When Labour launched their failed Three Waters scheme in 2021, which aimed to confiscate council water services and amalgamate them into mega-authorities controlled by Māori, one of the major concerns raised was over the financing of the scheme. The quantum of the proposed debt was eye-watering – some $180 billion was to be borrowed. Their figures were made more attractive because the repayment of that debt fell outside of their 30-year cash flow projections!
This controversial funding arrangement was likened to a Ponzi scheme – one day the chickens would come home to roost and the money would have to be paid back.
As Frank Newman outlined at the time:
To explain how the government has made the figures look compelling one needs to understand what a ‘Ponzi’ scheme is. In essence, it is a deception that generates returns for earlier investors with money taken from later investors.
This is essentially what the government model does. It is shifting the water rating burden from current ratepayers to future ratepayers by accumulating debt that it assumes does not need to be repaid.
It’s a fake reality. Borrowing to fill the shortfall can only go on for so long – there will eventually be a day of reckoning – as there is with every Ponzi scheme.
Fortunately, in the end those concerns did not need to be addressed, because the scheme was axed by the new government.
However, it turns out that New Zealand has had something similar running for decades, as this week’s NZCPR guest commentator, former Labour finance minister and ACT Party founder Sir Roger Douglas explains:
We started down the wrong path almost 50 years ago in 1976 – when the National Government repealed Labour’s 1974 New Zealand Superannuation Act and replaced it with a Pay-as-you-go system. We currently operate under a ‘Pyramid Scheme’.
In 1976 the cost of retirement was shifted onto future generations – in other words, our children.
It is these liabilities, created by the unfunded Pay-as-you-go system, that is placing today’s unsustainable burden onto all of us. Hence the numbers in Treasury’s long-run projections paper.
The forecasts in that Treasury paper predict that if we carry on funding super and healthcare for retirees in the way we do currently, by the year 2061 New Zealand’s operating deficit will rise to an unsustainable 13.3 per cent of GDP, and net government debt will escalate to 197 per cent of GDP.
In other words, if nothing changes, New Zealand will be bankrupt by 2061 – or before.
Sir Roger explains that over the years, politicians have essentially misled the public about the country’s financial position by refusing to provide for the future cost of healthcare and superannuation for retired New Zealanders in the Crown’s balance sheet.
He makes the point that for this year alone those accrued retirement liabilities would amount to almost $40 billion dollars. He says if a private sector company failed to record an item of this magnitude in its books, the directors would end up in jail!
The cause of the problem we face is, of course, the inexorable rise in expenditure on super and healthcare as our population ages. While we currently have around 800,000 retirees, by 2061 this number is expected to approach two million. At that time the number of workers per pensioner will fall from around four to one today, to just two to one.
The reality is that the forecast rise in government expenditure on superannuation, healthcare and education over the 40 years from 2021 is in the region of 8.1 percent of GDP or $120 billion.
It is this unaffordable increase in government expenditure, from 2021, that is pushing New Zealand into the massive, yearly fiscal deficit position predicted by Treasury. These deficits will incur ever-larger interest costs, adding further to New Zealand’s financial woes.
So, what can be done to rescue the country from this mess?
Essentially there are three options for dealing with the escalating costs of super and healthcare for retirees. The first two approaches involve increasing funding to cover the escalating costs, whilst the third option involves changing the system itself.
Firstly, taxes could be raised to pay for the increasing costs of super and healthcare for retirees.
This is an option that Labour appears to favour as they once again consider introducing a capital gains tax as a key party policy. In contemplating this, they seem to have forgotten the warning succinctly articulated by a former Labour Prime Minister David Lange, who said, “A capital gains tax policy is one that is likely to lose you not merely the next election, but the next three.”
In fact, the last time a capital gains tax was recommended – by Labour’s Tax Working Group in 2019 – the public response was so hostile that Jacinda Ardern was forced to distance herself as far from the policy she had unilaterally promised to introduce in her first term of government as she could, by pledging there would be no capital gains tax while she was prime minister.
A second option to fund the future cost of retirees would be to increase tax revenues through economic growth. This is the coalition’s favoured approach. But the challenge they face is that funding demands are increasing at a rate that would require spectacular growth on a scale not seen before.
Experience from high-growth economies like Singapore suggests the only way to seriously increase economic growth is through low interest rates, low taxes, and less regulation.
Increasing productivity is also a key factor, especially as New Zealand currently sits near the bottom of the OECD on this vital economic measure: Kiwis work around 15 per cent longer than the OECD average to produce about 20 per cent less output per person!
While the coalition is moving to improve economic opportunity, they will need to be much more ambitious and courageous if they are to transform the country into a high growth economy.
A third option to address the retiree funding problem is to change the system itself – and there are three basic ways to do this: increase the retirement age, reduce the super entitlement, or fundamentally transform the way retirement healthcare and pensions are funded and delivered.
National and ACT have both signalled their intention to raise the age of retirement. While Labour has advocated raising the age to 67 in the past, their present position is to keep it at 65.
And as far as superannuation entitlements are concerned, they have been adjusted many times over the years – especially switching between indexing pensions to wage increases or to inflation. Pensions were also means tested in the 80s through a surcharge, but this proved to be so unpopular that it is unlikely any political party will consider it again as a viable future option.
With raising the entitlement age the only policy change that’s being seriously debated at the present time, very little attention has been given to investigating alternative solutions to the problem.
As a former finance minister, however, Sir Roger Douglas views things differently.
With no one presently in government with the foresight to recognise that the problems associated with future retirement funding can be solved if the system is changed from a pay-as-you-go scheme to a contributory scheme that takes advantage of the power of compound interest, he’s calling for fundamental change.
Compound interest is, of course, what drives the massive increases in the value of long-term investments.
It’s the magic of compound interest that would have led to the value of Labour’s 1974 New Zealand Super Fund reaching $500 billion – if it hadn’t been axed by Prime Minister Robert Muldoon.
The chief executive of the KiwiSaver fund Simplicity, Sam Stubbs, described the decision to cancel the fund as one of the worst ever made by a New Zealand politician:
Few economists would disagree that Robert Muldoon’s decision to cancel the fledgling New Zealand Superannuation Scheme was probably the worst financial decision ever made. Why? Because had it continued, New Zealand would now be one of the richest countries in the world. We would have at least $500 billion saved in our own individual retirement accounts.
To put it into perspective, the value of the 1974 scheme would have far eclipsed the combined value of the New Zealand Super Fund at $79 billion, KiwiSaver at $110 billion, and the stock exchange at $165 billion.
Sir Roger believes that if every New Zealander was helped into their own retirement savings account in their own name, then over the decades, not only would their personal investment funds grow to be worth millions of dollars in retirement, but the amount the government would need to spend on retirees would reduce so substantially, that this country could end up with one of the lowest tax rates in the world.
Imagine how profoundly that would change our future prospects as a nation – it would transform us from our current low-growth, falling living standards path, into one of the world’s most prosperous and desirable nations.
Underpinning this new way of thinking is the concept of seamlessly redirecting a portion of the money that individuals would pay to the government in income tax directly into their own personalised retirement savings accounts so they can earn compound interest.
Sir Roger demonstrates that regular contributions over a working lifetime would accumulate into a substantial sum that would meet the financial needs of a retiree.
But he doesn’t stop there. Having watched the quality of social services delivered by state institutions decline over the years he believes transformative change is needed there too.
There is no disputing the fact that our health system is teetering on the verge of collapse, our education system is struggling to even get kids to turn up at school let alone excel, and our welfare system is creating entrenched dependency instead of independence from the State.
Having observed how other countries ensure quality services through competition, Sir Roger’s answer is to empower New Zealanders through choice.
He’s proposing that a further portion of the tax individuals pay should be channelled into personalised social service provision.
Individualised health savings accounts would fund universal health insurance cover for treatment with a provider of choice in either the public or private health system, along with funding to cover other incidental medical costs.
For those with dependent children, education vouchers would be available to fund their education provider of choice.
And tax-funded risk cover would ensure that income support would be available if someone became ill, had an accident, or lost their job.
Sir Roger believes that enabling Kiwis to choose the social service providers that best meet their needs would result in a substantial lift in the performance of public and private providers as well as a significant improvement in service delivery.
Just as the present KiwiSaver scheme enables workers to accumulate funds for their retirement through contributions made by both employers, employees, and the government, so the universal savings scheme Sir Roger is advocating will allow all New Zealanders to not only save for their own retirement, but to benefit from universal health and risk insurance cover, as well as funding for school choice, through redirected taxes that result in vastly improved social service outcomes.
With the government setting up personalised accounts on the birth of a baby through a $100 deposit to kick things off, as well as acting as ‘insurer of last resort’ for those individuals unable to save sufficient in their individualised savings accounts, this scheme has the ability to transform our future – if politicians have the vision to make it happen.
I will leave the last word to Sir Roger:
Savings held by individual New Zealanders, for their future health and income needs in retirement, would exceed nine trillion dollars by 2074, under my policies. Compared to unfunded liabilities of five to six trillion dollars, if we stay with the current pay-as-you-go-based welfare system, favoured by Treasury and all of New Zealand’s current political parties.
This article was originally published by the New Zealand Centre for Political Research.
