The Sweet Hereafter: Will You Be Better off Under RSS?

Listener 9 August 1997

Keywords: Social Policy;

In this column I assume that the government’s proposed Retirement Savings Scheme (RSS) works the way the government says it will. In which case the RSS is a privatization of the current New Zealand Superannuation (NZS), where instead of the government taking responsibility for the funding, the private sector does, albeit under considerable government regulation.

Why go to all this trouble? Individuals will be required to contribute a proportion of their income (initially 3 percent of income in excess of $5000 p.a, later up to 8 percent) into a fund until it reaches a certain size (currently thought to be about $120,000 for young people) to purchase an annuity equal to the level of NZS. This levy is equivalent to an income tax. (To complicate matters a little, the levy will be offset by income tax cuts. The government has stated that if the RSS does not go ahead, the tax cuts still will.)

The point of this tax hike is that the government expects the fiscal cost of the NZS scheme to rise because of the aging population. (A later column will discuss whether the existing scheme – or any scheme – is “sustainable”.) As the accompanying graph (which comes from the white paper) shows, the government thinks the cost of the NZS scheme will rise moderately from about 5 percent of GDP to 6 percent in 2017, and then rise quickly to about 11 percent of GDP in 2037, rising slightly after to 12 percent in 2059.

On the other hand the government expects the RSS scheme will have a fiscal cost between 5 and 7 percent of GDP until 2038, and then decline to just above 2 percent in 2059. (Note the fiscal costs of the RSS scheme are slightly higher than the NZS over the next few years.) This is the cost to the government budget. The full economic cost is more difficult to calculate, but the government seems to think that the average RSS levy contribution will be about 3 percent of GDP.

I have added a line to the white paper graph which shows the RSS cost plus 3 percent of GDP. It suggests a fairer way to think of the public cost of the RSS scheme (fiscal cost plus levy) as being between 8 and 10 percent of GDP until 2038, and then declining back to the current level of about 5 percent. Thus it involves higher taxes and levies in the immediate term and lower ones thereafter.

Some will benefit earlier or later, depending on their circumstances. For instance the chief executive of Telecom will have to pay the levy for perhaps six months. Low paid people may have to pay the higher levy all their working lives (and be no better off after they retire). For the population as a whole the total fiscal plus levy cost of the proposed RSS scheme seems likely to be higher than that of the existing NZS scheme up to 2030. This suggests that the average person over the age of 45 today will get no significant benefit from the RSS scheme, nor will those younger people (especially women) who are low paid or intermittent workers. (There may be older richer people who benefit. Expect a plethora of confusing anecdotal examples making this point.) The big beneficiaries of the RSS scheme will be younger well-off New Zealanders, many of whom are not born, or are not eligible to vote in the referendum (or wont vote). Meanwhile most of the people who vote on the RSS scheme will be dead when the nation gets any benefit.

It is also claimed the RSS scheme will be less vulnerable to government interference. Ever since the current NZS scheme was established in 1976, it has been altered significantly every few years. However, because the RSS scheme attempts to imitate the NZS one, and involves various government regulation and guarantees, it too will be subject to change. (We vote without having the legislation before us, only the white paper). The advice remains. If you want some to better protect your retirement income from politicians, have your own private savings program (including owning a house). Unfortunately the RSS scheme, because of the levy, will make that objective harder.

If there is an aging crisis (it is rather different than from the way it is presented) the immediate measures might be to repay government debt (as the government has been doing) to reduce the burden of public debt servicing on future generations. There are also attractions in the Labour party proposal to have a special fund in which the government invests to service the aging population from its revenue. (I will discuss it in detail, if the proposal reappears in the public policy debate.) The coalition government RSS scheme is a privatized parallel scheme, more favourable to the rich, and administratively messier.

I have been assuming here the administrative details are workable. They may not be. But even if they are, the essence of the scheme is to pay more tax now to reduce taxes in the future. For many people any tax reduction occurs after they are retired or dead.

(The column was accompanied by a graph which showed that up to 2030 the cost of RSS. That is the levy plus the existing NZS was more than the cost of NZS by itself but after 2030 it would cost less.)