Appendix to Chapter 12: Provision for Retirement

This is an appendix to a chapter of Globalisation and Welfare State The chapter is not written.

Keywords: Social Policy;

Since the 1970s there have been various proposals for state involvement in retirement provision. Each accepts there is a role for voluntary private provision (commonly called the third tier). The differences occur over the treatment of the first and second tiers.

In New Zealand first tier retirement provision refers to a state provided income for everyone above a certain age, which is flat rate (i.e. the same for everyone independent of their income and wealth, (1) although the quantum may be abated or taxed so that high income people get less or nothing), and is funded out of general taxation (pay-as-you-go or PAYGO). It is the PAYGO which defines the first tier. The current first tier provision originated in 1898, with variations in the criteria of entitlement and the rate of abatement. Most rich countries have a first tier of sorts – in a residual welfare state there will be meagre support for the poorest, at a low rate, with strict eligibility conditions, and high abatement rates.

Second tier retirement provision involves the occupational schemes, in which the employee (and usually the employer) contribute to a fund which is invested, and from which at retirement an annuity for life is paid. In principle, the annuity reflects the contribution plus return on investments, but as we shall see, the payment may be set in a quite different way. The defining characteristic of second tier schemes are that they are contributory scheme based on employment. Note that a scheme may be compulsory, that is imposed by the state, or may be voluntary, agreed to by the worker and firm (although sometimes membership of the scheme is a condition of employment). Compulsory second tier schemes are common in continental Europe. New Zealand second tier schemes have been voluntary and far from comprehensive, with only 30 percent of the labour force belonging to such a fund in 1974 [check]. The largest membership arose from the requirement that once every permanent public servant was required to belong to the New Zealand Government Superannuation Fund (NZGSF), with related provisions for those on the fringe of the public sector.

Third tier retirement provision is the result of the individual’s or household’s voluntary activities such as private savings including savings in banks, investments in shares, contributions to life insurance, and the purchase of housing (typically through mortgage repayment) since a freehold house reduces household outgoings. Many retirees live on the income from investments acquired as the result of business activities (including from being self-employed). Another important source of retirement income seems arise from the wealth inherited from earlier generations, perhaps reinvested before retirement. (2) This appendix will have little more to say about third tier provisions.

Contribution and Benefit Determined Second Tiers

Second tier schemes may be divided into those which are contribution determined, and those which are benefit determined, depending on how the level of the retirement annuity is calculated. If a scheme is contribution determined then the amount of contribution (plus subsequent investment income) is used to determine the annuity on actuarial grounds. (Note that all third tier provision is contribution determined.) If it is benefit determined, the annuity is determined by some other criteria – such as a proportion of average wages (typically adjusted for inflation and sometimes for productivity growth) over some period of the contributor’s working life. (Thus all first tier provision is benefit determined.)

In principle any benefit determined second tier scheme is equivalent to a contribution determined one, insofar as there is some level of contribution which will give the promised benefit. However, practically one needs to know the future precisely , especially the future return on investment, to calculate the appropriate contribution level. Thus the promises of an annuity/benefit level in a benefit determined scheme cannot be guaranteed by the contributions and investment returns.

So corporations administering privately run (voluntary) schemes make guarded and conditional promises. Their schemes are contribution determined, and in principle they may give no income at all (as happened to the employees of Robert Maxwell who dissipated the pension funds to support his crumbling financial empire).

But government imposed compulsory schemes (such as the continental European general employee schemes (and the NZGSF up to 1988 [check]), often offer guaranteed payment levels – they are benefit determined schemes. In retrospect the calculated contributions have often proved to be less than the promised annuities. This has led to a deficiency in the contributory funds because payments to the retired are more than can be acutarially sustained from the contribution and investment returns. In the case of NZGSF the fund is guaranteed by the government, and ultimately any deficiency is made up from general taxation. In the case of the European funds, the deficiency is currently covered by contributions from those still in work. At some stage those funds may go bankrupt.

The New Zealand Superannuation Debate

Any welfare state has to make a decisions about the coverage of its retirement provision:
– how generous and accessible should be the first tier;
– whether any second tier should be compulsory or voluntary, and whether it will be benefit or contribution determined;
– how the three tiers are to be integrated.

