By Bernard Hickey
Political leaders rarely risk telling voters they need to reduce or delay pleasure or consumption.
More often than not they reassure voters that they can have it all and that someone else will pay in some other universe or time zone.
That usually means politicians and today's voters do an immediately convenient but economically disastrous deal to consume the future now and punish tomorrow's voters.
This strategy of stealing from tomorrow's voters so today's voters can feel good is successful as long as the major political parties tacitly agree not to call each other's bluff.
It has worked for John Key until now. He could be confident of continuing to stonewall calls from experts aplenty for a rise in the retirement age as long as Labour did the same.
The announcement today from Phil Goff that Labour would make KiwiSaver compulsory from 2014 and would phase in an increase in the eligibility age for New Zealand Superannuation from 65 to 67 by 2033 appears to be the political equivalent of the Charge of the Light Brigade -- a gloriously admirable gallop to certain defeat.
This is not the first one (Labour's Capital Gains Tax plan was a training exercise for Goff's Light Brigade) and it must be making John Key either thank his lucky stars or wonder whether he's missing something.
The opinion polls at the moment showing Key romping to victory suggest a bout of short term electoral thinking will put paid to Labour's long term bravery.
Or will it? Will Labour's decision to call Key's bluff leave him looking like an irrelevant King Canute type figure trying to deny the inevitable.
Aside from the political theatre of it all, let's look at the details of the policy and whether it makes long term economic sense.
Labour is proposing a bunch of things that it says was estimated by the Savings Working Group to improve New Zealand's net debt position by 17% of GDP and reduce government spending on NZ Superannuation by NZ$100 billion over 30 years.
These changes to KiwiSaver would include:
1. KiwiSaver would become compulsory for all employees from 18-65 from 2014. Beneficiaries, students, self-employed people and those under a minimum income threshold would not have to join.
2. The employer contribution would increase by 0.5% annually from 3% to 7% over 9 years to 2022. The employee contribution, which is due to increase from 2% to 3% from April 2013 under National, would be reduced down to 2% under Labour. This would stay at 2% under the Labour plan.
3. The goverment's NZ$1,000 kickstart for new KiwiSaver members would be spread over 5 years and the member tax credits (currently NZ$521/year) would be unchanged.
4. Universal KiwiSaver would cost the government around NZ$370 million a year or a total of NZ$2.02 billion over the seven years to 2019/20.
5. Labour will keep the first home buyer's subsidy of up to NZ$5,000 per person (NZ$1,000 per year of saving). KiwiSavers are allowed to withdraw their contributions after three years in the scheme to buy their first home. So far 1,300 KiwiSavers have withdrawn NZ$12 million at an average of NZ$9,640 per person in the 9 months since this was allowed on July 2010.
6. The age of withdrawal from KiwiSaver stays at 65, even though the NZ Superannuation eligibility age would rise to 67 by 2033.
7. Labour would review the default KiwiSaver fund provider arrangements, including fees and disclosure. It may offer the option of saving in government guaranteed bonds.
The changes to NZ Superannuation would include:
1. The age of eligibility would increase from 65 to 67, rising at a rate of two months each year between 2020 and 2033. This would save NZ$100 billion in government pension payments over 30 years, Mercer has estimated.
2. There would be transitional assistance for those unable to keep working after 65, with payments at the same level of the pension.
3. Labour would keep NZ Superannuation payments for a couple at 66% of the average wage.
The changes to the government payments to the NZ Superannuation fund (Cullen fund) would include:
1. Labour would resume government contributions to the NZ Superannuation fund in 2012/13 with an initial contribution of NZ$750 million a year, rising to NZ$2.4 billion a year by 2015/16.
2. This would contribute NZ$5.5 billion more than under National's plan, which is to resume contribution some time after 2015/16. They were suspended in 2009. Labour said its plan, including investment returns, would mean an estimated NZ$12.8 billion extra would be in the fund to help pay for extra cost of retiring baby boomers. The cost to the government of the ageing workforce increases the NZ Super costs to 8% of GDP by 2050 from 4% now. Labour said its changes would limit that cost to 5% of GDP.
The pros of these policies:
This goes some way to limiting the weight of debt and contingent liabilities (health and pension costs of the baby boomers) piling up on future generations.
John Key's guarantee that he would never change the retirement age or payout rate from 65 and 66% respectively while he was Prime Minister was one of the most short-sighted and irresponsible things he has ever said.
Comments he made recently in parliament about not needing to worry about the government's finances after 2025 reinforced his apparently short term view on this. See Alex Tarrant's October 4 article.
Key was asked by ACT MP John Boscawen whether New Zealand should raise the retirement age.
The government was comforable that the costs imposed by the retirement age, which were modeled out to 2025, were affordable, Key said on October. "That's about as far out as we need to go," he said. Key will be 65 in 2026.
Labour is biting a very tough bullet on this and taking a longer term view. Good on them. It says it would add an extra 730,000 members to KiwiSaver, adding to the 1.8 million already in the scheme and essentially democratising this type of investment in assets other than the family home.
This would increase the size of the savings pool, at least some of which would be invested in New Zealand businesses and infrastructure.
The cons of these policies:
There is a risk a significant ramping up of KiwiSaver funds under management would increase the amount of profits and bonuses for fund managers. One of the complaints with Australia's AS$1.3 trillion scheme is that it has created a generation of 'Macquarie Millionaire' investment bankers and fund managers.
Labour says it would regulate fees and charges hard.
Another risk is that savers are being forced to save in investment vehicles that may lose money. Labour says it could address that by ensuring KiwiSavers could invest in government guaranteed bonds.
Some also believe the fastest and most efficient way to improve national savings is for the government to quickly reduce deficits and start running surpluses, through government spending cuts and higher taxes. Labour says its plan encourages private foreign debt reduction, given the government subsidies are magnified by private borrowing.