by Susan St John

Abstract

The recent superannuation saga in New Zealand was described by one international study as reading like an implausible script for a farce. Yet the basic arrangements have been surprisingly durable and have a number of potential advantages. Compared to the generous schemes of many European countries we are better placed to manage the demographic pressures that build from 2010. Until recently we have also avoided the pitfalls of the British approach in which poorer retirees are increasingly marginalised. Nevertheless the social contract has been seriously undermined. Do we inevitably enter the new millennium with uncertainty and insecurity?

I recently attended a Gerontology conference held in South Korea and took the opportunity to visit several old people's homes in Seoul. In one, residents lived 8 to a room about the size of the average NZ lounge. The floor was marked out into eight sleeping areas. They slept on the floor with all their belongings in small lockers behind them against the wall.

I tell this story to illustrate an important point. With no other details it may sound quite Dickensian. Yet the women I saw, in their 70s and 80s, were cheerful and supple with all that getting up and down from the floor. There were lovely grounds outside or them to go and garden and walk. The floors were heated, they obviously enjoyed great companionship, and the place was spotless. There was a variety of communal activities for them such as paper flower making and aerobics, supportive healthcare, and the home swarmed with volunteers.

The moral is that it is dangerous to look at things in compartments, especially when we are talking about policies for retirement. Policies for pre-retirement, health, housing, pensions and long term care need to fit coherently together and deliver an overall package. Instead we devise policies in compartments, seldom checking to see if they met consistent goals for the modern world.

It is no wonder there are conundrums:

• How do people feel when they have saved to provide for their retirement and find it they lose almost all of it all including their homes in paying for long term care?

• Who pays when the wealthy fail to pay appropriate contributions for health care and other services, because they have divested themselves of assets and income?

• How do younger cohorts feel about universal pensions for all regardless of wealth when they are saddled with student debts and tightly targeted other social assistance?

• How do middle aged workers, squeezed out of full time employment, save for their retirement in what should be their peak saving years? Those who do not yet qualify for NZS and cannot support themselves must fall back on the meagre community wage. An almost 100% penalty on any income earned over $80 week is likely to ensure a crippling erosion of any assets saved for retirement. Tumbling into the abyss is a good way to picture the demoralising situation.

In typical New Zealand fashion we might wait for the market to solve these conundrums. Or, we could return to the old fashioned view that society should act through intelligent government. For that approach a wide and inclusive public debate is essential. Dare I suggest we need leadership? "Where there is no vision the people perish."

We know how fast the last ten years has disappeared. It is only ten years until the first wave of the large babyboom cohort reaches 65. David Thomson's paper last week suggested, if current downward trends continue, by 2010 far fewer of those aged 45-65 will have traditional full time work. Many goods and services will require less and less labour to produce, and except for the highly skilled jobs, most of the work that remains will be low paid or unpaid. We need to rethink the fundamental market formula of paid work and saving = rewards and access to goods. Big ideas, such as a basic income as promoted by Keith Rankin, or part pensions, that facilitate a range of activities both paid and unpaid should be being discussed.

The late middle-aged need income security and certainty as they face their imminent retirement. Only if they have this, are they likely to be able to contribute to the full in the years preceding 65 and those productive years of early retirement. I suggest we are failing to provide this because of a series of policy blunders that have left us ill-equipped to face the pressures of the new Millennium.

The cardinal rule of good public policy is to start with clear objectives. Only when we know what the goals are along with agreed principles for policy design should we debate actual policies. Finally the chosen social contract carefully implemented and continually evaluated. Do policies meet agreed objectives? Are the agreed objectives still relevant? Does the social contract need to be redrawn? Are there any new principles to be considered?

Sadly this process is almost never followed before policy is implemented in NZ. There are countless examples. The 1997 referendum was a classic case of what happens when you are not clear about objectives. I think the Treasurer wanted more national savings to buy back the family farm as well as a way of making the retired better off. But the scheme we actually voted on was not designed to achieve either goal. At least we got to vote it down. A failure to understand the proper policy process has, in my view, led to the undermining of both of NZ's innovative social insurance programmes- ACC and superannuation.

The secret of the Woodhouse vision was to put the needs of the injured person at the centre. When that was done the differences as to whether the accident occurred at work or at home faded away. Whether fault of the injured or another party could be proven also did not matter. His objectives were clear and prioritised:

He had the vision to see that private arrangements with private insurance companies could never meet these social goals. Yet right from the inception of the ACC Act, his vision was undermined. The history of ACC is one of betrayal of the original principles and of the social insurance notion of broad risk sharing. As private insurance principles instead crept in, the original vision of community responsibility in ACC was corrupted. We are fast losing a scheme of which we were once proud and which might have been a model for the rest of the world.

Just as it might be judged that the 1967 Woodhouse report marked the high point in thinking about the social contract for accidents, perhaps the 1993 Accord was our best shot at a social contract for superannuation. It has been all downhill ever since.

