the Cullen fund will be
just a part) will go to the more affluent minority of persons of retirement age. Cullen Super, as proposed, will be
neither means-tested nor tax surcharged. Only a small proportion of the goods and services made available to persons
over 65 will go to those who worked hard in low-pay or no-pay jobs or who participated in the 'reserve army of labour'.
Those people die younger and, when old, pay rent while depending entirely on publicly-sourced retirement income.
Cullen Super is a compulsory savings scheme. Rather than balance the budget across the 10-year business cycle, the
government plans to run budget surpluses every year; big surpluses in boom years and little surpluses during recessions.
We will be paying through higher net taxes and/or reduced expenditure on health, education, defence etc. (How would the
outbreak of world war affect the fund? Would we let an invader overrun Godzone rather than "irresponsibly" reduce the
value of pensions paid from the Cullen fund?)
Who will pay the most through higher net taxes? Whoever would have been the beneficiaries of lower net taxes will be the
losers. I emphasise "net taxes", because, in economics, benefits and subsidies are accounted for as negative taxes. High
net taxes means, among other things, lower benefits and lower family support tax credits. It means continued low
income-thresholds for student loan repayments. It means that low income young people will continue to pay the absurdly
high average rates of tax that are at present driving them out of the country.
The only real point of practical merit in Cullen Super is that it can be interpreted as a way of living with the 1994
Fiscal Responsibility Act. If we are obliged to run budget surpluses across the business cycle regardless of the Cullen
fund, then by definition, once the public debt has been paid of, then those surpluses are a fund. Better a super fund
than a slush fund.
The best new pension scheme would be to invest our surpluses in today's children; in their creativity, their technical
capability, their historical awareness and their ethical appreciation of issues such as the inter-generational social
contract. Part A of the intergenerational contract (the support of children) forms the moral and technical foundation
for part B (the support of the elderly). On the other hand, overtaxing the young is a recipe for harm.
What is the problem that the Cullen fund is intended to solve? There is no dependency problem. After all, the dependency
rates forecast for 2030 are no higher than those which prevailed in the 1950s and early 1960s, and in the period from
1988 to 1992. It's just that a greater proportion of the "dependent" population in 2030 will carry the label 'retired'.
In 1955, a greater proportion were called 'housewives', 'children' or 'disabled war veterans'. In 1991, a greater
proportion were called 'jobless', 'discouraged workers' or 'domestic purposes beneficiaries'.
We know, through experience, that the present system of benefits and pensions can support the dependency rates forecast
for 2030. What we do not know is whether today's young will honour the intergenerational social contract. Why jeopardise
that contract by overtaxing young people of modest means?
We overstate - to the point of giving ourselves repetitive brain injury - the issue of retiring baby boomers. Having
manufactured a problem, we have created a market for an elegant solution.
© 2000 Keith Rankin