A Submission to the Inland Revenue Department on what sort of structure the tax system might need to take on to be suitable for the future, given, “The long-term fiscal pressures and current tensions in our system”.
PART ONE: BACKGROUND NOTES
SETTING OBJECTIVES FOR A WINNING MEDIUM- TERM STRATEGY FOR NZ
– We can turn New Zealand’s current problems into opportunities, if we define what we need to deliver by say 2035, and how we intend to do it.
– A single, measurable, overriding policy objective is suggested as the criterion which integrates a total 5-15+ year program.
– I highlight the fundamental linkages, between the key issues and areas, which are key to solving the problems we face in New Zealand today.
– In order to ensure policy credibility and success, my paper is based on a framework that exploits those basic linkages.
– My paper is a broad description of an approach to policy which would work successfully in practice and ensure delivery, if implemented in an appropriate way.
The second part of my paper spells out detailed objectives for 2035, and beyond, and the key policies needed to achieve them.
– What then are the key issues facing New Zealand at present time: they include general health, education, retirement super and health, welfare, tax, debt, housing, race, unemployment, productivity and the economy.
– New Zealand cannot win, on any of these issues by seeking short-term answers to our problems over the next 12 months, or even the next 24 months.
– None of these issues can be resolved, unless we place them in a medium-term context, of around 4 years, with retirement policy needing an even longer time period.
– Because the issues set out above are fundamentally linked, and the people of New Zealand know it, we cannot win either if we look at each area in isolation, as New Zealand’s politicians have been doing for the past 30 years. Unfortunately, the Inland Revenue Department in their paper, appears to be taking the same, one-issue-at-a-time approach to their project as well.
– Poor parenting, lack of motivation, inadequate skills, alienation, unemployment, and delinquency reinforce each other.
– Low income, inadequate housing, poor health, lack of opportunity, debt and lack of economic growth are all part of the same syndrome.
WHAT THEN IS THE TASK THAT FACES NEW ZEALAND OVER THE NEXT 5-10 YEARS
– First and foremost, we need to encourage New Zealanders to think about where they want to get to over the next 5-10 years.
– To achieve this objective, we will need to have a program, about goals, objectives, and dreams — and practical common-sense delivery.
We will also need to understand that New Zealand cannot win by trying to defend the past 50-60 years. New Zealand’s performance in total over that time is now seen as confused and totally unsatisfactory for today’s requirements.
– New Zealand can only win if it establishes a great policy agenda, one that is seen by the people of New Zealand as having the ingredients in it, that are needed to be successful.
While IRD’s paper has some interesting facts and raises some interesting questions, better than Treasury’s recent efforts, it falls somewhat short of what is required, in part because the authors seem to believe important issues are outside the scope of their mandate.
Given New Zealand’s current economic and social situation, what it needs is an active medium-term strategy, which aims to unite as many New Zealanders as possible behind it.
A STRATEGY TO APPEAL TO ALL NEW ZEALANDERS
– New Zealanders as a whole are desperate to see a real recovery, not the phony ones they have been subjected to by some politicians (eg John Key: “New Zealand is a rock star economy”).
– The simple fact is that the social costs of very low growth, over a period of several decades has damaged the security and well-being of people at every level of New Zealand society.
– While the costs, have hit the disadvantaged harder than anyone else, their reaction to it has had an impact on everyone.
– Deep down the public know growth is the only way to avoid an ongoing erosion of living standards and wellbeing – and they look to the government to provide the policy leadership needed.
– Growth of necessity involves a reduction of waste, privilege (tax privileges for example), inefficiency and avoidable burdens placed on those who create and contribute to growth.
– In these circumstances, Governments need to be seen to be tackling the fundamental problems of our society. That is, tackling the root causes of dissatisfaction at every level of our society, rather than dealing piecemeal or short-term with the symptoms, as New Zealand has been doing for most of the past 60 years.
In order to solve our problems, New Zealand governments, will in the future need to focus, without shame, guilt or confusion on what they want to deliver to voters across the whole social and political spectrum. The government who-ever it is will need to tell voters the truth, the whole truth, about their country’s current economic and social situation. They will need to stop polling, in order to be able to tell voters, what voters want to hear as Clark, Key, Ardern and others have been doing for the past 25 years.
WHAT KEY ISSUE COULD UNITE NEW ZEALANDERS?
– The issues defined on page 1 of this paper, are central to New Zealand’s recovery, as a nation, because they react negatively on rich and poor alike.
– Those issues focus around the plight of the disadvantaged and the adverse impact their situation has on the rest of the public.
