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Salient. Victoria University Student Newspaper. Volume 37, Number 5. 3rd April 1974

Super Scheme -a mass ripoff

Super Scheme -a mass ripoff

Jim Delahunty, in his article on the New Zealand Superannuation Scheme, claims that the scheme is something hotched up by the Labour Government to deprive the old rather than tax those who have plenty now. The mere fact that the underlying feature of the scheme may be to accumulate vast sums of money cannot be contrived to imply that this scheme is not going to be run on theoretically sound bases.

The principles of superannuation lie basically in interest, yield on money invested, and mortality rates. It always has been, and must always be, sound practice that an average person (one who dies when predicted from previous experience) can get out of a fund only as much as he puts in, plus interest and yield on investments.

This principle is adhered to in the government scheme, where the income, or contributors to the fund will be handled in a contributor's account.

When a person retires, his contribution plus interest will be used to purchase an annuity from the annuity account.

Annuities are calculated as being the purchase amount, divided by the value of future payments discounted at some interest rate and adjusted by some factor to allow for inflation.

Once the pension has been determined, it must keep on rising at the rate of inflation. If the fund only assumed 6% inflation over the remaining years of the pensioner's life, and inflation one year is 11%, the pension must increase by 11%.

It must be emphasised that the Act specifies that pensions may not be paid from incoming contributions. They are paid from a separate account which comprises all the purchasing amounts for annuities from the various pensioners at that time receiving a pension from the fund.

It will be by no means compulsory to belong to the Government fund. Legislation merely stipulates that other schemes must be at least as good as the Government scheme.

In theory this means that any Life Office which wants to can start a scheme to compete with the government one.

In practise however, full particulars of the government scheme have not yet been decided upon, much less released, so no company really knows what their scheme will have to be like to be a suitable alternative to the government scheme.

It is probably, that even in April 1975 when the money starts coming in, that the full particulars of the benefits of the scheme will still not be decided. However the other life offices do not share the privileges of the government and will be required to submit detailed accounts of how their contributions schemes will be run, before they are allowed to commence operation. A formidable task when you aren't told what to submit.

Image of a man wearing a newspaper cap

It is therefore evident, that at the start of the scheme, nearly all of New Zealand presently un-superannuated workers (75%) will go to the Government Scheme for lack of any alternative.

When a person in a non-government scheme retires, the company he is with can give him a pension which they must guarantee against inflation. But since no company will carry this risk, and a fixed proportion of the pension must be guaranteed against inflation, the company will use at least some of the pensioner's contribution to purchase an annuity from the government annuities fund, once again, for lack of any alternative.

All this is a cover to the real issue though. Although this scheme follows well-established principles, there is practically no experience of a scheme of this magnitude.

In this scheme there will be (for a start) $350 million per annum paid in for (say) 30 years before anything is paid out. That is $10,500 million at today's rates.

It is conceivable that the government could lend itself this money and pay the interest from tax.

In an idealised situation where the income from contributions plus return on investment was equal to the pensions being paid out, the pool to be invested would be constant.

To put it bluntly, the government could lend itself $10,500 million from the scheme, and never have to repay it.

The contributions up to this point would then be taxation in the broadest sense. One of the alternatives to lending the money to itself is to lend it to other countries, a practise leading to incredibly low return on investment, since international lending rates are below even New Zealand internal rates, there is practically no chance of the government using funds to purchase overseas owned interests, since most of these are 'political' in any case. The final alternatives then desirable would be to lend the money within New Zealand, or to invest in property within the country.

In New Zealand, most lending is done by the insurance companies. Insurance companies between them, can practically dictate the current mortgage rates for home finance. But by comparison with the new super scheme, the capital invested by the insurance companies will be chicken feed. The Government Life, NZ's second largest insurance company has a capital of around $350 million. The new scheme will be investing that per annum for 30 years.

It appears that so much money available for mortgage must force interest rates down, unless an interest fixing racket emerges, contrary to the principle of a free market.

As we saw last June to December, when interest rates are low and money is easily got, it is inevitable that an excessive rate of inflation results, simply because there are more people wanting houses etc. than there are houses for sale.

If property prices increase, then rents increase and so we are back on the old inflationary spiral. And this argument obviously still holds if the money is invested industrially.

No worker is going to accept a drop in his standard of living as a result of this scheme. It has even been stated by the government that no-one's take home pay will drop as a result.

So if the worker gets an increase to cover the contributions, prices must go up to accomodate for this, and they must go up still further to accommodate for the boss's share.

This inflation thereby created will only serve to decrease the value of the worker's contribution and since a scheme of this size cannot earn sufficient interest to equal inflation, the worker must lose out.

Ultimately then, the scheme can be seen as a mass rip off, cheap pensions for most (but not enough), or a lot of bull about nothing. They're going to get the dough out of you somehow. Does it really make all that much difference how?

—Martin McKendry