Dr Michael Cullen
19 July 2000
BIIA 2nd Annual Superannuation Funds Conference
DR MICHAEL CULLEN ADDRESS TO BIIA 2ND SUPERANNUATION FUNDS CONFERENCE
WELLINGTON TOWN HALL
I am delighted to talk to you today about an issue which is important to both of us, central to your business and close
to my heart as a politician. I have a long track-record in superannuation, and have put solving the problems associated
with maintaining an adequate level of public pension into the future high on my agenda as Finance Minister.
I am now working toward a deadline of July 1, next year. I to want start the new scheme on that date. Earlier I was
talking of April 1 which has led some commentators to talk of a delay. In fact, the change to a July 1 deadline reflects
a change in the proposed funding formula.
Labour Party policy, as you will know, was to fund the scheme through a dedicated income tax, carved out from the
existing tax take. But we have abandoned this idea as it did not appeal to either the Alliance or the Greens. The
proposal now is to fund it through a proportion of gross domestic product.
The effect of this change is twofold. First it moves the accounting basis for the fund from April 1 and the tax year to
July 1 and the Crown financial year. Second, it reduces the administrative complexity of setting the fund up.
A tax-based fund would need to be legislated for at least three months before implementation to allow enough time for
the tax arrangements to be put into place. A fund based on a direct transfer from the consolidated account needs much
less lead-time, and could be quite simply established.
That said, I would like to get a proposal before Cabinet as soon as possible so that we have a solid proposition to
take to the other political parties - particularly New Zealand First and the Greens but also National.
National's response will be interesting and will tell us a lot about the motivations driving the National caucus.
National may see a short-term political advantage in trying to torpedo the scheme, simply because it is being led by
But I still think it possible that they will let a higher ethic prevail. Potentially at least, there is some common
cause amongst politicians on the issue of retirement income.
Retirement can be a time of intense personal insecurity because the core options for earning income are effectively
closed. This creates an obligation on governments to establish an environment that restores a level of confidence that
there will be an adequate income when people retire.
Confidence about personal security in retirement is assisted if retirement income policy is relatively stable.
Most political parties would sign up to that. It is surprising then, that in an area where stability of policy is
vital, policy has been so unstable. There are obvious political explanations for this. I think, though, that there is a
deeper source of instability in policy on superannuation.
That source of instability is the conflict between the current and the future costs of maintaining a given level of
entitlement. New Zealand Superannuation, net of the income tax that the government reclaims from pensioners, costs about
4 percent of GDP per annum, or about a ninth of total government spending. On the other hand, pensioners make up about a
sixth of the voters. There is a type of short-term political benefit to cost ratio of 1.5 to one operating here. It is
tempting for political parties to see some margin in the pension vote.
Frankly, on current rates, and with current costs, New Zealand Superannuation is affordable. It doesn’t squeeze other
programmes too heavily. What is more, as the age of eligibility creeps up to 65, and as those born in the low birth
years of the depression and war retire, the relative cost of NZS actually starts to fall slightly. In ten years time, it
is virtually the same as it is today.
This is the comfort zone. The problem is that from about 2011, the baby boomers start to retire. The cost of NZS starts
to accelerate. By 2035 it is eight percent of GDP - double the current cost. When the population structure matures
around the middle of the century, the cost is nine percent of GDP.
At this point, the comfort is long past.
If nothing else is done, New Zealanders will face three stark choices:
reduce the level of New Zealand Superannuation, particularly in relation to average incomes in the rest of the
introduce tighter eligibility criteria by, for example, raising the age of eligibility, applying income and asset
tests or withholding NZS from those who are still economically active;
increase average tax rates to cover the additional costs.
The government does not believe that any of these options are desirable, defensible or politically sustainable.
The only way to sustain universal superannuation is to start saving now so that there is a source of income available
in the future to augment the money raised from taxes. The problem, for the government as for any individual saving for
retirement, is that time is of the essence. Delays are costly: putting off decisions until later makes the cost of
dealing with the problem much higher.
