16 October 2000
Speech Notes
Dr Michael Cullen
Address to Rotary Club of Remuera
Dr Cullen's speech to the Rotary Club of Remuera, Commerce Club of Auckland, 27-33 Ohinerau Street, Remuera
The Government has taken a clear leadership role in the matter of safeguarding the future of New Zealand superannuation.
We have laid out clearly both our plans and the implications of those plans.
We have not attempted to hide the information from other parties or from the public at large. The information has been
put into the public arena.
We need to remind ourselves of our history in this matter. We have been through a very long period of instability on
public-pension provision in New Zealand. Conveniently, some people date it back to 1974, with the start of the
Douglas-Rowling compulsory individualised second-tier scheme, but, in fact, probably one could date it back to the 1960s
when we removed the Social Security Fund and the Social Security tax.
That happened for good reasons. The tax was not kept honest; the payments into the fund were never sufficient to meet
the obligations, which covered superannuation, unemployment benefits, invalids' benefits, health benefits and all the
rest. Obviously the sum of one shilling and sixpence in the pound was never enough to pay for all of those. But by
abolishing the tax and the fund we broke any clear connection between payment and future pension provision in New
Zealand.
In 1975, the incoming National Government promised the impossible: it promised to give back to everybody not only their
own contributions but the employer contributions into the fund. For the majority of workers that was an offer simply too
good to refuse.
The government of the time offered 80 percent of the average wage to all married couples, and superannuation at aged 60
years, with absolutely no income or asset test. The cost of that very quickly placed a huge strain on the government's
finances and was in substantial part responsible for the massive deterioration and fiscal position the government faced
in the late 1970s.
The Labour Government from 1984 to 1990 and especially from 1987 to 1990 began to address those issues.
In particular, we began to move to change the relativity over time to the position that it now holds, that is, from 65
percent to 72.5 percent. We projected a long-term change to the age of eligibility to 65 years of age.
That was then accelerated by the incoming National Government, which also, to their great cost, tried to tighten the
surcharge of superannuation as a means of trying to achieve fiscal balance in the short term.
We learnt a number of things from that process. That long-term superannuation planning on the public policy level has to
be within a framework that the great majority of New Zealanders see as fair, and which can last.
Sometimes I am a little frustrated with people in the private sector, who put up rigid income and asset testing and a
substantial cut in New Zealand superannuation as an option or alternative to partial prefunding.
I challenge those people to set up a political party and try to be elected on that basis!
Policy must be based upon what New Zealanders accept as fair.
And New Zealanders do accept the present relativity as fair and they are not prepared to see the elderly cut off from
the fruits of economic growth.
So cuts in relativity are not part of this government's agenda. I do not believe they are parts of the agenda of a
number of other political parties and this is for a very good reason.
Income and asset testing is not part of this government's agenda. Again, nor is it part of the agenda of some other
political parties and for very good reasons. Income and asset testing is a disincentive to savings and, further down the
track, it will become a disincentive to encouraging participation in the paid work force by people past the age of
pension qualification.
So these things are here to stay and as far as I can see into the future, 65 will remain as the qualifying age for
Government Superannuation.
If we accept then that these are the basic entitlements that most people are prepared to sign up to and to couch policy
around, then we move on to the next questions. How do we fund such a pension in the long term and how do we give people
stability and security about the funding of that pension arrangement?
Of course that means we must make choices over time. It means, for example, that the government has a further
encouragement to maintain a strong fiscal stance. But let me be clear. There is every reason government should maintain
a strong fiscal stance over the next 20 years in any case.
There is every reason for a country with a somewhat chronic current account deficit – a country in a very exposed
position internationally – to be running a strong savings position on its government accounts.
A government could use surpluses to pay off debts, but in fact on any reasonable projections it would run out of debt
within that 20 year time frame and would then have to build up assets.
And how would those assets be managed and for what purpose? So we come back to the governance of a superannuation fund.
But here we come to another problem. How do we give security? How can people have confidence in the fund? How can they
see that it will be there when they retire?
It is clear that the one sensible answer to that - the answer that the Labour Alliance Coalition Government has put
forward - is partial prefunding.
Last week we released details of how to structure that funding and what the contribution rate will be: a 40 year rolling
fund model which enables the government to be clear about what its contribution rate has to be to the fund on a
reasonable, conservative earnings assumption.
The government may depart from that from year to year, if circumstances dictate it is sensible to do so, by putting more
in or by putting less in. At the top of the cycle, probably rather more and at the bottom of the cycle, rather less.
"Any contributions have to be paid for out of a cash surpus into the fund according to some opponents of the fund. But
that would mean that a government's nominal debt could never increase. This is not a constraint any government would
place on itself if there were no fund. It makes no sense to place that restraint on a Government's finances just because
there is a fund. What is important?"
Any contributions have to be paid for out of a cash surplus into the fund. What is important is that the operating
balance is, at the very least, somewhat in excess of the contribution rate retired and that contribution rate is about
1.75 percent of gross domestic product at peak.
I am perfectly confident that this is affordable. We are coming out of the bottom of an economic cycle in the Asian
crisis. All the projections are for us to come out through an economic cycle where the government will be perfectly
capable of maintaining a surplus in excess of 2 percent of GDP on average.
But I am not seeing the world through rose tinted glasses. A tight fiscal position is critical in order to meet our
fiscal targets for the next two years – with our without a fund.
We have imposed on ourselves a tight spending limit for the next two years. But on the medium term assumptions there is
a spending capacity of $1.2 billion a year for beyond that two year horizon.
That $1.2 billion a year is roughly equal to the increased spending in this year's Budget. However, that spending was at
the top end of what a New Zealand government would regard as prudent over the medium and longer term horizon. This is
because it included the restoration of the pension level, it included substantial moves on student loans, and it
included the reintroduction of income related State house rentals.
There were a number of major spending policies encompassed within that limit.
A $1.2 billion normal additional spending limit year by year gives very substantial freeboard to future New Zealand
governments.
To say, as some have done, that the fund will create an intolerable fiscal constraint and that there would be little
additional spending, implies that one could spend a great deal more than this, and that would certainly invite
punishment by the financial markets. Because that position would not be accepted as prudent management of New Zealand's
economy.
We need to be extremely clear about this. In order to have this debate aired well and discussed sensibly we cannot
pretend there is a free lunch.
By maintaining a decent, non-income tested pension we do place some limits on what else we can do in any one year.
But as I have already explained, those limits are probably placed on us in any case.
I challenge the critics to come up with clear, viable, fair and politically robust alternatives to prefunding
superannuation. We have deliberately upped the ante on this debate. This debate is no longer about sitting around and
trying to find some low level universal accord that each and every party is prepared to sign up to. This debate is now
about what the credible plans are for securing the funding for present and future pensioners.
A political party that fails that test, that has no clear plan, that refuses to state what its policy is, when its
conference said it was not a responsibility of the Government to ensure pensioners lived in dignity, is dicing with
electoral death.
I have had 9 years in Opposition to think about superannuation policy, and I am very clear what the government's
responsibility is. Our responsibility is to look after present and future pensioners with a minimum decent level of
retirement income.
We must then move to a serious analysis of how to produce a better environment for private superannuation on tier two
provisions. Let me be clear that my proposals on NZ Superannuation are not designed to remove the need for private
savings. They are designed to provide a credible long term framework within which people can add further provisions. But
to facilitate that we need to improve the present regime which is scarcely conducive to maximising long term savings.