In each country the resolution is a function of its history and its social philosophy. At the same time in every country there is a debate about developments, especially about whether current or proposed schemes are sustainable. This is certainly true for New Zealand. Because its pension scheme was early and because there was not much of an earlier social infrastructure for the settler communities (the Maori had one of course), New Zealand state provision has been based upon a first tier universal PAYGO scheme. There have been at least four (possibly five) distinct sorts of schemes that have been proposed in the last quarter of a century, each of which has evolved to a lesser or greater extent. I call each by a person associated with the scheme, rather than by an abstract characterisation.

The McCarthy scheme (after Thaddeus McCarthy, chairman of the 1972 Royal Commission on Social Security) was that which had existed and evolved from the late 1930s, consisting of a first tier and a voluntary (and hence contribution determined) second tier. The first tier was universal, but eligibility from the age of 60 for the Age Benefit was heavily abated, so that many people in the 60 to 65 age group received no state support. After the age of 65 there was a universal benefit (Universal Superannuation), which was taxed and was at a lower level than the Age Benefit. This two phase first tier – an entitlement by need from an early retirement age and an entitlement by right at a later one – has a number of attractions (but the disadvantage of being very expensive). However that which existed in the 1970s had the two phases poorly integrated (partly in order to reduce its fiscal cost). In particular because of the abatement arrangements it was of advantage for many people to stay on the Aged Benefit after the age of 65 which had the effect of classifying the elderly over 65 into two groups – perhaps the needy and the better off. (The distinction was not even clear cut, because it often involved a sophisticated calculation for a person to work out which category would give them a higher income. Some chose the Universal Superannuation category even though it made them worse off, because they did not want the indignity of being classified as needy.)

A response to the McCarthy Scheme was the Muldoon scheme (its most prominent advocate being Rob Muldoon) implemented in 1976. It resolved the problem of integrating the two phases by making every one over 60 eligible for the tax but not otherwise abated Universal (subsequently National, and eventually New Zealand) Superannuation. However to do this, and maintain the needy at the level set by the Aged Benefit, was costly. It involved giving a generous benefit to those in the 60 to 65 age group who were not in need, and additionally raising the value of the benefit level for those over the age of 65 not in need.

The enormous fiscal cost (moreso than the McCarthy scheme which many thought onerous) pressured the Muldoon scheme. (The cost was large enough to have distorted macroeconomic policy in the late 1970s through its impact on the fiscal deficit and/or the level of taxation.) The level and terms of eligibility was shaded down in 1979. In 1984 an income tax “surcharge” was imposed. We do not need to go through the details here, but the effect of the surcharge is to introduce an abatement above that of ordinary income taxation, so that retirees above some income levels received no first tier income. This caused substantial political pressure from Grey Power, an issue discussed in the next section.

(In passing it should be noted the Muldoon scheme was the preferred option of the Labour left in the late 1930s, but was not implemented because of cost. In some ways Muldoon and his supporters were atavistically recalling that debate.)

At the time of writing in early 1998, the situation hade been resolved as follows. The age of eligibility was being raised to 65, but there was a strongly abated early retirement benefit for those under 65 in need. (Thus far the uptake of this benefit has not been high.) However there is no surcharge on after-65 benefit, so it is just treated as if it is other income. (3)

So after a quarter of a century New Zealand seems to have retained the McCarthy scheme, perhaps more generous to the rich elderly than his Commission envisaged and in that sense incorporating features of the Muldoon scheme -in a McCarthy/Muldoon compromise which is still contested. But there had been deviations on the way to this outcome.

About the time of his election to parliament in 1969, Roger had been impressed by the continental European systems (perhaps because of the enormous investment funds they produced). The 1972 Labour election manifesto included a proposal to switch to such a scheme with an abandoning of the first tier universal provision. That proved impracticable, for two major reasons (as well as transition difficulties). The first is that many people do not earn enough in their working lives to provide an adequate pension (the most obvious are the women who out of the paid workforce for long periods). (4)

The second problem is the cost of the scheme. For a simple example, take an economy without inflation, economic growth, taxation, and a zero interest rate. Suppose someone works for 45 years, and retires at 60 with a life expectation of 22.5 years (about the current rate). Then their earnings of 45 years have to be spread as spending over 67.5 years, so they need to save 22.5/67.5 or a third of their income during their working life to have even spending. We can fiddle around with these assumptions – if the retired only want half the standard of living of their working life the savings rate becomes a fifth. (5) (Higher interest rates appear to avoid the result, but the higher interest is paid by the workers during their lifetime in mortgages and other debt charges – and/or depress wages.)