Therein lies the problem. At precisely the time when the short-term costs make it tempting to delay putting more into
NZS, the long-term evidence makes it imperative to save rather aggressively.
As a society, we need to get out of denial or wishful thinking.
There are some trite answers that are often trotted out to justify inaction on the funding question. Firstly, that the
problem is only theoretical: these are forecasts and the future is uncertain. The population projections are not
guesses. We can virtually name the people who will be over 65 in 2050.
Second, immigration can change the patterns and keep a flow of young people sufficient to meet the costs of the retired
citizens. Immigration will not make much of a difference. There are nearly four million New Zealanders. 20,000 new
immigrants only add half of a percent to the population.
It takes vast numbers of migrants to change the age structure of a population. In our recent past, the migration risks
are, as Treasury might say, on the downside: there is probably a bigger risk that outward migration will increase rather
than decrease the proportion of the population who are retired in fifty years time.
Third, that all we are facing is a switch in the composition of government spending: less spent on education and
unemployment benefits, more on retirement benefits. I seriously question this. My expectation is that as time goes on,
the demands for education, training and lifelong retraining will increase, certainly in per person terms, and probably
in aggregate. Plus there are likely to be health and other direct costs associated with supporting a larger population
of retired citizens.
Next, the view that economic growth can solve the problem. It will not. Normally, as an economy grows, incomes grow.
Wages tend to follow the trend growth in incomes. NZS is linked to average wages. Therefore, as the economy grows, the
individual level of NZS grows.
The only way growth can lower the relative cost of NZS is if we break the link between NZS and relative incomes in the
rest of the community. If we are prepared to cut the elderly adrift, and shut them out of participation in the dividend
that a growing economy and technological advances deliver, then growth can solve the problem.
I suspect, though, that this is a nonsense. Even if a future government was prepared to confront that issue on some
sort of moral basis, the political realities of the demographic structure would reassert themselves.
Finally, we can simply hike the tax rate to generate the revenue needed to pay nine percent of GDP alongside the other
health, education and similar functions of government. The numbers involved are not convincing. A pay-as–you-go NZS
needs nine percent of GDP compared with the present four. Five percent of GDP is a fifteen percent hike in the present
tax rate. It involves more than that on whatever tax base is selected – GST, income tax or whatever.
It might be an option – if anyone is still around to pay the tax! In an age of mobility and skill scarcity, hiking the
tax rate above generally prevailing aggregate levels can easily drain the country of its skilled and more highly
So we cannot tax, or grow, or migrate our way around the problem. It is a real problem and we cannot fix it by robbing
young Pamela to pay Pauline a pension.
Which ever way you look at it there is a basic policy question to confront. Cut the pension for the next generation, or
start to save for it.
Before I get on to the policy questions that relate to how to construct a savings regime, let me make a few comments
about what I think we should not be saving for.
The proposed New Zealand Superannuation Fund is not intended to be a complete answer to income adequacy in retirement.
It will provide a basic standard of living, but New Zealanders should aspire to a retirement income that is better than
that offered by NZS. This means that they should save to augment NZS.
The amount of current income that people are happy to trade off in order to supplement their state pension will vary
from person to person. The role of the government in facilitating private savings will have to be faced once we get the
universal pension issue finalised. I look forward to talking with the industry on this project in the near future.
To return now to the central fund. It will not be an individualised entitlement linked to tax paid or some other
measure of contribution. That would create all sorts of problems with migration, death and the like. I am talking about
a general contribution from public revenues to fund part of the emerging future cost of NZS.
We are not funding the complete future cost of NZS. A large part of NZS will always be funded out of current year
revenues. The scheme is partial pre-funding: a little bit more than is strictly necessary to finance current year
entitlements in order to allow a little bit less than is necessary to be collected in meeting the higher costs in the
This leads me to design issues.
The core question is what sort of money has to go into any fund and where is it going to come from?
