Since around 1950 New Zealand has been in relative economic decline, and its productivity has been stagnating for many years. Key to this has been low domestic saving rates, which translate into thin capital markets, investment short-termism and to a low ratio of capital to labour, constraining labour productivity. Low domestic savings rates mean high real interest rates and a real exchange rate that weakens our tradeable sector.
The National Party’s policy is that the entitlement age for superannuation goes up to 67 from 2044. In contrast, Carmel Sepuloni in her 27 May address to the Labour Party’s Congress confirmed that Labour will not lift the eligibility age for New Zealand Superannuation (NZS). She indicated it was affordable as long as we keep paying into the New Zealand Superannuation Fund (NZSF). Sepuloni stated to OneNews: “We’ve got the numbers in front of us, Treasury tells us its affordable as long as we keep contributing to the Super Fund”.
Carmel Sepuloni has integrity and does not intentionally mislead the public. However, Treasury’s own data does not suggest current superannuation settings are sustainable. Treasury publishes the NZS Fund model at every forecast round. Taking 2010 as the last year before the ratio of NZS to GDP starts to accelerate, the aggregate net of tax NZS to GDP was 3.5%.
It is the net NZS amount, rather than the gross (tax inclusive) figure normally cited in the government’s accounts, that reflects the true cost to taxpayers of funding the public pension as the tax superannuitants pay on NZS returns to the government coffers.
By 2050 the net NZS to GDP percentage is projected to be 5.6%. Of the 2.1 percentage points of GDP difference over this 40 year horizon, the $295 million capital withdrawal in this year is 0.03% of GDP. It gets a little better if you go forward ten years, as the NZSF is going to provide very little over the next 25 years or so, but even then the lift from 2010 is 2.7 percentage points of GDP while the withdrawal from the NZSF Fund is 0.34% of GDP. The NZSF pays for about 1/8th of the increased cost of NZS, and not until nearly 40 years into the future.
The Labour Party has forgotten its history of leadership on superannuation.
In 1974 the Kirk government initiated a compulsory superannuation scheme to supplement the pension. Had the New Zealand Superannuation Act 1974 not been repealed by the Muldoon administration in 1976 New Zealand would be much wealthier today, and our superannuation system would be sustainable.
Capital formation from the 1974 scheme would have retained New Zealand ownership of major manufacturing and service sector businesses. Our high-tech businesses would have grown and internationalized, while still remaining rooted in New Zealand. Our labour productivity would have grown through more capital being invested in labour-augmenting technology.
Some countries and jurisdictions support individual or children’s development accounts (CDAs). These are typically geared to lifting individuals’ wealth-creating capabilities, for example through education, home ownership or business equity investments. They are effectively an assets-based approach to economic welfare.
Launching a new development fund for individuals is unlikely to attract support, given what is already in place. Instead, Kiwisaver could be made compulsory with higher employer and employee contributions. Currently it supports retirement savings, first home purchases, and it can be drawn on in cases of hardship. It could be widened to support tertiary education and business equity investments, all of which are wealth-creating investments rather than consumption expenditures.
Widening Kiwisaver’s role carries risks of losing the core focus on retirement savings. However, “sidecar” investment funds that are focused on financial objectives other than retirement can be aligned with Kiwisaver and draw on its supporting infrastructure.
Further discussion on the relationships between savings initiatives and economic performance, and on development-oriented savings accounts are in the linked papers development accounts and our equity and productivity challenges and what the NZ Initiative might learn from Keynes. Other papers below by Robert MacCulloch reinforce the point that NZS is unsustainable and that mandatory savings are needed for New Zealand.
References and other reading
Down to Earth Kiwi blog post May 2023: Labour’s election campaign starts with dishonesty on a scale that would see private directors jailed.
MacCulloch, R. (2019). Mandatory savings: The saviour of New Zealand’s welfare state. Policy Quarterly, 15(1).
Douglas, R., & MacCulloch, R. (2019). A welfare reform for New Zealand: Mandatory savings not taxation. New Zealand Economic Papers, 1-35.
Dr Peter Winsley has worked in policy and economics-related fields in New Zealand for many years. With qualifications and publications in economics, management and literature. This article was first published HERE
Carmel Sepuloni has integrity and does not intentionally mislead the public. However, Treasury’s own data does not suggest current superannuation settings are sustainable. Treasury publishes the NZS Fund model at every forecast round. Taking 2010 as the last year before the ratio of NZS to GDP starts to accelerate, the aggregate net of tax NZS to GDP was 3.5%.
It is the net NZS amount, rather than the gross (tax inclusive) figure normally cited in the government’s accounts, that reflects the true cost to taxpayers of funding the public pension as the tax superannuitants pay on NZS returns to the government coffers.
By 2050 the net NZS to GDP percentage is projected to be 5.6%. Of the 2.1 percentage points of GDP difference over this 40 year horizon, the $295 million capital withdrawal in this year is 0.03% of GDP. It gets a little better if you go forward ten years, as the NZSF is going to provide very little over the next 25 years or so, but even then the lift from 2010 is 2.7 percentage points of GDP while the withdrawal from the NZSF Fund is 0.34% of GDP. The NZSF pays for about 1/8th of the increased cost of NZS, and not until nearly 40 years into the future.
The Labour Party has forgotten its history of leadership on superannuation.
In 1974 the Kirk government initiated a compulsory superannuation scheme to supplement the pension. Had the New Zealand Superannuation Act 1974 not been repealed by the Muldoon administration in 1976 New Zealand would be much wealthier today, and our superannuation system would be sustainable.
Capital formation from the 1974 scheme would have retained New Zealand ownership of major manufacturing and service sector businesses. Our high-tech businesses would have grown and internationalized, while still remaining rooted in New Zealand. Our labour productivity would have grown through more capital being invested in labour-augmenting technology.
Some countries and jurisdictions support individual or children’s development accounts (CDAs). These are typically geared to lifting individuals’ wealth-creating capabilities, for example through education, home ownership or business equity investments. They are effectively an assets-based approach to economic welfare.
Launching a new development fund for individuals is unlikely to attract support, given what is already in place. Instead, Kiwisaver could be made compulsory with higher employer and employee contributions. Currently it supports retirement savings, first home purchases, and it can be drawn on in cases of hardship. It could be widened to support tertiary education and business equity investments, all of which are wealth-creating investments rather than consumption expenditures.
Widening Kiwisaver’s role carries risks of losing the core focus on retirement savings. However, “sidecar” investment funds that are focused on financial objectives other than retirement can be aligned with Kiwisaver and draw on its supporting infrastructure.
Further discussion on the relationships between savings initiatives and economic performance, and on development-oriented savings accounts are in the linked papers development accounts and our equity and productivity challenges and what the NZ Initiative might learn from Keynes. Other papers below by Robert MacCulloch reinforce the point that NZS is unsustainable and that mandatory savings are needed for New Zealand.
References and other reading
Down to Earth Kiwi blog post May 2023: Labour’s election campaign starts with dishonesty on a scale that would see private directors jailed.
MacCulloch, R. (2019). Mandatory savings: The saviour of New Zealand’s welfare state. Policy Quarterly, 15(1).
Douglas, R., & MacCulloch, R. (2019). A welfare reform for New Zealand: Mandatory savings not taxation. New Zealand Economic Papers, 1-35.
Dr Peter Winsley has worked in policy and economics-related fields in New Zealand for many years. With qualifications and publications in economics, management and literature. This article was first published HERE
1 comment:
Well done, Peter.
Another excellent analysis that coheres with the views of various New Zealand economists on this subject. Let's hope that Treasury and the Reserve Bank listen.
David Lillis
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