On line from BUDAPEST. John has been around the business scene for a long time.
NZ Super: The World’s Best Pension
We have more than a highly successful government retirement programme in New Zealand. Sir Robert Muldoon’s National Superannuation Scheme is a world leader. National Superannuation ( NS ) which provides all New Zealanders with retirement income security is vastly superior to compulsory or privatised superannuation for these reasons.
Firstly, NS has successfully eliminated poverty if not hardship in old age, something the market does not do.
Secondly, NS insulates all superannuitants against the risks of inflation and stock market downturns or collapses. A future resurgence of inflation can never be ruled out. And capital markets do not always work well. Again, the market does not provide this kind of insurance.
Thirdly, governments can manage superannuation schemes far more effectively and efficiently the private sector.
NS’s universality ensures everyone is covered in retirement. Privatised superannuation does not cover those outside the workforce even if their contribution has been substantial, such as women for example. The unemployed, marginalised and so on are not covered.
Governments through large scale computerisation are highly efficient in managing superannuation schemes. The private sector, which charges fees, simply cannot match the very low administrative costs – typically below 1% of budget – characteristic of publicly funded, government managed pensions.
Fourthly, because NS is administered by the Government it is highly responsive to its “clients”, that is, the thousands of New Zealanders who, without other income, depend on it for retirement income. The Government’s recent payment to superannuitants for winter heating costs illustrates NS’s responsiveness. A need was identified and the Government could respond immediately. Such ameliorative public action is foreign to the market.
Finally, NS achieves a modicum of national income redistribution which ensures even our least fortunate – whose number is growing – receive a basic level of subsistence. Privatised superannuation would only increase New Zealand’s already grotesque inequality.
But the greatest shortcoming of privatised superannuation – and this applies equally to kiwisaver – is how will future retirees support themselves who, either through profligacy, inflation or stock market collapse – outlive their savings ? The result would be widespread destitution. Again, NS avoids all these problems.
Despite its success critics unrelentingly charge NS is “generous and unsustainable”. It is neither.
NS is hardly generous given that it is tied to a modest percentage ( 66% ) of the average wage of a low wage nation. Accordingly, those solely dependent on NS for retirement income are reduced to a fairly frugal, spartan existence. But hardship is far preferable to poverty in old age.
But the greatest criticism levelled at NS is that with the impending demographic bulge it will prove unsustainable in its present form. Again, the facts do not support the claim.
Some history. In the 1980’s critics claimed Sir Robert Muldoon’s “generous” NS would become unaffordable by 2010. They were wildly wrong. NS’s gross cost in 2010 was $10 billion, or 4% of GDP or national income. The net ( after tax ) cost was just 3.7% of GDP. It proved very affordable.
Treasury projects NS’s gross cost in present form will peak at 7% of GDP by 2050, then decline. But some perspective is required. Presently, the average cost of public pensions across the EU is 12.9% of GDP, well above NS’s projected cost at the height of the demographic bulge. Accordingly, the EU nations are faced with three grim choices: raise the retirement age, increase taxes or reduce pensions.
Treasury’s projections, it should be noted, are based on the continuation of New Zealand’s suboptimal economic performance.
Fortuneately, New Zealand’s situation is vastly different from the EU nations. As superannuation expert Michael Littlewood recently wrote the critical factor in NS’s sustainability will be our future economic performance.
New Zealand is an under-developed, low national income, low wage nation in relative economic decline. Unlike the tiny, high income nations we simply do not have the massive productive sector ( relative to population ) which gives those tiny nations the world’s highest living standards and unmatched quality of life.
The Retirement Commissioner, Diane Maxwell, has cautioned economic growth will not suffice. She is correct. The solution is economic development. The greater the gap between our national income and population by 2050 the higher New Zealand’s living standards will be, including all superannuitants.
Achieving rich-nation status will require the appropriate development institutions, a permanent immigration stop and a massive expansion of our productive sector. Like Singapore and the Nordic nations we must become an export powerhouse. With rich-nation status New Zealand will have the best of everything, including extraordinarily generous NS. Its all very straightforward.
John H. Gascoigne2 Dallas Place,Leamington,Cambridge.Ph; 0221953160