Superannuation

Andrea Vance at Stuff reports:

Labour and the Greens have promised not to attack Prime Minister John Key if he agrees to cross-party talks on the pension age.

Mr Key admitted yesterday that National was isolated over the issue but is standing firm, saying lifting the age is “a very simplistic way of looking at a very complex issue”.

The debate has raged over the last few days with a series of reports questioning the affordability of the current scheme.

It is bullshit that Labour and the Greens would not attack Key if broke his word on superannuation. Every second TV ad at the election would show him having said he would resign if he changed the age or level of super.

It is quite correct that future superannuation costs are not affordable without large increases in taxation. But this is not some new revelation. This has been known for over 20 years. Up until 2008 Labour and Greens never showed any interest in reducing the future cost of superannuation. Labour in fact attacked the age going from 60 to 65 and savaged Don Brash when he suggested further changes were necessary.

While Labour and Greens support for increasing the age is welcome, lets make no mistake that the primary motivation is anything except to destroy John Key’s political credibility. Does anyone honestly think that if Key had not made the pledge he made in 2008, that Labour would be pushing for cutting spending on superannuation – when every other policy they have is to increase public spending?

I have previously written in the Herald that I believe the 2008 pledge was wrong, and I regret it was made. However Key must never break his word on this issue – his pledge was too specific, where he said he would resign both as PM and as an MP.

But there does need to be a way forward. However this is a path that should not be rushed. Any changes are likely to be post 2025 or even later. Whether decisions are made in 2015 or 2017 is not going to be greatly material.

The first step that the Government should take is to entrench the current scheme for everyone born before say 1960. Pass legislation saying that nothing short of a super-majority in Parliament can change that scheme. This provides absolute certainty for current retirees and those near retirement. All parties in Parliament would hopefully vote for such legislation.

Then the Government should establish some sort of expert group on retirement savings for post 2025. We need a debate on more than just the age of entitlement. Merely changing the age does not make superannuation sustainable. It helps – but by itself is not enough. Also people may be unaware that Labour’s policy is not to simply increase the age, but to apply a means test to it for those aged 65 and 66 – this could result in minor savings only.

Merely moving the age to 67, will by 2030 make a difference of 0.7% of GDP. With Labour’s mean testing proposal, it is even less than that.  The debate must be about more than just the age.

We need a first principles review of retirement savings – not just public superannuation, but also workplace superannuation such as KiwiSaver and also private savings. Merely changing the retirement age is a knee jerk response which is more about trying to nobble John Key than making superannuation sustainable. We absolutely have to also consider the level at which it is set, the indexing, income or asset testing, fixed sum vs annuity etc. We need to define the minimum income people need in retirement and look at how much should come from public superannuation, from KiwiSaver and/or from private savings.

The current focus for the Government is the short-term fiscal outlook – getting back to surplus. Changes to superannuation after 2025 will not impact that, so I agree there is no need to be trying to resolve the issue today or this year. However as we get close to the hoped for surplus in 2014, this is when the focus should go on the longer term fiscal sustainability.

My wish is that in 2014, National does three things:

1. Introduce legislation, with cross-party support, to legislatively guarantee the current superannuation scheme for those born before 1960. This doesn’t mean any changes for those born after 1960 – just that those arrangements will not be entrenched like for those born pre 1960. This means that Grey Power can not run a scare campaign that their members could ever be impacted by a future change. Also it would stop the current scheme being made even more unsustainable.
2. Set up (preferably with cross-party support) a royal commission on retirement savings. This would be tasked with designing a sustainable savings regime for those born after 1960.
3. Announce that the essentials of the regime proposed by the Royal Commission would go to a referendum in 2017. The public would get to decide whether to stay with the status quo or adopt the new model for those who retire after 2025. No cherry picking of some aspects – it has to be a binary choice.

From a public policy point of view this would be a desirable outcome. Those currently retired and near retirement would have absolute certainty over their retirement income arrangements. A binding referendum on the post 2025 arrangements would also provide certainty and a political consensus for those of us born after 1960.

From a political point of view, I believe this would be achievable without the Prime Minister having been seen to go back on his pledge. Any change will be made by the people, not by the Government. But also by having the referendum in 2017, it is likely Key will have retired by then (hopefully winning a third term, serving the majority of a third term but not necessarily trying to win a fourth term).

National doeesn’t need to take any action today, or even in 2013. But in 2014, I think it will be desirable for it to adopt an approach along the lines outlined above – both because it would be the right thing for the country, but also good for National.

It is important that we do not allow the debate on superannuation to be just about lifting the retirement age to 67. That would provide a false sense of security, and just be kicking the problem to touch for a few more years.