Let's review the policy history for the last decade of the 20th century: A history that earned the following comment from the author of a recent international study of pensions in OECD countries:

The experience of 'reform' in New Zealand has been especially unhappy, protracted and frankly absurd. A full description of all the reforms, proposed reforms, counter reforms and about turns read like an implausible script for a farce.
  Paul Johnson Older getting Wiser, Institute of Fiscal Studies (London, 1999)

In 1991 the Mother of all Budgets followed the betrayal of the promise to rid superannuitants of the bogy of the surcharge. Remember the "no ifs no buts - the surcharge is immoral and must go". Cast iron promises were soon turned to custard as Ruth and Jenny tried to make NZS into just another welfare benefit. Above a low exemption, people faced an unbelievable 93% clawback of their pension. This upsetting change to the expectations of retired people was passed in an all night budget marathon sitting so that it could never be changed.

The legislation was, of course, reversed after an enormous outcry. But we ended up with a much tighter surcharge than before with the exemption cut in half and the surcharge rate lifted to 25%. Embarrassed by the mother of all policy blunders, the government set up a taskforce to figure out how people could become more self-reliant. In the meantime the more stringent surcharge nicely sensitised the retired population to avoidance measures. The Taskforce on Private Provision for Retirement took a broad view and essentially endorsed the traditional state pension and private non-subsidised saving. Compulsory saving and tax incentive options were dismissed.

The Accord on retirement incomes followed in 1993. It was signed by the three major political parties and cemented in the voluntary tax neutral arrangements for private saving. It talked about income to allow belonging and participation and tied the level of the pension for a couple to a band of between 65-72.5 % of the net average wage. Public and private provision were to be linked by means of the surcharge or a progressive tax with equivalent effect. Policies were to be subject to regular reviews at 6 yearly intervals.

Under the Accord we had a proper state pension and a flexible system for additional private provision. In contrast to the complex systems in other countries, ours was simple, fair and egalitarian. Based on the individual not the married couple it copes well with social change such as divorce, separation and remarriage. It ensures that all are covered regardless of previous contributions or paid work experience.

While the Accord process was not always smooth, between 1993-1996 it gave retired people protection against ill-considered changes. Those coming up to retirement could plan with certainty. Then, in 1996 the rot took hold. Matters that should have been left to the Accord became negotiable in coalition talks. In 1997 the country was turned upside down with a referendum on compulsory superannuation. But it was the abolition of the surcharge as an outcome of the Coalition Agreement that was, in my view, more serious. The surcharge had been the glue that held the Accord together. It provided a compromise between the left who wanted universal pensions and the right who wanted the pension to be a means tested low slung safety net only.

Working through the time of the referendum, The Periodic Report Group chaired by Jeff Todd produced its final report on retirement policies in late 1997 as required by the Retirement Income Act and set out in the Accord. Its recommendations were sidelined, its reports ignored.

The final mortal blow to the Accord was delivered in September 1998 when the government announced that the wage band floor for NZS would be lowered to 60% (from the 65% floor that had just been breached). There could now be no Accord, and thus no rational non-political process for decision-making. Thus now there is no guarantee than when the 60% floor is reached that it will not be lowered again.

Finally, a new taskforce (Taskforce 2000) was announced, with many of the same objectives as given to the Periodic Report Group of 1997. They are to find 'equitable and sustainable solutions by the end of 2000. Lest it sound like sour grapes let me not dam this initiative outright. I make the observation however that this taskforce has been given twice the time of the PRG, 5 times the number of members, 6 times the funding, but the advisors in Treasury are the same, and the taskforce has only one third of the support of the main political parties. I predict lots of advertising, community consultations, discussion papers and at the end of two years, a conclusion that urges the parties to endorse the New Zealand model by forming an Accord!

When we look at the kind of projections that we did on the Todd Taskforce in 1997, our spending on pensions and healthcare costs did not go off the chart. They showed that the cost do rise after 2010 but they have also been coming down because we have raised the age to 65. Projections of costs are notoriously dangerous as Ian Pool has suggested. But if they can be relied upon at all, they tell us that NZ is better placed to weather the storms than many other OECD countries. Many are struggling with their overgenerous promises to pay earnings related state pensions from social insurance schemes. They also have the hidden costs of tax incentives for private saving that New Zealand does not have.

The Todd Taskforce concluded there was no need to panic, but suggested some modest adjustments needed to be in place by 2015. More urgently, they believed that some kind of link between public and private provision such as the surcharge provided needed to be reintroduced to return some basic sense of equity to the system. The last useful act of the Accord had been to return the exemption for the surcharge to the real level of before the mother of all budgets. Thus for 1997/98 last year of its operation it was a very gentle income test affecting the top 16% only, and few of those lost all their pension.