– The only way, both sides of the equation can be satisfied is if we set ourselves one single overriding objective, which is central to achieving our economic and social objectives and solving New Zealand’s growth issues at the same time.
My suggestion:
“REAL SUSTAINABLE GAINS IN LIVING STANDARDS AND OPPORTUNITY FOR ALL NEW ZEALANDERS,
WITH PARTICULAR EMPHASIS ON THE DISADVANTAGED”.
– Within that framework, we could integrate all our thinking. On growth, investment, jobs, tax, security, and social policy, in areas like education, retirement, health, housing and social harmony.
– If all our programs, once developed were referred back to that objective, New Zealand governments could, if they chose to do so, act with purpose, conviction and commitment in the interests of all of us.
The Audit or some other specialist office, should be charged with the job, of telling the public when the government’s policies were likely to fail to help us reach our central objective.
(See Appendix One on how New Zealand got into the mess we are in today).
THE POLICY STEPS – REQUIRED TO FIX THE FINANCIAL MESS NEW ZEALAND IS IN TODAY, ARE THE SAME AS THEY WERE WHEN WE FORMED ACT IN 1994
This paper builds on some of my earlier papers of the last 30 years, and Act’s opening publication. Papers which have, proved to be 100% right, in their call for major changes to the way we fund welfare in New Zealand. As demonstrated by Treasury’s long run fiscal projections for 2021-2061. Treasury predicts on a same trend basis, an operating deficit of 13.3% off GDP by 2061, with net government debt of 197%. That is, New Zealand will be bankrupt by 2061, or before (see Treasury’s projections for 2021-2061 in Table Three below, as a percentage of GDP – from page 19 of their report).
These numbers are driven, by the 8.1% of GDP (120 billion dollars), increase in government expenditure, for superannuation, healthcare and education over the 40 years from 2021.
It is this increase in government expenditure, from 2021, that is pushing New Zealand into the massive, yearly fiscal deficit position predicted by Treasury in their paper. These deficits result in large increases in the interest costs of government each year, adding further to New Zealand’s deficit position. (See Appendix one, for details about how NZ got into the mess it has).
Unfortunately, Treasury’s ideas to get out of the mess NZ is in, can only be described as are old hat, (increase taxes and cut benefits) policies. Policies which would merely kick the can down the road, for a while.
Whereas my policy approach would not only fix the problems Treasury highlights, it would make New Zealanders better off as well. As we will see, the magic of compound interest will do it for us.
MY POLICIES TO REDUCE FUTURE DEFICITS, INCLUDING A REDUCTION IN KEY GOVERNMENT EXPENDITURE AREAS BY 50% (SUPER, HEALTHCARE) AND INCREASE PRODUCTIVITY AS WELL
STEP 1: Involves putting in place the policy, I have advocated for 30 years, of moving away from our existing pay-as-you-go system to an individual saving-based retirement system.
STEP 2: Involves revising my earlier estimates, about how much a person needs to save each year during their working years 18-65, (possibly 68 by 2060) in order to have enough capital, to cover their income and healthcare needs in retirement.
I used Treasury’s 40-year forecasts, to calculate, what the average cost of superannuation and healthcare was likely to be beyond 2070. I then calculated how much New Zealanders would need to save in order to have enough capital to meet their welfare needs in retirement.
My answer was they would need around $2.5 million each, for their super income and their healthcare needs in retirement. The $2.5 million was based on the assumption that on average, New Zealanders would live for 20-21 years in retirement and earn 6%-6.5% on their capital.
Given that few New Zealanders will work every year for the full 50 years (18-68) of their working lives, I decided to have a higher saving level per year than theoretically needed. I decided on a figure of $6,000 per year, adjusted for wage and health inflation at 3.5%, with fund earnings at 6.5% a year. (See Table One below)
I also decided that the $6,000, to be saved each year by working New Zealanders between the age of 18 and their retirement age, would be made available to them by way of personal income tax reductions.
To do this the first $62,000 of any income earned would be made tax free, reducing New Zealanders’ personal income tax by $10,820 a year: $6,000 would go into an approved retirement savings account of their choice, with $4,500 of what remains going into their personal healthcare account (see tax & health policy details below).
TABLE ONE
Note: While a retirement account will be opened at birth in a child’s name by the government with a deposit of $100, this table does not take into account any savings before the age of 18.
