Different Strokes: Superannuation Schemes Are Being Designed by Successful Men

Listener 10 August, 1996.

Keywords Distributional Economics; Social Policy

Various government imposed contributory superannuation schemes will be offered to the electorate this year by the political parties. …

… Some involve topping up the state provided flat rate universal New Zealand Superannuation. Others plan to replace it altogether eventually. Some propose a voluntary scheme, others a compulsory scheme. All sorts of intricate opt-in and opt-out options are offered. Each scheme will be dressed up to appear the most favourable. A good way to cheat is to postulate very high returns of the funds, failing to mention that if interest rates are high for savers, they will be even higher for the house mortgage. Another trick is not to mention various government subsidies involved. No doubt the din will lead many thoughtful people to say a plague on all your houses, and vote on some other basis.

This column looks at an especially misleading element of various presentations – the use of the average wage as the basis of the calculation of how much will be saved and invested in a fund (which determines the annuity after retirement). Note that although the amount (currently around $620 a week) is described as the average wage, it is in fact average employee labour earnings, including wages and salaries. Even more importantly, a lot of people earn less than the average. When a proponent is using average earnings to justify their scheme never forget that most people are below this figure, so most people will be worse off than what is being promised.

“Most” people? Just how many? We do not know. The first problem is that the distribution of earnings is “skewed” (to the right), with some people getting enormous payments. The Chief Executive of Telecom gets around $1.2 million a year (over $23,000 a week), so there has to be many people below the average to offset his earnings. If that were the only problem we could use another measure – say the “median” or midpoint, which has as many people below it as above it. But labour earnings refers only to those people with a job. What about those who are not employed, or are employed only part of the year, or part of their working life? When proponents of a scheme use the average earnings they are assuming that the typical person earns that amount every year for forty odd years. Few people do. Some take time off for education or vocational training or for leisure; some because they are sick; some because they are unemployed; some because they are looking after children or a relative in need; some retire early (perhaps they have no option).

The 1991 population census gives some idea of the size of the gap. In the 1990/91 year average labour earnings amounted to around $28,800. Of those in the 20 to 60 age group, 61 percent of men and 86 percent of women reported that their incomes had been below $28,800. Thus almost three out of four of the working age population have incomes less than average earnings in any year. Using the average wage as an indicator of what would happen to the typical New Zealander is woefully misleading. The median income for the age group in 1990/1 was $18,800, or only 65 percent of so-called average earnings. It would be more meaningful to illustrate any contributory superannuation scheme using 65 percent of “average” earnings. Assessed this way, contributory schemes tend to look a lot less attractive.

It is not surprising that there are many more women than men in low income ranges, and so they will receive less much lower annuities from an earnings related superannuation scheme than men. The proponents fail to mention this, perhaps because those who design and advocate such schemes are successful men, or (occasionally) successful women with male-like career paths. They overlook that many men and most women are less successful financially than they are (even though that lack of financial success may be the consequence of doing something as socially useful such as caring for children and invalids).

Much of our social policy is screwed up because it is designed by the successful men and women in their image. The opposite approach is more fruitful. We should be designing state intervention in retirement policy for the average woman, who gets paid less than a man, who workers fewer hours a week and weeks a year than a man, and who works fewer years than a man. If we get the public policy for an average woman’s retirement right, it will be a good strategy for men, and for the successful too. (After all, the well-off can always top up with a voluntary private scheme.)

From such a women’s perspective a flat rate universal state provided scheme like New Zealand superannuation is almost certainly the best option. There is a place for contributory schemes as a top up. Whether they should be compulsory or voluntary is a matter I leave to public discussion. But hopefully the voice of women will be more prominent in such debates in the future.