Part One
This article calls on all New Zealanders to be clear-eyed about the state of social services, particularly health, education, welfare and superannuation, and acknowledge that without major changes the system will inevitably collapse under its own weight. No government has had the courage to face up to the fundamental structural flaws of our present system. This lack of courage is an abdication of duty. Putting off the necessary measures to avert that collapse is far from compassionate. It is mortgaging our children’s future beyond their ability to repay it. (Our existing unfunded social liabilities for super and health exceed one trillion dollars)
My objective in writing the article is three-fold: Firstly, to warn the public about the coming tsunami of deficits, or tax increases and benefit cuts, as our super and healthcare obligations for the growing number if retirees come due. Secondly to look at the solutions suggested by Treasury and our political parties to these problems and explain why they are insufficient or dangerous. Finally, to provide a workable plan for reform, that will restore New Zealand’s solvency and ensure security for New Zealanders.
Deficits or Tax Increases/Benefit Cuts: (As Welfare Obligations Come Due)
“Pay-As-You-Go financing can be an attractive option for politicians who know that they will retire before the system collapses. As the system matures it reaches a point where the number of beneficiaries grows and the number of workers paying into the system declines, leaving increasing gaps between state income and expenditure.”
– Michael Tanner Cato Institute.
My political journey over the last 50 years.
At any number of points in that journey, I have questioned our existing welfare state, especially in the areas of retirement health and superannuation. According to Treasury, those policies are leading New Zealand towards a fiscal deficit of 13.3% of GDP in 2061, which, if it was allowed to get to that, would send the country into bankruptcy. Many New Zealand politicians have known, this outcome was inevitable given the policies they were following, yet they have continued to follow the same course they were on.
1972: My first foray into Retirement Policy.
Fifty-Two years ago, I introduced a private members bill into the New Zealand Parliament with the support of the entire Labour party caucus, that would have made a lump sum superannuation policy available to every New Zealand worker. There was a view in caucus that the established Old Age Pension would eventually prove to be inadequate.
1973-1974: The New Zealand Superannuation Scheme.
In November 1972, a Labour Government was elected, and in 1974 a compulsory superannuation bill along the lines of my private member’s bill was passed into law. As a result, income in retirement became the joint responsibility of the government and the individual through a compulsory savings scheme.
1975-1984: Introduction of National Superannuation.
The National Party repealed the Superannuation legislation very quickly after their election in November 1975. As a result:
- Individual responsibility for super ended, with the government once again taking responsibility for it.
- Eighty percent of New Zealanders retiring in 2024, who would have had a million dollars in investment savings will do so with next to nothing – and depend on the government for their income.
- Unfunded liabilities, started to accumulate once again after 1976 as a result of the National party’s super legislation. Unfunded liabilities which stand today at more than one trillion dollars, are set to become New Zealand’s most serious financial problem over the next 50 years. They will be the main contributor to the large yearly fiscal deficits that New Zealanders will face from now on unless there’s a major change.
1984-1990: The Fourth Labour Government
During my time as Minister of Finance (1984-1988), as you would expect. I had a word or two to say about New Zealand’s social policy framework and the impact it was having on the economy. (See chapter 20 of my book Towards Prosperity: Ends and Means):
Despite Toward Prosperity being published just three months before the 1987 election, it was very open about what Labour still needed to do. The chapter spelt out in some detail the issues I felt the government had to deal with in its second term, including:
- Institutional capture in the areas of health, education and welfare, all too often put institutions ahead of people.
- The rising cost of government social services, which was running well ahead of inflation was another area that needed attention.
These two issues, as we will see, are still at the heart of New Zealand’s economic and social problems. It was these views that David Lange, the Prime Minister at the time, disagreed with, leading to my effective resignation as Finance Minister at the end of 1988.
1994: The formation of ACT
Unhappy with the direction New Zealand was taking in 1993, when National and Labour signed a Superannuation Accord to protect the pay-as-you-go pension scheme, along with the lack of action on the part of all of New Zealand’s existing political parties at the time, I along with Derek Quigley and several other interested New Zealanders formed the Association of Consumers and Taxpayers – ACT.
The policy agenda that ACT ran on when it was first formed (see appendix one for an outline) is, in my opinion, even more important today, than it was back then, as it reflects exactly what has gone wrong with New Zealand over the past 30 years.
What we predicted in 1994 would happen is in fact coming to pass in 2024. It is happening because every political party, including ACT after 2000 decided it was in their best interests to ignore the debt that was accumulating and leave it to their children to pay for the mess they were creating. (An unfunded liability that stands at 1,200 billion dollars today)
1996-2024
Before looking at where New Zealand is in 2024, it’s important to appreciate the role the various political parties played during the years following 1996 in the social policy area.
While National and Labour came to an agreement on superannuation in the mid 1990’s, which they claimed would solve New Zealand’s problems. I said only quality reform would do that and what they had agreed on was not quality change. The facts that follow testify to the correctness of that statement.