SAVINGS FOR RETIREMENT- (NOTE: around 70% goes to Super & 30% for Health Care)
No years Deposits Income earned Total Savings Estimated Super at
at 6.5% retirement retained
5 years $38,000 $ 8,000 $46,000 98.5%
10 years $76,000 $32,000 $108,000 97.5%
15 years $122.000 $80,000 $202,000 95%
20 years $176,000 $167,000 $343,000 90%
25 years. $240,000 $308,000 $548,000 84%
30 years $316,000 $530,000 $846,000 70%
35 years $406,000 $868,000 $1,274,000 60%
40 years $514,000 $1,370,000 $1,884,000 42%
45 years $641,000 $2,109,000 $2,750,000 15%
50 years $800,000 $3,200,000 $4,000,000 – – – – – –
NOTES TO TABLE:
– Note, the miracle of compound interest, that takes place over the 50-year period the table covers, and the details, of how it compounds and grows year on year.
– Note also, how the magic of compound interest, comprises 80% of a person’s savings by year 50, leaving an individual’s contributions providing only 20%. In other words, compound interest in the future pays for 80% of a New Zealander’s welfare needs in retirement, with individuals paying only 20% – not the 100% they pay today, under the current pay-as-you-go system.
– Note also the slow decline in the percentage of the existing pension paid out under the new system, during the early years of the new saving system.
– Note for example, that after 25 years of contributions to the new system, a retiree would still be getting around 84% of the existing super pension, plus having a large lump sum of $548,000 to go with it.
– Note that most New Zealand workers, in addition to their welfare super savings (around $2.5 to 4 million dollars by 2074) will also have a Kiwi Saver style account in their own name and/or an alternative saving approach, which could easily equal their welfare super savings if individual New Zealanders wanted it to.
Lower income earners will be incentivised to save in a Kiwi Saver style account if they can.
– Why is it, that despite the above information, Treasury, along with all of New Zealand’s existing political parties, favour cuts to the existing superannuation pay outs and higher taxes across the board, rather than a saving based option, which would maintain their retirement benefits – at least at current levels as outlined above? A lot of New Zealanders believe, holding onto their powers is the main reason politicians take the stance they do.
– In the case of Treasury, their approach comes straight out of their standard play book, when faced with the kind of financial mess New Zealand is in today, they go straight to it – answer: cuts to benefits, and higher taxes as well. No imagination, whatsoever.
– In the case of New Zealand’s political parties, they are driven by mixed motives and incentives, as we will see.
ON THE LEFT: It gives them the opportunity to appear to be caring – keep super benefits in place and tax the rich to pay for it, by taxing capital gains, and increasing taxes on those earning $100,000+.
ON THE RIGHT: There is a total lack of imagination, about what can be done. National has already adopted Treasury’s approach of cuts to super and they will hope that this will somehow be enough.
Act, while agreeing with the policy to cut superannuation, would also adjust personal income tax rates in a way that would penalise hard working lower income earners, while rewarding high income earners.
Why is it, that none of New Zealand’s political parties, favour an individual saving-based approach to retirement, for health and income, despite the following facts:
– Savings held by individual New Zealanders, for their future health and income needs in retirement, would exceed 9 trillion dollars by 2074, under my policies. Compared to unfunded liabilities of 5-6 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.
– By year 2073, 220 billion dollars + or around $2,000 a week would be available for tax reductions (much of it already in place by that time under our policies) as a result of the reduction in government spending on superannuation and healthcare. New Zealanders paying their own way.
(See Table Two below, which outlines how the money, to pay for the tax reductions, costing 17 billion dollars in year one, will be found).
THE COST OF RETIREMENT SUPER AND HEALTHCARE – LOST REVENUE YEAR ONE
Cost year one: 17 Billion Dollars (2,833,333 workers X $6,000) by way of lower personal income taxes. See Table 2, below for details on how this cost to government is paid for.
TABLE TWO
YEAR ONE FIVE TEN FIFTEEN TWENTY THIRTY FORTY FIFTY
*Savings/tax
reductions
for year 17 20 24 30 36 80 150 280
HOW WILL THE REQUIRED SAVINGS BE FINANCED BY GOVERNMENT.
*Retirees
contribution to
their super 0.3 2 6 12 21 55 145 310
*Tax on savings 0.1 0.5 1 4 6 15 25 40
*Income earned
from Super Fund 4.0 5 4 5 4 5 4 5
Super Fund Capital not likely to be required
Asset sales Asset sales not likely to be required
Reduction in
size of govt 5 5 5 4 4 4 4 4
Reduction in
middle class
capture 4 4 4 4 4 4 4 4
Reduction in
corporate
welfare 4 4 4 4 4 4 4 4
High income
earners
contribution 2 2 2
Total 19.4 22.5 26 33 43 87 186 367
SURPLUS 2.4 2.5 2 3 7 7 36 8
A BRIEF OUTLINE OF THE SAVINGS IN GOVERNMENT EXPENDITURE, SET OUT ABOVE
– Reductions in the size of govt bureaucracy, staff numbers (for example, Education and Health Depts), a reduction in the use of private consultants, government grants to special interest groups.