I can pose the policy dilemma this way. The aim is to increase confidence that NZS will be available on roughly the
same basis - a universal, non-means tested income set at 65 percent of the net average wage for a couple, payable from
If too little goes into the fund, the uncertainties and the lack of confidence remains. It too much goes into the fund,
there is an unhealthy reduction in necessary spending on health, education and economic development, among other things.
Certainty increases if governments are locked into a contribution, but this can mean too little flexibility.
Flexibility is needed to respond to changing economic circumstances, trends in wages, and changes in labour force
participation. It is also needed to deal with unusual economic circumstances – say financial windfalls, very strong
revenue growth or the onset of an economic recession.
As I have said, the details of dealing with this are still under discussion within the government. Without wanting to
pre-empt that process, I want to take this opportunity today to outline to youdo not want to pre-empt that process But
without pre-empting the outcome of that debate
The proposed scheme is forming around five core elements. Firstly, a forecasting time horizon over which the government
attempts to smooth the costs of NZS. Secondly, an independent or at least transparent calculation of how much has to go
into the scheme to meet the costs of NZS over that forecast period. Third, a review mechanism to regularly – and by this
I mean probably annually – to review the required contribution rate. Fourth, an obligation to pay the assessed
contribution into the fund, but with an opportunity for the government to pay more, or less, in, in exceptional
circumstances, but with an obligation to explain any variations to Parliament. Finally, a mechanism to assure Parliament
and the wider public that any contributions are fiscally and economically affordable.
This will put a discipline on other government spending. The issue though is that if that discipline is not there, a
spending pressure will emerge that the government will have enormous problems dealing with, and which it cannot transfer
onto the retired by way of default on their NZS entitlements.
Let me conclude by responding to two issues that are raised around this issue. One is why the government doesn’t cut
taxes and let people save for their own retirement. The second is why I don’t repay debt first.
There is a simple response to the tax cut argument. Nobody who asks for tax cuts offers to give up rights to NZS. Tax
cuts make it harder to finance NZS. It is NZS that is the emerging problem. The alternative is to match tax cuts with an
income related reduction in NZS. That would either be self-defeating, or it would mean people saving to save the
government money via lower NZS, not for a second tier income supplement of NZS.
The argument on debt repayment is more complex.
My justification for establishing a separate fund alongside nominal public debt at roughly existing levels is
Firstly, I cannot accept that government bonds are the highest yield option in town. Assume that the government decided
to repay its debt. What would it do? It would go out into the marketplace and buy government bonds.
What would a stand-alone superannuation fund do? It would go into the marketplace and buy a mix of bonds and equities,
government and corporate. So if government bonds were the best deal in town it would buy them.
It cannot do worse than earn the same as repaying debt, only better.
This is why all fund managers only keep a portion of their assets in government bonds.
The second reason is that a stand alone fund is much more secure from political raiding for short-term advantage than
is a general run down of debt. As debt reduces, borrowing head-room increases and it is much easier and more tempting to
make one-off decisions to expand the debt again.
The third reason is that paying off all debt does not deal with the problem of meeting the costs of the emerging
population structure. Even if the government had no debt the basic options still stand: build up financial assets, or
increase the average tax rate dramatically in the future, or cut superannuation entitlements, or introduce a savage
income and assets test.
Building up financial assets is the only option that is politically sustainable.
I do not want to overstate things, but in many ways our approach to New Zealand superannuation will define the
contribution that this generation of politicians makes to the longer term wellbeing of New Zealand's social structure.
Our challenge is to make decisions that will constrain us as we fight elections and will only deliver benefits many
years after we have left the political stage. It is a big ask.
It does, though, have two attractions. One is that it will represent the triumph of logic and responsibility over
short-term electoral expediency. The other is that it is the defining issue on which so much of the integrity of the
political process and confidence in the system of government has been destroyed in the past, and has so much to offer in
restoring trust in government.
I am confident that we can forge an historic political consensus on this issue. We owe it not so much to ourselves as
to our children and grandchildren to do so.