The agreement between Labour and National relating to super involved the basic elements of New Zealand’s superannuation system as it is today.
The social contract, relating to super involved:
- Workers paying taxes every year they worked.
- When a worker turned 65 the state agreed to pay a pension and look after their healthcare.
In coming to this agreement, the two big parties ignored the following facts:
- The state already owed New Zealand workers at least three times our gross domestic product (GDP).
- The debt was increasing by around 15 billion dollars a year, today by $40 billion plus.
- There was no backing for the debt that had already been incurred, let alone future debt.
- The super scheme they had agreed on was a pyramid scheme, which would go bust at some time in the future.
Derek Quigley’s and my view was that the scheme was likely to go bust inside 50 years. That is why we set up a new party.
2024
New Zealanders are starting to feel a large sense of unease about their country, and rightly so as they increasingly become aware of the social decay taking place.
Political leaders have reacted in several ways to this situation.
On the left, the major drive has been a supposed caring and compassionate stance, but in reality, their main agenda has been to increase dependency on the state. The left has also sought to deny New Zealanders the opportunity to make their own decisions in areas such as health and education.
On the right, the drive has been for so called fiscal responsibility, while the real agenda has turned out to be preferential treatment for selected groups of New Zealanders.
What they have in common is that, since 2000, the two main parties have polled continuously. They have used the voters’ answers to their questions to help them design their policies. Policies that people want to hear, not policies they need to hear.
Part Two
New Zealand’s welfare state is unsustainable in its current form. That much is clear from the Treasury’s own forecasts of the state of the government’s finances in 2061 relative to 2021.
Superannuation and health spending alone are expected to go up by 6.4% of GDP. Add education, and the expected increase in government expenditure becomes 8.1% of GDP. With total government expenditure increasing by 12% of GDP, by 2061 we are expected to be running a negative operating balance of 13.3% of GDP. That would make us technically bankrupt.
What is behind the government’s de facto insolvency and the coming explosion in the debt and deficit? Put simply: 30 years of political cowardice finally being confronted by structural trends long obvious to any genuine observer. To understand the origins of the crisis, we must return to its basic design.
At its core, New Zealand’s present welfare state is a monopoly Ponzi scheme. Unfortunately for the sustainability of the Ponzi structure, New Zealand’s population is aging. In 1977, when National introduced national superannuation, the median age of the population was 25, in 2021, it was 37. By 2061, it is expected to be 45, leading to a dramatic increase in the number of pensioners each worker has to support. The rapid increase in the cost of health care, is also driven by the aging population.
Current Problems:
Apart from its long-term unsustainability, the welfare state barely works. Take education for example. The results of New Zealand students in international examinations in mathematics and reading have declined in every year since records began. That is despite a significant increase in per student education spending, adjusted for inflation. Similarly, our health outcomes leave much to be desired. Even our generous universal pension is becoming a less effective guarantee against elder poverty despite its massive cost. This is mainly due to rising rents and falling home ownership.
Treasury’s Ideas:
Treasury’s limited solutions are either a bad idea or insufficient.
Increase the age of eligibility for Superannuation: Some changes in the age of eligibility are likely to be necessary at some time in the future. For example, we could consider establishing a formula along the following lines, the average time New Zealanders spend on the pension is set at 20 years, once it exceeds 22 years, the age of retirement is lifted by one year.
Index Superannuation to Prices rather than Wages: This change would reduce the pension received by those who retire in 2061 by more than 30%. This policy would mean retiree’s standard of living would decline relative to the rest of the population. This would fall hardest on those who rely solely on government support, and those who do not own their own home.
Increase existing taxes: Treasury identified four possible increases in existing taxes, to help make the existing program more affordable.
- Increase income tax revenue by an increase in all existing personal income tax rates.
- Allow inflation to erode the value of the existing tax thresholds.
- Increase the existing GST rate by at least 1.5%.
- Increase the existing company tax rate.
The government currently spends around 30 billion dollars on the retirees’ pensions and healthcare – this will increase by $268 billion (9 times) to $295 billion a year by 2072.
The idea that higher taxes, whether on personal income or anything else, will be able to cover this massive increase is simply nonsensical.
Bracket creep the hidden tax: Bracket creep increases the tax paid by New Zealanders significantly without the government having to do anything. The left support bracket creep, because it enables them to make lower income earners dependent on the government. ACT supports bracket creep because it enables them to increase the average personal tax rate paid by the poor and give the billion dollars of extra income the government gets to the rich. (See ACT Tax policy)
Create new taxes: Treasury’s next suggestion is to consider taxing new bases, such as capital, land, wealth and inheritance. No consideration is given in Treasury’s proposal to any of these taxes replacing an existing tax.
