SUBMISSION TO THE MEMBERS OF THE PARLIAMENTARY SELECT COMMITTEE

ON FINANCE AND EXPENDITURE

from Len Bayliss 9/2/01

NZ Superannuation Bill

1. This submission makes four major points

(a) The basic demographic premise i.e. changes in the working age/superannuitant ratio, on which the Government’s prefunding proposals are based are spurious - and hence quite unsound as a basis for superannuation policy.

(b) The estimated additional future fiscal cost of NZS will be partially or wholly offset by reductions in other general Government expenditures reflecting a static/declining population.

(c) The future real level of NZS will be significantly higher in the future if funds, instead of being allocated to prefunding, are invested in education, training and research - so raising labour productivity and technological development .

(d) Prefunding is not, and can never be, an "enduring solution" to funding NZS.

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SPURIOUS BASIC PREMISE OF PREFUNDING PROPOSALS

2. The Government’s prefunding proposals are primarily based on forecasts of a major deterioration in the ratio of superannuitants to the working age population. Whereas there are now six persons of working age to support each superannuitant - in 50 years time there will only be two .

% Total Population 1976 1999 2011 2031 2051

15-64 61 65 67 60 59

65 and over 9 12 14 23 26

3. "NZS will require an increasing proportion of Government expenditure, when there are less people in the workforce to generate the income to pay for it . Although there are now about 6 workers per superannuitant, by 2050 there will be only about 2 workers per superannuitant.. It is both unfair and unrealistic to expect the relatively small future proportion of workers-to-superannuitants to have to meet these costs through their taxes..." .

"Pre funding NZ Superannuation - Funding arrangements" Cabinet Policy committee 6/9/00

4. "Like other developed countries, New Zealand faces an ageing population. In the future there will be fewer working age people for each retired person . A higher proportion of the population will be receiving NZS, which will lead to a significant increase in the costs associated with NZS.

If nothing is done, future governments will face four equally unpalatable options:

- Cut retirement income entitlements dramatically

- Impose a large increase in the tax rate

- Introduce a harsh asset and income test on eligibility for NZS

- Cut other programmes like health and education."

"Why do we need to prefund" Questions and answers on Prefunding NZ Super.

NZ Government publication October 2000

5. The Government`s basic premises, as above, are not original. Similar statements have been widely propagated for many years, mainly for political and business advantage, and have led many persons to the belief that NZS cannot be sustained. The December 2000 "AMP Superwatch" stated that 75% of the persons surveyed believed that the existing level of NZS could not be maintained in the future- a shameful finding reflecting a deluge of misleading and inaccurate statements.

6. Rarely has the media reported that

- NZS is amongst the least generous old age pensions as measured by its relationship to

average wages.

- NZS has a very low fiscal cost by comparison with other OECD countries .

- Even if the cost of NZS doubles over the next 30-50 years it will still be below the

current average OECD cost!

- NZS has been repeatedly characterised as "another welfare handout" when in fact it is

a compulsory tax funded PAYG super scheme paid for and received by all persons

whereas welfare benefits are tax funded but only available to a targeted minority.

So much for "informed"(!) public debate.

7. The key point is that the working age/superannuitant ratio is gravely flawed as a basis for superannuation policy. It is the "employed" not the "working age" population, who produce New Zealand’s GDP, and hence support all dependents. Dependents - young, middle aged and old - comprise that part of the population who are not employed. The latest statistics show that 71 % of the working age group are "employed " whilst the remaining 29% comprise working age dependents - the unemployed, students, home care givers etc. The working age/superannuitant statistics also exclude another major group of dependents i.e.children aged 0-15 years.

8. Hence the key ratio for superannuation policy is the "employed/dependents ratio" . All dependents - young, working age and the elderly - have to be supported directly or indirectly ( i.e. via tax) by the employed. The main focus in the seminal OECD report "Maintaining Prosperity in an Ageing Society" is on the employed/dependent ratio as is its follow up report "Reforms for an Ageing Society". The OECD view is strongly supported by the NZ Government’s evidence to the latter OECD report "A more useful way of looking at the combined effects of demographic and labour market trends is to examine the changing percentage of the population that is employed - and producing the goods and services that are consumed by the population as a whole ".

9. The employed/dependent ratio is forecast to fall in many OECD countries because of an ageing population and earlier retirement. Hence the report`s prime focus, and that of its recently published follow up report, is on halting the decline in the employed/ dependent ratio through "Positive Ageing" and related policies. The latter`s primary objectives are to increase the number of elderly employed - by choice not by compulsion- so strengthening both economic growth and the fiscal position whilst at the same time increasing both the incomes and the quality of life of superannuitants.

"Encouraging people to work longer would raise economic growth, increase the tax base and reduce the number of dependent older persons, a triple gain." (OECD MPAS)

10. Employed/dependent ratio`s

%Total Pop 1976 1999 2010 2030

Employed 43 46 50 48

Dependents

0-15 30 23 n/a n/a

15-64 18 19 n/a n/a

65 and over 9 12 n/a n/a

Total dependents 57 54 50 52

11. The forecast statistics for the number of employed in 2011 and for 2031 are official NZ estimates supplied to the OECD for inclusion in "Reforms for an ageing society". The number of employed from 2011 onwards will be strongly influenced by

(a) the major impact of "Positive Ageing Policies" in substantially increasing the number of employed and reducing the number of dependents.