Income among the group aged over 65 is quite unequal. As a result of the tax cuts in 1996 and 1998, and the removal of the surcharge the better off two-income superannuitant households have gained up to $350 a week. Meantime a couple going on the sickness benefit since Oct 1998 gets $30 a week a less than before and still face a harsh income test. Universal pensions and low tax seem unjust in a world where everything else is targeted.

Universal pensions are also vulnerable. To contain their cost, the level must fall or the age of entitlement must be lifted. In 1998 we got the changes to the floor. It would be hard to overstate the seriousness of that de-coupling of pension and wage movements. As the British have found, this is a highly effective but covert way to reduce the pension over time. In that country, price indexation since 1979 has seen the basic pension fall dramatically to 15% of the average wage today for an individual and it is projected to be only 7% of the average wage by 2030. About one third of pensioners there now require means test top-ups. These are stigmatising and complex. They have a poor take-up rate as many people do not know how to access them. Means-tested top ups in turn encourage the modestly well-off and some well-off people to run down their assets and income to qualify.

In New Zealand, we have few hard statistics on living standards of the retired. But we do know that until recently, there was little need for means-tested supplements except for the minority who did not own their own home and few have needed foodbanks. That picture is now changing.

By the middle of next century one in four of the population are expected to be over 65 and one in four of those will be over the age of 85. The last census showed that 73% of women over 80 were widowed, compared to 33% of men over 80. 63% of women aged 80+ lived alone compared to 31% of men. Thus we can predict the queues at WINZ to apply for top-ups will increasingly include older women as the lower levels of the pension begin to bite.

Insecurity is further promoted by the prospect of needing to fund long-term care. The Royal Commission in the UK on the funding of Long Term Care (1999) suggested that at age 65, 50% of women and 30% of men can expect to eventually need long term care for two or more years on average.

At present, in NZ, about 28,620 people are in long-term residential care, or around 6% of those over 65 years of age. Of these, two thirds qualify for a subsidy. The cost to government of the long stay subsidy is around $450m or nearly 9% of gross New Zealand Superannuation payments. Some of this cost is attributable to the use of asset protection mechanisms. Around 100,000 New Zealanders now have trusts, and the numbers are increasing rapidly as an aggressive campaign setting out the need for them gets underway (Stone 1998). Financial planners urge us to become income and asset poor while retaining control over our wealth in order to qualify for not just the rest home subsidy but also the community services card. Many of the care-giving services that are funded through the HFA are means-tested by use of the community services card.

The Coalition Agreement 1996 promised to remove the income and asset test for geriatric care in a public hospital and the asset test for care in a private geriatric hospital. This promise was to be implemented on 1 October 1998, but never enacted. In its place, some more relaxed thresholds for income and asset testing were announced.

Even so, a single person without dependent children may retain only $15,000 with no exemption for the family home. Even though contributions for care are capped at $636 a week, it does not take more than a few years to deplete a modest estate. For a married couple, one in care, the home and car are exempt, couple's other assets must be run down to a low $45,000 before the subsidy applies. Any income earned by the spouse at home over a low amount is expected to be used to pay fees, with a quite inadequate adjustment for other dependants. A non-working spouse whose husband or wife is in long-term care may see the means by which a secure retirement might be achieved, fast disappearing.

The income and asset tests have been developed for a past time, by a department that needs to take no account of the impact on saving or the big picture interactions. The issue also appears to be placed beyond the scope of taskforces. But the conundrum is this, the longer it is in place, the more evasion there will be and the higher the contribution required from other taxpayers, the more downward pressure there will be on the level of the pension.

I am not suggesting the long-term care social insurance schemes of countries like Germany, or the Medicare type levies being talked about in Australia would necessarily be appropriate here. The issues are complicated.

A direct contribution from individuals for their long-term care will always be required and is a reason why people should be expected to save for their own retirement. Nevertheless there is a very strong case for paying for the long term care of the elderly much more equitably than is currently the case.

Private pensions are an obvious source of income for long term care; they cannot be gifted away or be hidden in trusts. They provide the valuable insurance function of transferring the costs of old age care from those who live longest and hence are more likely to need care to those who die young.

But private pension provision in NZ occupational schemes is now the preserve of a relatively small fraction of the working age population. Without government intervention to secure the social advantages of pensions, they are likely to continue to decline in importance in the retirement income mix, while the direct investment in assets and trusts increases. In this regard New Zealand is regarded a quite odd in international circles where the value of pensions is more appreciated.

To sum up: The New Zealand system for pensions is simple, egalitarian and unique. The retired have not been conspicuous in the population to date experiencing difficulties because of inadequate income. This achievement may be regarded as a real success story. Nevertheless the future is looking bleak, just when we need it to be certain and secure. It leaves the baby boomers casting around for ways to best protect themselves, to the detriment of the whole. The conundrums require a broad vision. At very least I believe a non-political process such as the Accord provided must be re-established, and equitable funding arrangements for long-term care must be found.

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