– Putting an end to middle class capture, interest free loans, working for families for the higher income earners, energy payments, kiwi saver subsidies, free fees tertiary education, best start, kiwi build.
– Putting an end to corporate welfare, handouts, and tax breaks, provincial growth fund, film industry, forestry industry, other grants and subsidies, Callaghan Innovation fund etc.
– A high-income earners’ contribution, if needed, why? Because they have the most to gain by way of tax reductions in the future.
TAX POLICY TO GO WITH RETIREMENT SAVING SYSTEM AND OTHER POLICIES
Tax reductions, to fund individual savings for super and healthcare in retirement,
for workers aged 18-65 (with a possible move to 68 over 30 years, starting 2040)
PERSONAL INCOME TAXES
ZERO – personal income tax on first $62,000 of income: A TAX SAVINGS $10,820 per year.
– $6,000 of the $10,820 in personal income tax reductions, to go into an individual’s approved retirement saving account for income and healthcare in retirement.
(See Table 1 above, for estimated retirement savings each year for the next 50 years, along with the percent of government superannuation retirees could expect to still receive, on top of those savings).
$4,500 of the remaining $4,820, in tax reductions, would go into an individual’s healthcare fund, to help pay for any health costs incurred, during their working life, including a yearly catastrophic healthcare policy. (Paid for out of existing health vote).
Any money in an individual’s health account at their retirement date, to remain with that person, and be available to meet any healthcare costs they might have in retirement.
Thresholds to go up each year by the rate of inflation in each specified area, for example (wages, healthcare costs for retirement, and healthcare costs for those aged 18- 65).
OTHER PERSONAL INCOME TAX RATE CHANGES
– A flat 28% personal income tax rate, on any income earned above $62,000.
– A welfare tax levy – to the extent it is needed over the early years of the new system – equivalent to the same tax rates that apply today on income between $80,001 and $180,000 of 5%, (a combined tax rate of 33%: 28%+5%) and on income over $180,000 of 11%, (a combined tax rate of 39%: 28%+11%).
Any money raised by this welfare levy in the early years of the new system, would help pay for the education and other welfare costs, that New Zealand currently has.
OTHER TAX ISSUES
Cost of Tax Reduction Policy to the government:
Superannuation – $6,000 X 2,833,333 individuals = 17 billion dollars
Healthcare – $4,500 x 2,833,333 individuals = 12.7 billion dollars
How Paid For:
Superannuation – By a reduction in government expenditure of 17 billion dollars. (See Table 2 above)
Healthcare – By using 12.7 billion dollars of the existing health vote for that purpose. (Individuals spend their own money, and no longer have the government doing it badly for them)
OTHER TAX POLICIES – WEALTH TAXES:
While I do not support a capital gains tax as such, I would support, consideration being given to the idea of a wealth tax, provided it is linked to getting rid of company tax and other business taxes. (I advocated this approach to capital taxes 45 years ago: outcome – I was removed from the Labour Party front bench)
The change in incentives, from a policy of this nature, could, if done well, result in a massive increase in productivity. The policy would reward people who use their assets well, while penalising those who do not do so – the exact opposite to what we do today.
Example: Two farmers, both own a property, valued at 100 million dollars.
Farmer A is very productive and makes a profit of 15 million dollars after wages. He pays company tax of $4.2 million dollars, and tax on his wages of $200,000.
Farmer B is far less productive and fails to make a profit, and as a result pays no tax.
Both farmers had the same opportunity, A is successful, so we tax him hard. B is not successful, so we give him a tax holiday – in other words a free pass. That is the current system we have in place, is it fair? Or should we at least, have a look at an alternative system, like a wealth tax.
Under a wealth tax, both would pay the same amount in tax, let’s say 1%, of their capital – that is $1 million each. A would be $3.2 million better off, while B would be $1 million worse off. A is rewarded for his productivity and skills, while B has to get better or sell his farm to someone who is in fact better than he is.
Should we not at least examine this idea? (My 1980 Paper on the idea is available if required).
RISK COVER (Accident, Sickness, Unemployment)
Existing risk cover by government in the areas of accident, sickness and unemployment, will all be closed off from a specified date. A specialist organisation would be set up, with the sole purpose of winding down these three existing areas of risk cover. No new entrants.
Cover from the specified date, for the three areas of risk highlighted above, will be for income only, with healthcare being covered separately. (See healthcare policy for details)
RISK POLICY:
– Individuals will contribute, what they do today for ACC in year one, while employers will at least match the contribution made, by their employees.
Individuals will be covered, for an amount equal to the existing sickness benefit for them. (Individuals wanting a higher level of cover, will need to take it out for themselves in the private market).
– The employer and employee will determine where and with whom any risk insurance policy is taken out, this could include self-cover if that has been approved.
A government underwrite (if funds available are insufficient to cover any part of the first 13 weeks of being out of work,) will be put in place during the first two years of the new scheme.
An insurance policy to cover the next 143 weeks, will need to be put in place by the individual/employer.
A government underwrite beyond three years (i.e. 156 weeks) would be put in place.
WORKING FOR FAMILIES
Existing payment rates will be maintained, but will become part of the personal tax system as soon as possible.
POLICY:
An individual’s Working for Families weekly payments entitlement for the next year, will be calculated by the Inland Revenue Department, each year, between April and June, based on an individual’s income for the past financial year, April to March.
– A tax credit will be issued for each individual taxpayer, with copies going to both the individual and their employer(s).
– The employer will pay their employee, the taxpayer, the working for Family’s tax credit, due to them, each pay day for the twelve-month period, July to June.
– No adjustment to a working for family’s tax credit, apart from that relating to the birth of an extra child, will be made during the year to the amount paid.
– Nor will there be any end-of-year adjustment, even if, for example, if an individual’s wages went up by a significant amount during the year.
– New Zealanders hate getting a bill at the end of the year for any under payments that have come about because they earned more than was anticipated during the year.
– Note, an adjustment, will automatically come about anyway, when the IRD calculates the next year’s Working for Families tax credit.
HEALTHCARE
The key relationship, in the new healthcare arrangements, will be that of the individual and his local doctor.
GOVERNMENT INVOLVEMENT IN HEALTHCARE
The New Zealand Government’s central planning of healthcare, over the past 80 years has done little if anything that can be regarded as really good. It has simply, substituted politics for the marketplace. The system has wasted resources, and in the process has held back economic and social progress as well.
Under my proposed new healthcare regime, government activity in the healthcare industry would be limited to providing those goods the market is unable to provide.
The reduction in the health vote for administration would, as a result, be significant.
POLICY:
– The $4,500 healthcare tax credit mentioned above, would for most New Zealanders fund the cost of their catastrophic healthcare policy, that is, to cover any major healthcare event and leave something over. The money left over plus any interest earned on it, would go towards meeting any other healthcare costs, they might have at some time in the future.
– Individuals and families would be responsible for their healthcare costs up to 5% of their income, most of which would be covered by the tax reductions above for lower income earners.
– Additional tax reductions for families and the balance of any tax credit mentioned above, will cover a major part of any yearly healthcare costs, for families.
– The chronically ill would, on the advice of their professional medical advisor, be enrolled with a new health status authority, which would – along with an individual’s own doctor – take responsibility for meeting their healthcare costs and needs beyond what is normal for the average New Zealander.
EDUCATION
The New Zealand education department would be abolished. It has out-lived any usefulness it ever had a long time ago. Under the existing education department, education has been neglected and replaced with some form of weird indoctrination.
POLICY:
The education department will be replaced by a small number of specialist operating units.
1.An education monitoring and approval unit – whose function will be to approve the continuation of existing schools at the start of the new system, including their must-have prospectus, and any new schools that wish to enter the education market place.
They will also be responsible for monitoring schools that have been approved, including reporting on their performance yearly against their prospectus.
They will also be available, to advise the board of a school on the appointment of a new principal for the school, as required
2.An education property company – whose main function will be to provide any approved school, the property they need.
Maintain the school property in good condition and charge an appropriate rent for doing so. A rent that reflects its use as a school.
After 5-6 years of the new education system being in operation, a review of school property and how it operates will be undertaken, to see if the model of school ownership and provision is suitable.
3.An education voucher will be issued – to the parents of all children between the age of 2 and 19, by IRD.
4.Money not spent in any year will be carried forward – and could for example be used at some time in the future to pay for university or other training.
5.Two billion dollars a year would be set aside to meet the needs of children with special educational needs (in areas such as reading, maths etc because they have fallen behind, or the child with exceptional skills in various areas).