This led to the proposal introduced by the third Labour Government in 1975. The (Bill) Rowling scheme (named after the Minister of Finance) involved a compulsory second tier on top of the first tier. (6) The advantage was that everyone was entitled to the first tier, so it guarantees a minimum income. Moreover since the second tier is supplement, the compulsory levy can be tuned to a level which is feasible (typically about 12 percent including the employer contribution).

Following the repeal of the Rowling scheme by National in 1976 when it introduced its Muldoon scheme, the Douglas and Rowling schemes (each with a compulsory second tier, the first without the first tier, the second with) disappeared until the 1990s. After doing nothing in the 1980s while Minister of Finance, Douglas resurrected his scheme in his book Unfinished Business. A major claim for the scheme was it would involve a reduction in taxation, and it assumed a sufficiently high return on investment to give this outcome (although that household would be paying high mortgage interest rates was not mentioned). The ideas in this book were adopted by the new right wing party, ACT, which however faced the problem that the Douglas scheme involved an unacceptable degree of compulsion to the party. It was therefore modified in ACT’s 1996 election manifesto to a scheme where an individual was only compelled to save up to the point that they would have an annuity equal to that provided by the existing (first tier) scheme (roughly 33 percent of the average wage, from the age of 65).

I call this the (Richard) Prebble scheme, after the leader of ACT, for it is sufficiently different from the scheme first envisaged by Douglas. As will be explained below, the Prebble scheme is a privatisation of the McCarthy scheme, not a replacement of it.

The scheme was, in effect the one voted on in the 1997 referendum, but to get to how that happened we need to look at New Zealand First (NZF). Particularly concerned with the shortage of national savings, NZF originally investigated a Douglas type scheme, but the difficulties (not least the level of contribution required) proved insurmountable, (7) and their election manifesto (8) proposed a Rowling type scheme, of retaining the McCarthy first tier (without a surcharge), but adding a compulsory contribution determined second tier. However the coalition government proposed a Prebble scheme, all the more astonishing because neither of the manifestos of the two parties which made up the Coalition Government proposed it and, as we have noted, NZF had specifically rejected it. So did 92 percent of the voters in a referendum on the proposal in September 1997.

We should not be surprised, for essentially the Prebble Scheme was a (partial) privatisation of the McCarthy Scheme. Instead of the state funding the flat rate benefit, the individual’s contributions would, but only up to the level which would give them the current state scheme’s income. However many people would never save enough because their income was too low. Estimates suggested over 40 percent of men and 60 percent of women (check). They would still receive the benefit as they would if the previous scheme had continued to operate, despite paying the levy.

Instead of the Prebble contribution being on top of a first tier, it replaces it. In effect it is a two “pier” scheme rather than a two tier one. The retiree is either on the first pier, where they receive their state benefit, because their contributions have been insufficient, or on a second pier, which is determined by their contribution. Inevitably there is a gap between the two piers, which is covered by an EMTR of 100 percent (since switching from one to the other does not affect one’s benefit income (in principle). The only people who might be better off (almost) immediately from the scheme were some of the rich, growing to about half the population when the scheme had fully phased in some forty years later, and the Treasury immediately (since the privatisation reduces fiscal pressure). (9) More subtlety the scheme, was – as for many other welfare changes in the 1990s – a shift towards the residualist welfare state (See Chapter 14).

Details of this story (or should we say `extraordinary policy cock-up’) belong elsewhere.(10) For our purposes the outcome of the referendum is to rule out politically any Prebble scheme and probably any Douglas scheme for some time, in favour of the McCarthy and/or Muldoon schemes, or some compromise between them. It does not necessarily rule out a Rowling Scheme, an issue to which we return in the last section.

The various sort of retirement provision schemes discussed in this section are summarised in a table at the end of the appendix.

Stability and Sustainability

Behind the details of these changes are some deep questions which are independent of the institutional arrangements. Insofar as the old people of a community can no longer work, or are not required to work, they have to be sustained. We deceive ourselves if we argue that a value free solution is this can be done by the saving during working life and living off the savings in retirement. At issue here is not the whether this is feasible, but that it is not value free. Deciding that property rights for the elderly (or anyone else) are inviolable is a value judgement. We may agree that is a good decision – one with practical benefits – but nevertheless a political value judgement has to be made.