The fiscal hole we are in:
We cannot increase taxes to the level needed to meet our obligations without destroying economic growth further. Similarly, we cannot reduce benefits without increasing pensioner poverty sharply. Treasury’s suggestions cannot be the answer to our problems. There is no easy way to fix the current pay-as-you-go superannuation system. All Treasury’s suggestions would do is put off the evil day when the system collapses and goes bankrupt as all Ponzi schemes eventually do. We need much deeper reform.
PRINCIPLES:
In order to reform our welfare state to make it more affordable and effective, we need some basic principles to guide us. Principles are crucial to good policy making otherwise politicians will be led astray by the interest groups.
Principle One – Each generation must pay for themselves:
Failure to adhere to this principle over the last 60 years is the reason we are in the mess we are in today. Under the current pay-as-you-go system, it is the young and the yet to be born children who will be asked to pay for New Zealand’s existing workforce in their retirement.
Under our suggested approach to social service delivery, enough money will be put aside each year to meet the needs of New Zealanders when they retire.
Principle Two – Every New Zealander should provide for themselves as far as possible.
By changing the system to give those who can provide for themselves the ability to do so, we can free up the government to focus its attention on those who require support.
Principle Three – Choice and competition:
Competition is a disciplinary force in the private sector. If businesses serve their customers poorly, they generally lose them to someone else who is doing a better job.
Competition should be just as important in the government sector, to improve performance, as it is in markets.
Competition among Government enterprises such as schools, and the private sector, would lift outcomes in a positive way.
Choice links consumers and providers directly, with consequential incentives on hospitals, doctors, nurses, financial advisors, teachers and schools. Choice would put an end to government monopoly provision we have had for the last 80 years in the areas of education, health and pensions and with it the poor outcomes the system has produced as well. Choice is the key to improving performance in social service delivery.
Conclusion:
For too long, we have lived with the fiction that we are doing well, lulled by politicians like John Key into believing we have a ‘Rock Star’ economy, when nothing could be further from the truth. We must start to admit to the problems facing our economy and begin to deal with them, if we want to avoid falling even further behind our OECD partners.
Next Week – The policy solutions to New Zealand’s problems:
(In brief – as it would take 100 pages + to spell it out in detail)
The New Zealand Government’s problems fall into two main parts:
- ONE – New Zealand’s poor financial position, highlighted by Treasury in its Long-Term Fiscal Projections (2021-2061)
- TWO – The New Zealand Government owned institutions in the social services area, have all been performing poorly for the last 60 years.
What I said in 1987, while Minister of Finance, is still relevant: “But something has gone terribly wrong with the system, and the institutions.”
They had gone wrong then and they are still in that position.
Appendix One – Extracts from what I said at the ACT launch in 1994 about social welfare.
“The question of money is particularly important at the moment. In the immediate future we are threatened with the largest debt in our history- a debt that hasn’t reached the public’s consciousness in any serious way. It is a debt that the state owes to us, its citizens, for all our retirement pensions and our health in retirement. Essentially the deal is this, we’re paying taxes into the system to fulfil our half of the social contract between us and the government. We pay taxes and when we are sick the contract says the government will look after us. When we’re old the state will look after us.
“We who pay tax have kept our part of the deal. But when we are sick, does the state do its part? There are77,000 people on hospital waiting lists who would say “NOT REALLY” NO.
When it comes to our retirement, are we going to get the care, the support, that our parents knew in post-war days.
“And the reason they say that is this. The amount owing to workers in New Zealand is so large- and there is so little backing for the debt-that no government, no matter how well the economy does on its present rate of growth, can possibly pay for it.
“The figure, including net public debt as of today is nearly 300 billion dollars. The largest single financial number in the country’s economy. Three times our gross national product.
This is a number so large that no current political thinking can accommodate it.
“In ACT we believe we can. We have found a way to reorganize our superannuation arrangement painlessly so that a more generous pension can be paid to all New Zealanders now and into the future.
“But we need a circuit breaker to get us out of the dangerous spiral we’re in. And in doing this, a number of wholly beneficial results would happen for all New Zealanders.
- An education system that responds to the individual needs of students, rather than having a one-size-fits-all approach.
- The elimination of hospital waiting lists.
- A solution to the issue of poverty in New Zealand.
- A way of getting on top of New Zealand’s monumental debt.
- The lowest rate of personal income tax in the developed world.
“It’s a new way of thinking, a new way of looking at the relationship between the state and individuals, the state and families.
“It’s a way that will make all New Zealanders of whatever income bracket, racial origin or educational background—all of us better off.
“These ideas are essentially common sense. They will suit New Zealand very well.
“Of course, we can’t do it by ourselves, we can only do it together. And we believe that is something we all want to do, because suddenly we have a chance to return New Zealand to the sense of wealth and well being we knew in our glory days when we had the third highest standard of living in the world.”
If you would like to be added to a mailing list and kept informed about Sir Roger Douglas’s reform proposals, please fill in the form below: