Superannuation

Like many of you I was fascinated both by the common sense suggestion of raising the superannuation age to 67 while removing disincentives to taking up annuity products – a suggestion said to save taxpayers around $100 billion by 2061 – and by the knee-jerk reactions to the common sense proposal to address what is a growing albatross round the neck of every taxpayer.

The idea that 65-year-olds must leave work and get paid for the rest of their lives by other taxpayers is immoral, demeaning, and ultimately unaffordable; and something has to be done. It is a failed experiment – a collapsing pyramid scheme that is costing taxpayers around one-sixth of what Inland Revenue extracts from them each year. The report by investment services company Mercer doesn’t go anywhere near far enough, but it does at least state the obvious:

      Consulting services company Mercer says the double whammy of an ageing population [see Bernard Hickey’s chart at right] and the global economic crisis highlights the urgent need to address the issue of retirement saving, and reduce reliance on New Zealand superannuation . . . [*}

True, all too true. Add to that double whammy another two-base hit: the diminishing number of under-65s in the future who will be expected to pay for it all [see below right].

      "The solution to our retirement savings conundrum [says Martin Lewington, head of Mercer in New Zealand] rests in both growing the economy - ultimately increasing the size of the funding pie - and addressing the social and welfare issues associated with an ageing population and ensuring all New Zealanders can live comfortably in retirement." 
    "It's time for the government to take decisive action and balance the politics in the current debate with what's ultimately best for New Zealand, particularly in regards to the 'hot potato' issues such as raising the eligibility age for NZ Super."

All very sensible, yet barely even radical enough to make the difference that’s needed -- which is no doubt why the government dismissed the idea without consideration. “In my view New Zealand super in its current form is affordable,” sniffed John Key, giving his best impersonation of King Canute holding back the retirement tides by his ability to fake reality. “I've made it quite clear,” he confirmed, “that it would be my intention to resign from Parliament if I broke that promise I made to New Zealanders."

All the better – that’s a two-for-one deal I could sign up for!

But in the meantime, while the government’s policy is to fake reality and shut down debate, even the Mercer proposal barely even makes a start on this problem which isn’t going away, and isn’t getting any smaller.  Within the next forty years New Zealand will move from a position of having 1 in 10 people over age 65 to 1 in 4 people over 65. 

That’s a pyramid scheme with too many blocks missing.  Holding your nose and stamping your feet isn’t going to make that problem disappear with the next tide.

And given that the “decade of deficits” promised by Treasurer Bill English is mostly needed to keep the welfare gravy train going, of which the lion’s share is the bill for the retired, we should see every new tranche of borrowing needed to fund the shortfalls as a new and additional government programme.  One we can’t afford.

We already face the prospect with the Government Superannuation Fund of the government taking a larger and larger share of local companies.  And we now face the prospect of watching it throw away its your money away on local ‘PPPs’ instead of genuine investments.  How much more difficult do we have to make it before we finally face reality and realise that the concept of a twenty-to-thirty year taxpayer-funded retirement is unsustainable?

It’s not like it’s too difficult to sustainably and painlesssly wean the country off this albatross.  Take George Reisman’s simple suggestion for reforming American Social Security for example**, which I’ve paraphrased slightly to give it a local flavour:

    First, following a period of two to three years to allow time for necessary adjustments to be made, immediately raise the retirement age from 65 to 70.
    This, of course, would be a major disappointment to everyone who had counted on starting to receive a pension sooner. Fortunately, there is a way to give these people a substantial form of relief, which would go a long way toward alleviating their hardship. That is, at the same time that sixty-five year olds are refused a pension, enact for their benefit a “senior citizens' employment-income tax exemption” in the amount of, say, $90,000 per year. . .
    The far greater part of the taxes thereby waived for these seniors on their income derived from employment would be taxes the government would never have collected in the first place, since most of the seniors would not have been working otherwise. The elimination of the government's payment of pensions to this group would far outweigh any loss of revenue from those sixty-five year olds who would have worked and paid taxes on their incomes even in the absence of the rise in the Social Security retirement age.

Which might even be enough to allow a similar exemption for all over-60s, which would give them a chance to prepare.

    This income-tax exemption should be extended and enlarged year by year until it embraces everyone in the 65 to 69 year-old age group. And, of course, it should be progressively increased from year to year to keep pace with rising prices and rising wage rates. Indeed, it should eventually be extended to apply to everyone 65 years old or older. In this way, the years remaining in life past today's customary retirement age might become truly “golden years” for millions of people, who at last would be freed of the burden of income taxes on their earnings derived from employment.

Who would be prepared to speak against freeing up that particular burden?  But let’s keep going:

    The retirement age of 70 should be retained perhaps for as long as fifteen years, to make it possible for all workers aged 55 and over at the time of its enactment to take advantage of it. Thereafter, however, the retirement age should be gradually increased further, to 75, over, say, a twenty-year period, rising at the rate of one calendar quarter for each passing year. Thus, workers aged 54 at the time of the reform's enactment would be eligible for social security at the age of 70 ¼, while those aged 35 at the time of its enactment would not be eligible until the age of 75.
    The system should accept no new pension recipients after the end of this twenty year period. In other words, it would be closed to workers 34 years of age and younger at the time of the reform's enactment. These workers, who would remain permanently ineligible, would all have ample time to make their own provision for the future. The superannuation system itself would progressively decline and ultimately disappear as its pensioners passed away.

A relatively painless way to accomplish the necessary reform.  But there’s one more thing to be done to ensure that no new impositions are imposed on anyone:

    The government's very considerable savings from reduced pension obligations over an initial phase-out period totaling almost forty years from start to finish, should be earmarked for tax reductions for workers who will never be able to enter the system, i.e., in the above scenario, workers aged 34 and less at the time of the reform's enactment. As these workers advance in age, new workers will be entering the labor market. There will thus be an increasing number of workers to bear the burden of the Social Security system's final phase. This will permit Social Security tax rates to be steadily reduced on this group, until they disappear altogether.

Reisman makes both the economic and the moral case to end government superannuation.

    The end of Social Security would be the end of something that should never have been started in the first place. The root of the system is the philosophy of collectivism, in that it forces everyone into a giant stewpot as it were, in which individuals are compelled to support the parents and grandparents of total strangers, whether they want to or not, in exchange for themselves later on being compulsorily supported by the children and grandchildren of total strangers.
    And, of course, standing between the generations has been a mass of politicians and government officials who have used whatever excess has existed of these forced exactions over current pension payments, to fund ordinary, current government spending.
    If a private insurance or annuity company had done such a thing and used its excess of premium income over current payments, to finance the consumption of its owners and employees, for whatever purpose, including the funding of charities and public works, the company officials would now be spending long terms in prison. For it would be very clear that they had embezzled the funds of their clients. Yet exactly that in essence is what politicians and government officials have done, on a scale far surpassing all private financial frauds combined over the whole of human history.

The creators of the world’s super scheme were bigger Ponzi operators than Bernie Madoff.  As US Circuit Judge Anderson said in the 1922 Lowell v. Brown case[*], the Ponzi scheme was “simply the old fraud of paying the earlier comers out of the contributions of the later comers.” So long as the number of late comers—you might call them suckers—grows, the fraudulent scheme has life.  When it stops growing, the reality is the same for us as it was for Bernie Madoff.

Confronting the reality of the situation is the first and necessary step to putting the unsustainable pyramid scheme to an end.

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* * In the final chapter of his book Capitalism: A Treatise on Economics, Reisman has a whole raft of similar transitional policies to pull the teeth of big government. And fortunately for you, you can read the whole chapter online.