The issue becomes more stark when we recognize that practically a person may fail to acquire sufficient investments during their working life to sustain them in retirement. It may not be their fault. (They may have made adequate provision, but the investment may have been fraudulently devalued – as in the case of the Maxwell pension funds. There are many such plausible scenarios.) How is the community to cope with its destitute elderly: insist they work, providing the minimalist income support grant of the residual welfare state for those who are invalided, or whose work skills are irrelevant, or provide all (or some of) the elderly with a decent standard of living via adequate state support? (Note that the issue becomes even more complex when the health needs of the elderly are added).

New Zealand, and most rich countries – the US is the most evident exception – has chosen the second option of adequate state support, but that leaves open a number of complicated issues. First what is adequate state support?

Not only is there no scientific value-free answer to this question (see Chapter 7), but the political answer has an uneasy implication. It is always in the interests of the selfish elderly to argue for higher state support. But for younger generations there is an asymmetry, since one day they are likely to be old, even although the elderly will never be young. But given a total consumption the economy can sustain, higher benefit levels for the elderly mean lower consumption for the younger generations. What is to stop the selfish elderly demanding higher and higher benefits, at the expense of the young?

Although his empirical evidence is extremely unsatisfactory, (11) David Thompson in Unselfish Generations argues this case eloquently, arguing each generation can make itself relatively better off in its retirement years. (12) It is easy to construct economic models which illustrate this end point problem.

The ultimate restraint against this instability is numbers. There are fewer elderly, and while they may be better politically organized than the younger generations (for the early retired have time and energy to devote to that organization), if they depress the standard of living of the young to greatly, that will generate the political organization for a backlash. Thus there is a political equilibrium of sorts of the amount of government support the elderly may extract, but while it is hard to judge what the maximum tolerable benefit level is, it would seem to be high.

There is a second process which has been overlooked both by the Grey Power strategists and their opponents. Raising state support does not give all the elderly the same additional benefit. We mentioned how the Muldoon scheme benefited the rich elderly. Arguably it made the poor elderly worse off, since funding of the additional benefits for the rich probably resulted in across the board cutbacks, and the inhibition of support for the poorest. (13) In principle then the political power of the elderly can be politically divided between those of different interests, although I cannot think of any case where this has happened thus far. (14) One may expect, however, divisions within the elderly to become more important in the future.

Political instability is related to economic sustainability. It is commonly argued that the current regime is unsustainable because the ratio of elderly to workers age population is rising. There are even claims of an “aging crisis”.

One of the safest rules of politics is that any claim there is a crisis is really an excuse to justify a policy. There may be a problem but, typically, converting it into a “crisis” distorts the analysis, resulting in a twisted policy prescription. Certainly there is an aging problem. The population is likely to get older, for the average age may rise, as may the proportion in the older age groups. If the population were getting younger, we would also have a problem. A couple of decades ago the youth of the New Zealand population was a drag on economic development, because we were having to invest resources to maintain and educate our young. Since most of this burden was carried by families, there was no rushing around calling it a “crisis”, advocating privatization or whatever. The private problem of the burden of children on the economy could be ignored.

Now those children are working, so that problem has gone away. But one day they will be retired, and will again be an economic burden. This has little to do with whether there is a state provided pension or not. Resources required by the retired will rise as their proportion of the population rises, unless we cut back their relative standard of living. Some of their consumption may be funded from income from their investments. But supposing they drop dead. The investments and the resulting income will still be there. It is the labour income (or lack of it, when retired) which matters.

Notice the aboves frequent use of such terms as “may” and “likely”. That is because we do not know about the future. Half a century ago the population “crisis” was thought to be about a decreasing population. That we got it wrong is a reminder we may get it wrong again. (There was the futurist who one day told the audience that we had an aging “crisis”, which means there too few workers. The next day the futurist was predicting massive unemployment because of a technological “crisis” which replaced worker by machine. That means too many workers. I dont think the futurist’s lecture fees cancelled out, even if the arguments did. Probably the limitation of the fee was the only reason he did not give a third lecture warning that the AIDS epidemic meant that everyone would be dying early.)

There is an interesting resonance here with an earlier point that the levy on the individual to fund a contribution determined scheme was very high. But if the problem is not the existence of the elderly themselves rather than the means of funding, does that not imply a high tax rate to fund the (equivalent level) first tier scheme. Not quite, if the population is growing. A simple illustration is children find it easier to look after their parents in retirement if their are eight to share the burden rather than one. But note the parents would have found the family burden greater when there were more children.

This is nicely illustrated in the following table, which shows the numbers of children (15 and under) and the number of retired (over 65) per 1000 of working age population (16 to 65), for different population growth rates (from natural increases, rather than migration). (15)

Economies with lower population growth rates have a higher proportion of their population who are elderly, but also a lower proportion who are children. The proportion of dependants falls also but, given that children require relatively less resources than the elderly, the burden of dependency is almost independent of the population growth rate. (16) Thus the difference between a high and low growth population is not really about the higher relative burden of dependents, but the shift of dependency moves from family provided support for children to state provided support for the retired.

This is not to argue that the elderly should be supported by their children, a public policy which is likely to be impracticable anyway. The point is that the different ways of funding dependents have created the aging problem.

Observe that if there is a population growth slow down (say from 2 percent p.a. to 0 percent p.a.), there will be a period in which the total dependency ratio will be low with a youth dependency ratio of the low population growth, and an elderly ratio of high growth. This is a transition phenomenon, available only temporarily. New Zealand has been living in such a transition since 1960ish, but it almost over.(17)

What are the policy options? The logic of a lot of people’s arguments is euthanasia. That is perhaps why their arguments are so irrational and ill-thought through, for they want to avoid this ultimate logic.

Another option would be immigration of working age people (providing they were as productive as the average domestic worker), which would involve further population growth, but would shift the aging problem elsewhere. (Note that increasing the birthrate would reverse the benefits of the transition from a high to low population growth strategy.) Increased employment in the working age population (and indeed in the younger retired groups) could reduce the burden in terms of the tax rate (but not the size of the transfer).

However the fundamental conclusion is that if the proportion in the population of the elderly rises, then the elderly will take a greater proportion of the total income of the society, unless their income levels get depressed compared to the national average. The conclusion is inescapable.

The Level of State Support for the Elderly

What should be the income of the elderly? The 1972 Royal Commission on Social Security (RCSS) said it should be enough to enable them to participate and belong in their community, although that does not give a quantitative level. One might also observe that the minimum level of the support should not be below the poverty level, whose quantification was discussed in Chapter 7.

But observe these are two different questions. What should be that minimum level, and what should be the overall distribution of income. The second addressed in the next section.

The changing level of state support reflects the difficulty New Zealand has had thinking about the implications of social change. Today the level of New Zealand Superannuation is set in a range which is a proportion of the average wage (e.g. between 66 and 72 percent of the average wage [check]). Given that the elderly probably owns a mortgage free house, and is not raising children nor work related outlays (such as travel costs), the ratio may seem generous. This approach goes back to the 1972 RCSS and earlier, and involves two implicit assumptions. First, that changes in the wage rate are a good indicator of the changes in the prosperity that the elderly should share. Second, it assumes that the reference household is a one income household. The first assumption is now probably wrong, the second one definitely so.

During the 1970s I made an extensive study of the New Zealand income distribution. A conclusion was that the average wage was a good indicator of long range changes in the personal market income distribution in the 1960s and 1970s. (18) No one has carried out such a thorough study for the 1980s and 1990s, but my impression from the evidence (see Chapter 7) is that relationship no longer applies – because of the rise in the profit rate, the real wage stagnation, the changing composition of the workforce, and unemployment.

A problem which did not arise for my study but is important here is that there is a substantial difference between the average wage, and average adult incomes. Although the amount (currently around $620 a week [update]) 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. 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 usually assuming that the typical person earns that amount every year for forty odd years.

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 (labour earnings, investment income, and benefits) 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. [update to 1996] Thus the 65 to 70 percent of the average wage which is the benefit benchmark is close to the median income. This suggests that the rate may be too high.

Second, and on the other hand, the benchmark is for a couple. The above calculations are for individuals, so the relevant reference point is twice the median income. Thus the state retirement benefit seems to be being set at about half the median income. Maybe, but that is not the way we think about it. It may be that when we focus on a two (rather than one) income couple, with total income (rather than wages), and the median (rather than the mean) we will start to get quite different conclusions about appropriate benchmarks. (19)

Abatement of the First Tier

The issue of whether the state first tier pension should be abated or taxed has proved politically contentious. Recall that the McCarthy scheme had its Universal Superannuation taxed as income with an additional surcharge which meant that the rich received less after tax benefit than for the same before tax income payment. The Muldoon scheme in effect removed this second element, but Labour reimposed (without consultation) an income tax surcharge in 1984 which was retained until July 1998 [check]. The 1997 Periodic Report Group (PRG) argued that some sort of surcharge should be reimposed in the future, following consultation, proposing a number of ways which this could be introduced.

