The Press SATURDAY, OCTOBER 13, 1973. The superannuation scheme

Press, Volume CXIII, Issue 33355, 13 October 1973, Page 14

The Press SATURDAY, OCTOBER 13, 1973. The superannuation scheme

The New Zealand superannuation scheme, soon to be debated in Parliament, will differ in some significant respects from the scheme outlined in the White Paper produced only five weeks ago — and will be barely recognisable as the scheme promised in the Labour Party’s “ Election Manifesto ” 12 months ago. The party’s promises on “ social “ security monetary benefits ” include an undertaking that a Labour Government will “ establish a “ comprehensive wage-related contributory super- “ annuation scheme. ” Later elaborations of this pledge commit the Government to providing pensions which will rise in sympathy with a special cost of living index.

Those who will be most affected by the scheme — today's schoolchildren and the younger members of the labour force, who can expect to contribute to the scheme throughout their working lives — have barely been consulted. Their elders in Parliament and among the interested parties which will be making representations to the select committee to study the bill have a heavy responsibility to the rising generation. Do today’s youngsters want an income-related, inflation-adjusted pension in their old age, financed by a compulsory levy on their earnings throughout their working life? If so, is the scheme which the bill will outline the best way of providing it? An article printed in this issue must raise serious doubts on both these scores. Mr D. F. Barker, a leading actuary, has produced Tome figures which will startle the layman: on the assumptions stated in the White Paper a man who starts work at 54500 a year will be earning more than $78,000 a year when he retires. His contributions to the superannuation fund would entitle him to a fixed pension, according to Mr Barker, of $30,100 — $2500 more than the pension payable to an executive who retired at the same age, when he would have been earning nearly twice as much as the “ average “ male ” worker.

Astronomical though these sums may seem today, they must be accepted as authoritative estimates, based on the examples and assumptions in the White Paper. They should not be read as forecasts of any individual’s wage, salary, or pension; for those amounts will vary according to the rate of wage inflation over the next 40 or 50 years and according to the individual’s work record in New Zealand. The examples illustrate an important principle not readily apparent to the layman — or, evidently, to those responsible for the Government’s superannuation scheme — a rate of wage inflation equal to the return on invested funds ensures a smaller pension to the man who makes a high Income late in life than to a man who makes a modest income throughout his working life. So much for the “ wage-related ” pensions promised by the Labour Party in opposition. Mr Barker also calculates the cost of providing for a 4 per cent annual increase in pensions, related to the cost of living. (In passing, it should be noted that the 4 per cent rate of inflation assumed in the ■White Paper is very modest by recent standards.) A person whose initial pension was $l7BO, for instance, could have been offered a flat pension of about $2600. How many people would prefer to retire on the annum, to a flat pension at the higher figure? But the lower figure, to be increased by 4 per cent per Government’s scheme does not give them the option; they must start at the lower figure. Nor, as Mr Barker points out, does the Government’s scheme offer the young woman leaving work to be married the option cf withdrawing her savings from the fund to help set up home at a time when her modest contribution to the fund might still yield a useful lump sum.

Much more will be heard of these actuarial problems when the select committee begins hearing evidence on the bill’s proposals. Up till now, most of the protests about the Government's scheme have come — not surprisingly — from members of existing schemes. Many of these objections are well founded. In the last year Government spokesmen have given many assurances that the contractual rights of members of existing schemes will be protected — a promise which was also made in the White Paper last month. The White Paper reduces the lump sum which a State senant may withdraw from the Government Superannuation Fund. Members of private schemes which do not meet the Government’s criteria and who decide to “stop” their schemes will be allowed to continue to contribute to their present schemes — but the amounts of their contributions will be “ frozen. ” Many private schemes provide for 5 per cent of members’ salaries to be paid into their provident funds, so that as their salaries increase so do their contributions — and their employers’ subsidies. A 25-year-old member of an existing scheme whose contributions are frozen at their present level would receive, on retirement, thousands of dollars — perhaps tens of thousands — less than he could otherwise have expected. The pension he will receive instead — from the State scheme — will, in theory, compensate him for this loss. Even if it does, he has lost the option which was open to him when he joined his employers’ scheme: of spending or investing his lump sum on retirement. By taking away this option has not the Government interfered with the contractual rights of members of existing schemes? Objections in principle, and in detail, to the bill are numerous and substantial. They raise serious doubts that anything worth while can be salvaged from this bill. One critic of the scheme, Mr L. V. Castle, reader in economics at Victoria University, maintains that higher social security benefits could accomplish more equitably and more certainly the Labour Government’s professed aim — “ benefits *’ should be sufficient to enable beneficiaries to live in ” dignity and comfort. ” After the select committee has heard the objections to the Government s bill, the Government may well decide that Mr Castle’s suggestion is more acceptable. At least, the Government should delay the implementation of the scheme until after the next election. The implications of a single sentence in the 1972 manifesto cannot have been appreciated by the electorate — or probably by the Labour Party policy-makers — at the time. Certainly the Government cannot pretend that it has a mandate to force this costly, inequitable, bureaucratic measure through Parliament during this term.