(b) the impact of market forces, particularly a very basic pension, in encouraging superannuitants to seek employment. A recent Victoria University survey revealed that a large proportion of older workers intend to undertake some paid work after retirement.

(c) the increase in the average age of the 15-64 working age segment would reduce the number of students and those on the DPB - so increasing the numbers of employed.

(d) if funds, instead of being misdirected on prefunding, were spent on education, training and research, employment growth would be faster - with much fewer unemployed dependents in the 15-64 age group.

The major barriers to a sustained rise in employment and in labour productivity is a poorly educated and trained labour force allied to declining commodity terms of trade .

12. It is clear that the working age/superannuation ratio is a spurious guide to superannuation policy and that the employed/dependent ratio is vastly superior. Moreover, the latter ratio for New Zealand 48/52 is much better than the average projected for the OECD at 43/57. New Zealand is particularly well placed to sustain NZS.

FISCAL CONCERNS

13. It is absurd to consider the rise in the proportion of elderly dependents and the consequent rise in the cost of NZS in isolation whilst ignoring the massive changes in economic and social structures which will take place over the next 50 years. For instance, in about twenty years time, according to official estimates, population growth will virtually cease and by 2050 the population will be declining. This change will cause a major fall in housing and related infrastructure investment in roading, energy, transport, sewerage, water etc. Because the elderly have a vastly lower crime rate than the 16-24 age group there will also be a major decline in police and prison expenditures. A lower proportion of young persons will see substantial declines in education and DPB expenditures. These change and many others will, for the most part, occur fairly slowly and often imperceptibly.

15. However, whilst clearly there is likely to be no pressure on total resources, there is a legitimate concern in regard to pressures on General Government (central and local) expenditures. The estimate that NZS expenditure will probably increase from approx 4% of GDP in 1999, to around 8% of GDP in 2030 and to 9% in 2050 is a concern - even though these much increased future cost estimates are still below the current OECD average. Nevertheless, a requirement to increase NZS expenditure by 4-5% of GDP, with approx another 1% being required for additional health expenditure, would be a justifiable cause for concern if it required a proportionately large tax increase, and/or major cuts in NZS etc,etc - as has been repeatedly affirmed.

16. The problem is that whilst estimates of the rise in the cost of NZS are plausible, it is much more difficult to forecast Government expenditure reductions resulting from a static /declining population.Clearly there will be major reductions in many central and local Government expenditures - as noted above. In addition, there will be the substantially higher tax take, as forecast by the OECD, resulting from "Positive ageing policies" leading to rising superannuitant participation rates. Overall, in my judgment, there is unlikely to be any significant increase in fiscal pressure - much the same result as with total claims by dependents on real resources.

17. However, an informed judgement by the Committee is impossible without estimates of future employed/dependent ratios and of future general government revenue and expenditure on the basis outlined above. Treasury should have no difficulty in making broad brush estimates through its current models suitably adjusted.

A crucial question is whether prefunding optimises government expenditure - would the money diverted to prefunding be better spent on other expenditures which would result in a significantly higher level of NZS in the future? OECD reports on New Zealand have consistently highlighted its poor economic performance - particularly in growth of real per capita GDP and in the (closely related ) growth of labour productivity. If these trends continue, the present significant gap between New Zealand wages and salaries and those in other English speaking countries in particular, will significantly widen - as will the gap between the quality and range of comparable government services. Hence, besides being responsible for a relatively slow rise in real NZS and real per capita incomes, low productivity will also accentuate the problem of retaining skilled and creative persons. Raising labour productivity is crucial for the future growth of per capita incomes, employment and NZS.

19. The last four OECD reports (1993/1999) repeatedly emphasise that low standards of education and training are the prime causes of New Zealand`s low labour productivity. Moreover, the OECD has recently reiterated its conviction that human capital is the core element in economic growth ("Links between policy and growth" OECD Economic Outlook Dec 2000) - a contention that is now virtually universally accepted.

20. Hence, if the money which the government proposes to allocate to prefunding NZS was instead spent on achieving major improvements in education and training - and hence in raising labour productivity - a much higher level of NZS could be achieved. Even if NZS was set at less than its present relativity to wages, it would still be significantly higher in real terms than on present productivity trends plus prefunding. Prefunding by diverting funds from education and training will prove a major obstacle to the real growth of NZS and to the living standards of all other New Zealanders.

21. The Government’s claim that prefunding provides "An enduring solution to funding NZS" (Hon Dr Michael Cullen Media Statement 10/10/00) is a delusion - even if passed by a parliamentary majority. There can never be such an "enduring solution" under any government. What governments can do - future governments can undo. Anyone who doubts this statement should read the OECD report "Reforms for an ageing society " which describes the progress being made, in most of the 26 OECD countries surveyed, in changing superannuation policies which until recently were generally believed to have been "carved in stone"! Each generation must tackle its problems as best it can in the light of changing circumstances - and circumstances inevitably change. Immutable policy blueprints or enduring solutions are a political chimera.

Len Bayliss telephone 06 3643308

P O Box 46 fax 06 3643307

TE HORO 5560 email