There is no neutral way to settle whether there should be abatement (above that of income tax), and at what level it should be if there is to be one. Ultimately it will be settled by a political decision, but it is possible to be more explicit about any principles underpinning that decision. The minimum benefit may be set on the basis that of “participating and belonging” which while still requiring considerable political judgement, limits the more extreme outcomes.

I want to argue for a second principle, which has the similar effect of limiting but not eliminating the range of policy options. In particular a good principle might be that the average material standard of living of the elderly should be similar to that for the public as a whole. This would not just be disposable income, but would need to be adjusted for housing situation and also private spending on education and medicine. It would also treat children as a proportion of an adult. Probably the existing data base may not be robust enough to deliver the calculation to the required degree of precision, and there would be all sorts of technical difficulties. Not only does the principle appears to be a fair one (and any retirement scheme is likely to be unsustainable if the elderly have a markedly higher average income than the population as a whole). It also reflects a central point: the two objectives cannot be delivered by a single policy instrument.(20)

This means we cannot (in general) use just a first tier benefit to give the desired outcomes. A second intervention is necessary. The obvious candidate is an income surcharge, whose incidence is not totally determined by the second principle, but is restricted by it. In other words, without a surcharge (or some other policy instrument) we cannot be sure that an adequate first tier benefit for the poorest could be too generous to the elderly as a whole.(21)

This is a different vision, I think, from the position taken by the PRG, who were concerned by the equity question (although at a vaguer level than argued here), but also seemed to be concerned with the fiscal cost of the existing scheme. Focusing on fiscal cost will convince no-one other than a Treasury officer.

Further Development

The emphasis of the PRG on the surcharge or abatement meant they did not consider the issue of compulsory second tier provision, the Rowling approach. The Prebble approach has been ruled out by its comprehensive rejection in the 1997 referendum, and the Douglas approach appears to be either unworkable (because it cannot guarantee an adequate income for many beneficiaries) or to collapse into a Prebble one.

Why the PRG did not consider the possibility of a compulsory second tier, if only to explain why they rejected it, remains a mystery. It may not be on the top of the political agenda, but as long as a voluntary second tier exists, there will be pressures to extend it to other workers via industrial action or via political action. At this stage, we need to think about such an extension to a more comprehensive second tier scheme. (Chapter 19 considers the case for a compulsory Rowling type scheme.) Here is how the consolidated voluntary scheme might look:

1. A comprehensive legislative framework, consolidating the existing law into a single easily understood act. Existing legislation would be retained, so existing schemes could continue, if that is their members preference. (There would be an opportunity to transfer – see 18).

2. Workers (and others) would volunteer to join the scheme.

3. Regular contributions out of earnings.They would chose the level of contribution (although some schemes might have minimum contribution rules). Others, such as their employers, could make contributions on the workers’ behalf.

4. While the level of contribution would be voluntary, the recommended level would be 8 percent of earnings. (A man who contributes for 40 years, is likely to get a retirement annuity equal to about 27 percent of their earned income over that period, at the age of 65. This is on top of the 33 percent of the average wage received as NZS. (22))

5. The contributions to the fund and the return on its investment would not be taxed, but any payments from the fund would be taxed as income. (23) To offset the fiscal cost of this arrangement, the fund would be required to hold 21 percent of its assets in government stock (issued at market rates of interest).

6. The contributions would be invested in a fund, and the return of the investment retained in the fund.

7 Contributors would chose their own schemes and the trustees of their scheme, who would choose the private fund managers of the scheme.

8. Subject to point 5, there would be no restrictions on where the funds were to be invested, other than those of normal prudence, and as may be agreed by contributors.

9. A contributor would be able to borrow against a part of their contribution for the following purposes: first home purchase, payments of education course expenses, establishment of a business. The aim of this provision is to reduce the pressures when an individual is saving for other investment purposes (which in the long run would contribute to their retirement provision).

10. On retirement the funds would be converted into a life annuity. There would be no lump sums.

11. The age of retirement would be normally after the age of 60. However for certain occupations, or in the case of permanent invalidity, the retirement age can be earlier.