SUMMARY: GOVERNMENT PROVISION OF RETIREMENT WELFARE
Table Three: Current System Compared to Proposed New System – Cost Thereof
CURRENT PAY AS YOU GO WELFARE SYSTEM NEW WELFARE SYSTEM
Cost of retirement welfare (Super & Healthcare) Cost of retirement welfare to government
Year one 26 billion dollars 25.5 billion dollars – saving $0.5 billion
Year ten 46 billion dollars 37.8 billion dollars – saving $8.2 billion
Year twenty- five 100 billion dollars 58 billion dollars – saving $42 billion
Year forty 201 billion dollars 42 billion dollars – saving $159 billion
Year fifty 274 billion dollars 36 billion dollars – saving $310 billion
Note – Savings in government spending, will be available for tax reductions, from year 10 on at least.
What does the new system result in, for the areas of personal and corporate taxes?
Personal and corporate taxes, along with GST, would be reduced each year, after10 years of the new system, relative to what they will need to be under New Zealand’s existing pay as you go welfare system – if that system was kept in place.
The reason why taxes can be reduced each year after 10 years, compared to our current pay as you go system is the contribution each retiree will be making to their own retirement. The contribution each retiree will make at their retirement date will grow each year until the new system is fully mature in 45-50 years’ time.
For example:
– In year ten, 6 billion dollars would be available for tax reductions (63,000 retirees make a contribution of $90,000 each or $3,500 per qualifying taxpayer for the year)
– In year twenty, 20 billion dollars in tax reductions would be available (66,000 retirees effectively, making a contribution of $300,000 each or $29,000 per taxpayer for the year).
– In year 30, 50 billion dollars in tax reductions would be available (69,000 retirees make a contribution of $700,000 each or $29,000 per taxpayer for the year).
– In year 40, 160 billion dollars or $1,500 + a week in tax reductions would be available.
While in year 50, 300 billion dollars would be available for tax reductions, or 50% plus of government income including personal, corporate, GST and other indirect taxes, under the current pay-as-you-go system.
OTHER ADVANTAGES OF THE NEW WELFARE SYSTEM
– Savings available for investment held by individual New Zealanders for their future healthcare and income retirement needs, will exceed 8 trillion dollars by 2073.
– This compares with the unfunded government welfare liabilities of around 4-5 trillion dollars we will have, if we stay with the current pay-as-you-go welfare system. A system where we will have no individual retirement savings set aside to meet our health and super needs.
– Tax paid on the income generated by the 8 trillion dollars of savings in 2073, would amount to around 60 billion dollars a year, at a tax rate of 12.5%. This 60 billion dollars in tax revenue will help contribute to much lower personal and other taxes.
– Individual savings of most retirees beyond 2073 are likely to exceed 4 million dollars at their retirement date – couples, double the amount. (Assumption: a welfare fund of around 3 million dollars, plus a Kiwi Saver account or other personal saving around two million dollars).
Government spending on retiree’s healthcare and superannuation payments after 2073 would be limited to those who retired before 2070, with government payments, made for these items around 230 billion dollars lower than they will be if we stay with the current pay-as-you-go welfare system. Virtually no government spending on healthcare and super for the retired will be necessary after 2090.
Personal and corporate income tax rates by 2073 should be no more than 12.5% under the above scenario, that is, unless politicians are allowed to spend our money by the New Zealand voter. The question is, will we let them, or have we learnt our lesson?
IN THE END THE CHOICE IS ONE FOR TAXPAYERS AND THEIR ADVISORS TO MAKE
They can elect to stay with the pay as you go welfare system we have today and see their personal income taxes, at least double, over the next 30-40 years, and see their government retirement benefits fall by at least 25%, over those 30-40 years (Treasury policy).
OR
They could support a saving-based welfare system similar to the one outlined in this paper and see their personal income rate and GST fall on taxable income or the money spent to between 10% and 12.5% in the dollar, over the next 30-50 years.
PART TWO: THE INSTITUTIONAL MESS WE ARE IN TODAY
Government welfare institutions are failing miserably:
EDUCATION – Limited choice, falling standards, poor disciple, poor outcomes, with 40 percent of all students leaving school with insufficient skills to succeed in life.
RETIREMENT – 50%+ of all retirees do so with little or no investment capital or savings. The number of workers to retirees is about to fall over the next 30 to 40 years.
HEALTH – Limited choice, long waiting lists in some areas, wide-spread staffing problems, bureaucratic inefficiency in many areas, rapid rising cost structures.
WELFARE – Dependency hurts the poor the most – results include, inadequate housing, bad parenting, monopoly supply of various services, and low self-esteem.
CAPTURE – Institutional capture, where money often goes to the benefit of the institutions or providers not the pupils or patients for whom the money was intended to benefit.
RESOURCE DISTRIBUTION – Within the social services resource distribution is often of a ridiculous nature. It is often based on political preferences, not user need or demand.
