Two weeks ago I spelt out in some detail why the current welfare system has failed the people of New Zealand and led to so much inequality in the country. I spelt out why we needed to move away from the current welfare system of tax and spend via government-owned institutions to a system based on individual choice, competition, and personal savings if we wish to solve the problems we have in the welfare area.
Unfortunately in this article it will be impossible for me to do much more than spell out in broad terms the policy steps I would take to fix the welfare system.
Step one: Lay down a new set of welfare principles to guide us as we develop a new welfare policy approach.
Step two: Get rid of 15 billion dollars of existing government spending in order to create room for a new approach to welfare (7 billion dollars of which would come from what can be described as unnecessary or wasteful spending given the new approach to be put in place and a further 8 billion dollars in government expenditure by way of hand-outs and tax privileges to the already well off would be done away with.)
Transfers of 25 billion dollars of current government expenditure (health and education) i.e. out of the hands of government and into the hands of individual New Zealanders to spend as they see fit, subject to any government regulations.
Step three: Personal taxation – reduce personal taxation by 6½ billion dollars a year using the money saved (step two). How? By pushing out the current personal tax brackets, the 10½% tax bracket from $14,000 to $34,000 the 17½% bracket from $48,000 to $70,000 and the 30% bracket to $120,000.
A majority of New Zealand taxpayers would have a tax reduction of more than $75 a week as a result, two income families $100 plus a week.
Step four: Introduce new policies in the area of retirement superannuation and healthcare. Use 5½ billion dollars of 15 billion of government expenditure saved see (step 2) and add it to low-income workers and their employers’ health and super retirement savings.
Example: Income $40,000 individuals’ and employers’ saving contributions 3% or $1,200 a year for superannuation and ¾ of one per cent for health or $300 indexed to relevant inflation measures. Government would contribute $2,800 for superannuation a year, lifting total savings to $5,200 for superannuation. For health, government would contribute $700 a year lifting total savings to $1,300. Retirement outcomes for a 20 year old would be a lump sum superannuation fund of around 2-3 million dollars (in dollar of the day terms) and around $350,000 in their health fund when they retire. Invested wisely, this would produce a weekly income of around $2,000 a week.
Inequality of capital and income in retirement would be a thing of the past
Step five: The remaining 4 billion dollars available (step two) would be spent on section development throughout New Zealand. The sections once available would be put on the market on a shared ownership basis to help New Zealanders unable to buy a house on their own to at least get their foot on the property ladder e.g. it could be a 60/40 split with the individual able to buy the government out at any time.
Step six: Security during a person’s working life in the area of health. Every New Zealander over the age of 18 would get a monthly health allocation by way of a tax credit. The size of that tax credit would depend on a persons age, e.g. a retired person is likely to get more than double what an 18 year old would get. Out of the tax credit, which would be deposited into the person’s health bank account each month by the Inland Revenue Department, the individual must buy a catastrophic healthcare insurance policy from an approved provider. T he balance left in the health fund is then available for out-of-pocket expenses such as going to the doctor. The balance of any money stays with the individual.
For the chronically ill a new health status corporation will be available to them to look after any extra needs they might have. A year one government grant of 10 billion dollars will be made to the health status corporation.
Other steps would include the following areas – income security during a person’s working life, skill development for the out-of-work, educational choice, and productivity improvements throughout the welfare sector.
Benefits flowing from a programme of this nature include-
- A massive reduction in future accrued welfare liabilities, around one trillion dollars over the next 30-40 years as we move to a system where each generation pays for itself.
- A 20 billion dollar plus reduction in year one of New Zealand’s welfare.
- An improved fiscal position of more than 30 billion dollars in year one once the increase in accrued welfare liabilities is taken into the government’s accounts, as they should be.
- A 40% reduction in government expenditure in year one, reaching 70% by year 35.
- With 95% of New Zealanders set to retire in 30-40 years’ time with at least one million in their superannuation fund in today’s dollar terms, inequality of capital and income will become a thing of the past.
- With most of the money currently spent by government in the health, superannuation, education and welfare areas now spent by individual New Zealanders power has shifted out of the hands of politicians and into the hands of individuals where it should be.
So where do we go from here? Probably nowhere. Why? Since 1988, policy innovation in this country has diminished almost to vanishing point, except for a brief period of activity at the end of 1990 and 1992. Our public welfare debt, which the government does not even acknowledge in its financial books, exceeds one trillion dollars and will grow to two trillion within 30 years if we continue to sit on our hands as we have for the past 30 years.
The cost of servicing this outstanding debt per worker, i.e. for health and super will increase at least four-fold in real terms over the next 40 years, unless we move and move fast in the direction I have spelt out in this paper.
What then, is the major parties’ current thinking on future policy?
After two years in office the Labour Government has failed to deliver on any of the major promises they made at the election in 2017. Since 2017, it would appear that no new policy development has taken place in the government, the party, or the bureaucratic systems. With the election only one year away any long-term policy thinking would seem to have been outlawed within the government.
National, in a policy sense, is no better than Labour, they both believe they can spend your money for you better then you can do for yourself. The only advantage National has over Labour is that they are unlikely to do something really stupid. When it comes to the welfare system however, both National and Labour intend to keep the status quo.
New Zealand First with Winston Peters as their leader, simply do not bother to offer any real policy to the public, they simply have none. Winston Peter’s penchant for character assassination is reminiscent of an earlier prime minister.
Are there any alternative approaches to what we have at the moment? Yes, but both are difficult. One would involve invading the existing parties in sufficient numbers to change the old culture, this would take years and the country may well be bankrupt before anything was achieved.
The second approach would be equally difficult, but might just bring change within the existing parties more quickly. A new party founded on the principles just outlined would however, need to understand from the start what it was running against. That is, the accumulated bile of all the existing parties and all the interest groups they represent.
If they kept it simple, one there are no policy differences between the existing parties, and what they could deliver in the way of healthcare, superannuation, housing and lower taxes they just might get some traction.
A 12-step programme to get rid of inequality
Step One: Understanding why the current welfare system has led to so much inequality.(Welfare debt of $3,000 billion, low productivity, churning, capture, monopoly supply.)
Step Two: Choice – Move the current welfare system from a government tax and spend system to a system based on individual choice, competition, and personal savings.
Step Three: Change – A new set of welfare principles, a reduction in government expenditure (50%), matched by an increase in disposable income of individuals. In areas such as health $15 billion, education $10 billion, tax, welfare and pensions $15 billion.
Step Four: Security in retirement-income provided by a lump sum retirement superannuation fund of $2,500 million in dollar of the day terms once the scheme is mature, interest earned from fund around $2,000 a week, plus New Zealand’s existing pension.
Step Five: Security in retirement-healthcare provided by a lump sum retirement health fund of $300,000 plus, interest earned from fund, around $15,000 a year while fund remains in place, and if needed the new health status fund of $10 billion dollars.
Step Six: Security during working life (18-65) – healthcare provided by a catastrophic healthcare insurance policy, a cash grant of between $1,800 and $4,000 a year dependent on age, and a chronically ill health status fund of $10 billion if applicable.
Step Seven: Security during working life (18-65) – income provided by an out of work income insurance policy paid for by the current ACC levies with a top up by government for low-income earners, areas covered, unemployment, sickness and accidents.
Step Eight: Skill development for the out of work – special training programmes for those who are out of work and need one. The main objective of the training programmes is to put those who need one in a position to find a job.
Step Nine: Tax reform that creates incentives for those in work. Bracket changes that substantially increase New Zealanders’ in-the-hand disposable income. The 10.5% bracket extended to $34,000, the 17.5% bracket from $48,000 to $70,000, the 30% bracket from $70,000 to $120,000, with the 33% rate applying from $120,001.
Step Ten: Housing policy reform – with the objective of placing all working New Zealanders in the position to be able to buy their own home e.g. a low-income family unable to buy at the moment, could do so with the government in a shared ownership arrangement, e.g. 60/40 with the buyer able to buy the government out at any time.
Step Eleven: Educational choice – Once again education would become the pathway to success via personal decision-making, competition and choice.
Step Twelve: Productivity improvements – the icing on the cake when it comes to putting an end to inequality. Important areas such as heath, housing, education, and welfare are likely to respond to the new structures with gusto.
Outcomes flowing from the twelve-step programme to end inequality;
Economy:
- Savings: $25 billion a year of welfare savings to offset the need for future spending.
- Debt: A reduction in the current growth rate of welfare debt of $30 billion a year.
- Fiscal Position: Improved by at least $30 billion in year one, with additional savings in healthcare and superannuation spending to add to the 30 billion over future years.
- Inequality: With New Zealanders set to retire in 30-40 years time, with at least $1 million in their superannuation fund inequality of capital is a thing of the past.
- Tax: With government expenditure reduced by close to 50%, New Zealand, as a result, has one of the lowest tax systems in the world.
- Expenditure: A 50% reduction in government expenditure i.e. $40 billion has taken place, $15 billion via the elimination of privileges and unnecessary spending, $25 billion via transfers from government to individual New Zealanders.
- Power: With the money currently spent by government in the health, superannuation, education and welfare areas now being spent by individual New Zealanders, power has shifted.
- Housing: By spending $4 billion a year on section development, then using sections to help New Zealanders buy their own home, most housing issues have been solved
Individuals:
- Savings: 95% of New Zealanders will retire in future with $2,500 million in their superannuation fund after 45-50 years, based on savings of $5,200 a year indexed.
- Savings: 99% of New Zealanders will retire in future with $.400 million in health fund.
- Income: on dollar of the day savings could be around $3,000 a week if invested wisely.
- Tax reductions of around $100 a week. New income tax rates to be indexed 10.5% bracket up from $14000 to $34, 17.5% bracket up to $70, 30% bracket up to $120,000.
- New Zealanders to have a catastrophic health policy and $1,800 plus in own account.
- New Zealanders who are chronically ill will have access to a government health status account with $10 billion in it.
- Every working New Zealander will have an out of work insurance cover policy.
- Housing: Working New Zealanders unable to buy a house as an individual will have the opportunity to go into a shared ownership scheme with the government.
More information on this plan for reform can be found HERE.