12. Specific provision would ensure that the scheme is portable between jobs, and there would be explicit provision for marital separation, to ensure that normally there would be an equal sharing of funds built up during the marriage.

13. Parents looking after young children would have a contribution by the state based on the base wage at the recommended level of 8 percent p.a. (See 4)

14. Appropriate contributions under the ACC scheme would be made for those whose earning power is reduced as a result of the accidents.

15. Except for domestic purposes, other parents, and ACC beneficiaries, there would be no contribution for beneficiaries by the state. (see 13 and 14).

16. The government would contribute to enable a woman’s annuity to be the same level for the same investment as a man’s at the age of 65. (This deals with the longer life expectation of women.)

17. The income tax system would be used as an efficient collector of contributions. One of the advantages of a compulsory system is that the income tax system can be used to administrate efficiently the contributory part of the scheme.

18. There would be transition provisions to enable existing voluntary occupational schemes to transfer to this one. They would be developed in consultation with the trustees of existing schemes.

19. There would be independent commissioners to regulate and protect the integrity of the overall scheme, and specific legislative provision that the scheme cannot be made compulsory, except following a majority vote in a referendum.

A particular advantage of this consolidation of a voluntary second tier scheme is that it is unlikely it could be converted into a benefit determined scheme, since that would be inequitable because not everybody would be covered by a second tier. The government guarantee is embodied in the first tie


TIER Funding Income/
(plus income
First PAYGO benefit comprehensive yes McCarthy
no Muldoon
contributory contribution possibly yes Rowling
probably none probably not Douglas
first tier
high Prebble
contributory contribution first tier no Encouraged

There is no Next Chapter. However there is an early draft of Ch 18: Meaningful Employment

1. There may be different payment levels reflecting different accommodation situations.
2. Easton, Income Distribution in New Zealand (1993), Appendix 1.
3. There are hints that a surcharge may be introduced in about a decade – but that is a long time in retirement policy terms.
4. This was not as acute problem in the late 1960s when the Douglas scheme was conceived because there was near full employment, and it was assumed that in retirement the husband would support those married women who had not been in the paid workforce.
5. (22.5 x .5)/(40 + 22.5 x .5) = .2 (or .8 x 45 + .4 x 22.5 = 1 x 45).
6. Although I have called the scheme after the politician who shepherded it through parliament, the key notion of the second tier on top of the first tier was conceived by the Secretary of the Treasury at the time, Henry Lang.
7. Another complication was the relevance of the mean wage for the calculation. This is elaborated in a later section.
8. And during the coalition negotiations.
9. .
10. St John (1998), Easton …..
11. See Easton ……
12. Thompson argues that the current generation of retirees will do this, but overlooks that subsequent generations can pursue exactly the same strategy.
13. Regrettably there has been no attempt to quantify these effects – indicative of the point made in the next sentence.
14. Arguably Labour’s 1975 election manifesto package for the elderly was an attempt to do this, insofar as it gave increased benefits to the poor elderly if the Muldoon scheme was not implemented. If so, it was so poorly sold it failed.
15. Using the 1992-94 mortality rates.
16. For instance, if a child were equivalent to .6 of an elderly in resource use terms, the ratio of equivalent dependents to working age population would be almost exactly the same at 0 and a 2 percent population growth rate
17. Perhaps this is where David Thompson’s thesis of an existing generation of the retired being better of than past and future ones could be rescued.
18. Easton, Income Distribution in New Zealand (1993).
19. One place that the use of the average wage led to faulty analysis has been in the calculations for contributory pension schemes, since the average gives little guidance as to what will happen to most people. Easton, “Different Strokes” (August 10 1986).
20. An even better second principle might be that the distribution of the material standard of living of the elderly should be the same as the for the population as a whole. While this has attractive theoretical properties, it is currently impracticable to implement.
21. Implicit in the discussion here, is that New Zealand Superannuation raises the income of the elderly (defined comprehensively) to above that of the population as a whole. This is a conjecture, supported by Easton “Poverty in New Zealand” (1975), which however does not adjust for housing, and therefore underestimates the relatively higher incomes of the elderly. Of course, things may have changed in the subsequent two decades.
22. A women’s retirement is more complicated because of the parental contribution. See 13. Note that her different life expectation does not matter. See 18.
23. In the jargon, this would be an EET scheme rather than a TTE scheme: E = exempt, T = taxed. and the three letters refer in order to contributions, fund earnings, and payments.