INSTITUTIONAL REFORM – OF THE MANAGEMENT OF GOVERNMENT WELFARE BY WAY OF COMPETITION AND CHOICE:
Fundamental to the reform of the New Zealand government’s social service institutions is the introduction of competition to all areas of welfare, such as education, healthcare, housing and general welfare (out of work).
Competition is just as important in government as it is in private sector markets. The lack of competition, over the past 80 years, in government-owned social service institutions, is why they are in such a mess today, when compared to say Singapore’s welfare institutions.
Competition between government-owned schools, and between government-owned hospitals, and private organisations in those sectors, would help promote efficiency, and as a result economic prosperity, and New Zealanders’ wealth.
In the private sector, competition is a disciplinary force that requires businesses to compete for the loyalty of their customers. Government-owned social service institutions need to be subject to the same disciplinary forces, before they will get any better.
Competition provides consumers with protection against poor service, high prices, and poor products. The need for competition is generally not recognised in New Zealand’s public sector areas such as education and healthcare. In fact, the opposition to competition within the public sector, is already very strong. You can see that in the teacher unions’ reaction to charter schools – a minor incursion, into their near monopoly position.
The reality is that performance would be enhanced if private firms were permitted to compete with government enterprises on a level playing field, in the welfare area.
Competition would improve performance, it would reduce costs, and it would introduce many innovations, if it was allowed to take place.
Competition is the force that encourages providers to:
– operate efficiently and cater for their customers’ needs,
– improve the products they produce on a continuous basis,
– use the assets they have more efficiently,
– put an end to monopoly provision
HOW THEN IT WOULD WORK IN PRACTICE
One example – healthcare
HEALTHCARE POLICY:
We would see New Zealand’s healthcare move closer to Singapore’s model of individual healthcare saving accounts, catastrophic insurance cover, individual choice and decision making. Why?
Because it works, the Singapore system was recently ranked sixth in the world in terms of overall quality, despite the fact, that in terms of cost, it was only half that of New Zealand’s or Australia.
STRUCTURE OF NEW HEALTHCARE SYSTEM.
A healthcare SOE Committee – similar to the 1980’s SOE Committees – would be established, to make recommendations on how the government should go about putting these policy measures in place and getting competition and choice throughout the healthcare industry.
A changed Health Department – would have a role that would be largely limited to the provision of public goods in the healthcare sector and contribute to the regulatory process making. Public goods are considered to be those goods, which the private sector finds impossible to produce and market.
As a result, the new health department will be much smaller than the current one is.
Government owned hospitals – will be turned into separate operating units (SOEs) with their own local directors (3-8), depending on their size. Directors would be appointed by the Government, on the recommendation of a special committee set up for that purpose.
Each hospital will publish a prospectus outlining the services it will offer, and the prices it will charge for each service.
A monitoring group will be set up, to consider and report on how well each hospital has met its obligations and promises.
Health Status Authority – a new health status authority, with around 12 billion dollars of income in their first year of operation will be set up. The main responsibility of this new body will be to look after the needs of the existing chronically ill and disabled New Zealanders.
New Zealanders who at some time in the future, become chronically ill, will if they wish, be able call on the health status authority.
Individual New Zealanders and their GP – will be at the centre of the new healthcare system. An individual’s local doctor will become not only a person’s GP, but their general health advisor as well when their client needs help from a specialist or any other health matter.
Individuals will make their own decisions in the healthcare market, with advice from their doctor and the new health status authority, as and when and if required.
APPENDIX ONE
How did New Zealand get into the financial and social mess it finds itself in?
Short Answer: Politicians – who over the years, have lied to the public, about NZ’s financial position. They have for example, refused to include, large items of expenditure, they have incurred each year, in the government’s accounts. For example, the $40 billion dollars of accrued retirement liabilities incurred this year. If a private sector company, failed to record an item of this nature in their books of account, their directors would end up in prison. Why not apply the same set of rules to politicians.?
Long Answer: We started down the wrong path almost 50 years ago in 1976 when the National Government repealed Labour’s 1974 NZ Superannuation Act and replaced it with a Pay-as-you-go (PAYGO) system. We currently operate under a Pyramid Scheme (see definition of PAYGO below). In 1976, as a country we shifted the cost of retirement onto future generations – in other words, our children.
It is these liabilities, created by the (unfunded) PAYGO system we have, that is placing today’s unsustainable burden on to all of us. Hence the numbers in Treasury long run projections paper, and what will no doubt be in the Inland Revenue final paper as well.
