Keywords: Social Policy;
There is a line entry in the 2002 Budget’s Economic and Fiscal Update for ‘GSF pension expenses’ of $671 million, an amount sufficient to more than double the total vote on arts, culture and heritage, the community and voluntary sector, conservation, national archives, the national library, and sport and recreation. Rewarding Service is a history of how that entry came about.
To understand this sum, we need to understand the distinction between contribution-determined and benefit-determined occupational superannuation schemes. In the former, the pension or annuity is set by the amount invested in a fund, together with the return on the investment. In the latter, the pension level is independent of the contributions. Most benefit-determined pensions involve contributions from both employees and employer which are calculated to be sufficient to fund the pension. The two approaches seem the same, since the ex-ante –– before the event –– calculations of the contribution in relation to the benefit for each type of scheme are arithmetically identical.
However, ex-post –– after the event –– the two kinds of schemes work quite differently. The assumptions of the actuarial calculations will not be realised; there will be a difference between what the investment fund proposed to pay and what it can pay. More often than not, the funds will be insufficient to pay the promised pension. Who bears the loss? In a contribution-determined scheme it is the pensioner, who receives only what the contributed fund can afford. In a benefit-determined scheme the employer makes up the difference between what was promised and what the fund can pay. In practice, only the government has the funds to guarantee a truly inflation-proofed benefit-determined pension, as the New Zealand government (that is, taxpayers) is doing this year to the extent of $671 million.
Histories of contribution-determined schemes are inherently boring –– a sequence of the institutional evolution, some of the personalities (and characters) who were involved, the odd event, and the buildings in which the administration resided. Occasionally there is the excitement of a financial crisis, as when Robert Maxwell got off with his employees’ contributions, but that shifts the nature of the history.
A government benefit-determined scheme is a different story altogether, because the connection between the contributions and the outcomes is not as tight, and there arises the possibility –– nay, the actuality –– of ongoing negotiations between the employer-government and the employee-prospective pensioners. It is these events (and the $671 million) which gives a piquancy to Atkinson’s history of the Government Superannuation Fund.
The story begins with the opening legislation of the nation’s second Parliament in 1856, when three members of the old Executive Council were granted pensions –– no contribution, and paid by the taxpayer. By 1858 Parliament was granting a non-contributory pension to long-serving employees in order to ‘secure those best fitted …… for the public service.’ The first contributory scheme was introduced in 1886, with an eventual contribution-determined pension. By 1893 the principle of the government topping up inadequate pensions was sneaking in, despite Colonial Treasurer Ward’s promise to Parliament that the scheme was ‘self-supporting’.
Following the introduction of the means-tested old-age pension in 1898, and coincident with a major expansion in the public sector, the Liberal government established separate contributory funds with benefit-determined pensions for police, railway workers, teachers and the civil service. By 1908 these were being tinkered with, a practice which continued until the unified Government Superannuation Fund ended in 1992. From the very beginning there were negotiations between the government and representatives of the future pensioners. Later negotiations, where there is a record, are described in the book.
These negotiations illustrate the basic problem. The government needed to be a good employer. Wanting a high-quality stable labour force, it provided a post-employment retirement pension as a part of the security of pay and conditions. Thus the scheme was benefit-determined. The connection with the employee contribution was compromised, not only because economic conditions would change over the lifetime of the contributor –– markedly and variably, as history shows –– but because the fund was administered by the government, and any failure to attain the returns that the actuarial calculations promised could be attributed to the government’s poor management. This meant that there could be considerable renegotiation of the terms of the scheme, with a tendency to improve them for pensioners because, unlike in a purely contribution-determined scheme, any increase in one condition (e.g. a better pension for widows) need not be automatically offset by a reduction in another (a lower pension for couples).
These changes through the twentieth century are detailed by Atkinson, so let me skip to the end, except to note some unnecessary errors in the text. For instance, on page 23 it is stated that ‘inflation was relatively rare in early twentieth-century New Zealand’. In which case, why was a commission of inquiry established to measure it in 1912? In a (hard-to-decipher) photograph on page 105, the Treasury solicitor, Ivan Kwok, is described as ‘Secretary of the Treasury’.
A key element of post-1984 economic policy involved reducing the exposure to risk of the government by shifting the risk to individuals. This is a complex story because any government risk is carried by taxpayers, so the transfer is from one group of New Zealanders to another. The government-underwritten, benefit-determined superannuation scheme for its employees was an obvious target. The aim was to shift the risk of actuarial mistake from the government and taxpayers in the current workforce, to the future retiring pensioners.
As Atkinson shows, the undermining of the comprehensive scheme began in the mid-1970s, and later government superannuation reform got mixed up with the politics of the changes to National (now New Zealand) Superannuation The government also made short-term concessions to win the long-term objective of eliminating the benefit-determined scheme.
As the $671 million line entry shows, the long-term objective is yet to be attained, although by 1996 there were fewer contributors to the rump scheme than there were pensioners. While the absolute amount continues to rise, the Treasury forecasts have the line entry very slowly diminishing as a proportion of government spending. At some stage –– perhaps 50 years hence –– that item will be an irrelevance and the scheme but history, rather than a part of today’s fiscal reality.
Its demise leaves us with a couple of issues to ponder upon. The GSF line entry currently amounts to about 15 per cent of the net cost of New Zealand Superannuation. However, it goes to only about 40,000 retirees –– less than 10 per cent of the over-65s. At some point this relatively well-off and secure group will diminish. What are the implications for the future elderly? And let us not forget that the original purpose of the scheme was to generate a cadre of loyal and long-serving public servants, at a lower wage cost. What are the implications for the future of a public service without this incentive?
Thus Rewarding Service does what its commissioners had hoped for: to record the past and provoke the learning of lessons for the future. One day some Treasury official, grumbling about the GSF line entry in the government accounts, may look at this study, see how the entry arose, and wish that he or she had been a member of such a secure pension scheme.