This problem was reinforced in 1993 – when Jim Bolger as Prime Minister, and leader of the National party and Mike Moore as Labour party leader, entered into an accord on superannuation. This agreement made the economic crisis that is happening today inevitable, rather than probable. Why?
Because it meant, we would continue with the policy of not setting aside, the money required each year to pay for the retirement welfare liabilities we were incurring each year. A smart 10 year, given the basic facts facing New Zealand in 1994, could have worked out what was going to happen.
On the other hand, the politicians of 1994, and since, have decided to simply ignore the problem, and pretend it did does not exist.
PAYGO – a definition: As the system matures, it reaches the point where in relative terms to where it was when it started, the number of beneficiaries grows compared to the number of workers paying taxes. This inevitably leads to a growing gap between government expenditure and government revenue.
As Thomas Sowell said – and I quote him: “There are few things more dishonourable than misleading the young”. New Zealand politicians have been doing that in spades, deliberately so, for at least the past 30 years.
New Zealand politicians, despite what has been happening over the last 30 years, have for their own selfish political reasons, continued to ignore the need to fund the contract they had entered into with the New Zealand taxpayer in 1994.Treasury, dominated by the libertarians amongst them did exactly the same.
EXAMPLES OF HOW POLITICIANS HAVE PUT THEMSELVES AHEAD OF THEIR COUNTRY, MAKING THINGS WORSE, IN THEIR SEARCH FOR VOTES
Politicians from both the left and right fall into this category.
From the left: The most basic fact about the political left, is that their ideas rarely if ever work, (look for yourself on a world-wide basis). Despite this, if you don’t agree with what the left is saying, you are immediately accused of being someone who does not care about the general public – who the left claim to represent, but never do it very well in practice.
Although the big word of the New Zealand left – (Labour, Green, NZ Maori Parties) – is the word compassion. Their big agenda is to make as many voters as possible dependent upon them. Why? So that they will have to vote for them at the next election.
A prime example of this, was the left’s refusal, to implement the reductions in personal income tax, due to come into effect in the 2017-2018 financial year. They preferred to keep the tax money in their hands (billions of dollars of it), to spend in a way that made as many New Zealanders as possible dependent on them. The left believed this approach, would, in the end win them the most votes at the next election. A lot more votes than simply letting the planned tax reductions go ahead.
Another example of this, was the decision of Helen Clark and Michael Cullen to have a centralised superannuation fund, which they could control, rather than individual saving accounts for all New Zealanders. How do I know this – because that is what Michael Cullen told the Act caucus when he went there to explain his super fund policy.
In answer to a question of mine, as to why he was going to have a centralised fund rather than individual accounts he said that was the policy they liked and intended to implement. He said they did not favour the individual saving approach I had advocated for 30 years. Why? Because Labour wanted to control the money – they simply did not trust the people they claimed to represent to do so.
In the end they changed their minds as a result of Winston Peters’ negotiations with them.
Another example of the left’s approach has been the deliberate introduction, of the biggest and nastiest taxes of all, on the poor. These nasty taxes, (often 100% of any increase in income) come about when lower income earners, lose some of their welfare benefits (for example Income Related Rents, or Working for Families) when their income goes up. The left, love these policies – they sound great and caring, and they win them votes while locking people into dependency on them.
In these circumstances, it is little wonder, that the left’s main area of support in New Zealand, tends to come from people who work for institutions whose ideas do not have to work in order for them to survive (Government, Universities, Schools).
From the right: Libertarians (some) have exercised a lot of policy influence (most of it quite good) amongst the centre right over the past 35 years. They also have a lot to answer for in one or two areas, as well. For example, they have played a major part in the creation of the financial mess New Zealand has ended up in today through the unfunded welfare liabilities we have in New Zealand of at least 1.2 trillion dollars (1,200 billion dollars). This is, in large part, a result of the influence of key National party and Act party politicians.
A bright lot, but also a group, who have their own form of religion, if I can call it that. At times, it seems to me that they never stop and think, beyond what their religion is telling them – libertarianism. They never seem to consider what long-term damage they might be doing. They believe they know what is right – that is they know what fits in with their libertarian policy approach. Any adverse impact it might have on ordinary New Zealanders, does not seem to have any relevance for them whatsoever.
Why, they have opposed individual New Zealanders having their own saving accounts so strongly has always worried me. They have never explained why they prefer compulsory taxes to compulsory savings – because that is what they did in the 1990’s and it is what, they still doing today. Why they prefer governments to control retirement income and health provision, rather than have individual control and private provision, is beyond me.
I still do not understand why they think the way they do. Another example of why dogma religion in politics, can be so dangerous, in some policy areas.
To be continued…