CREATING THE APPROPRIATE ECONOMIC INCENTIVES TO SAVE FOR RETIREMENT
SKF Ericksen © 2003
QUESTIONS
If I have a reasonable amount of assets that I have accumulated over my life, why should a solo mother who is working, trying to improve the circumstances of her children, be taxed to provide me with superannuation?
If I have earned a million dollars over my working life, but not saved any of it for my retirement, then why should a child doing a paper run to save for university, be taxed to provide me with full superannuation?
If I have not had the opportunity to work during my life, and nor do I have any assets, I would hope to live out my old age in dignity and respect.
If I had worked hard during my life and accumulated assets, but had lost these through misfortune or bad judgement, I would hope that society would provide a safety net to provide me with my basic needs.
PRESENT SCHEME
The present scheme does not differentiate between someone who has considerable assets or is a pauper. It also provides a negative disincentive to save for retirement for a considerable group of people. Current Government policy for the "Super" fund gives many people the false impression that they do not have to provide for themselves.
The Winston Peters scheme, rejected in referendum in 1997, would have forced people to save for their retirement using a narrow range of 'approved' options, and would have been a blunt economically inefficient instrument.
ALTERNATIVE PROPOSAL
The following proposal avoids these problems, is equitable, economically efficient, provides positive incentives and freedom of choice, but also ensures there is a safety net.
With this alternative proposal all people above the age of 65 could apply for and receive a base government pension (BGP) equivalent to the Transitional Retirement Benefit (currently net $202.05 for a single person, $336.76 for a couple April 2003. Source:
www.workandincome.govt.nz).
www.workandincome.govt.nz).
If, however, you wanted to receive a benefit up to the level of the government superannuation (currently net $245.30 for a single person, $359.81 for a couple April 2003) you would need to be means tested on past earnings. More specifically, the means testing of past earnings would be on the potential savings available to individuals from saving a nominal amount of their lifetime income stream.
The accumulated nominal savings (ANS) is derived as follows: the Inland Revenue Department would keep an ongoing tally of a nominal assumed savings rate of (say) 5% of all income for each individual.
The amount would be cumulatively totalled each year and indexed/multiplied by a 'long term investment index' (LTII).
The LTII would be the average after inflation increase in representative or across the board long term savings mechanisms (bonds, stocks, property, etc). The ANS would appear on individuals annual tax statements. This would allow individuals to assess the performance of their own savings rates and investments.
The "cut-off" point (for illustration purposes) for receiving top-ups to the BGP would be (in 2003$) an ANS of $166,000 for an individual or $250,000 for a couple. These amounts could purchase a life annuity that would give an income stream of $245.30 for a single person, and $359.81 for a couple (Source : www.immediateannuity.com). This is the same as the current weekly superannuation payment, and is referred to as an Annuity Equivalent to the Current Super level (AECS). The total weekly income stream, including the BGP of $202.05, for an individual with an ANS of $166,000 could be $447.35, if they had actually saved $166,000 and purchased a life annuity. The equivalent figure for a couple would be $696.57. There would, however, be no compulsion to actually purchase an annuity.
GOVERNMENT ASSISTANCE
If your ANS were less than the amount required to purchase an AECS, then the government would 'top-up' the BGP with a regular allowance. The 'top-up' would be inversely proportional to the ANS accumulated.
EXAMPLES
For example where no ANS had been accumulated (for example at the introduction of this scheme, or an individual who had never had any income prior to reaching age 65) that person would receive a full top-up of $43.25 giving them an amount equivalent to the current superannuation of $245.30 for a single person.
Where an ANS of $83,000 had be accumulated then that person would receive a 50% top-up of $21.63 in addition to the BGP of $202.05. With an annuity purchased with the $83,000 a total weekly income of $346.33 could be achieved. It would, however, be up to the individual as to whether they saved the amount equivalent to the ANS and, if they did, whether they purchased an annuity with it! Without the annuity their weekly income would be $223.68.
SAFETY NET
This proposal has a built in safety net of an amount available to all people over the age of 65, and is equivalent to the Transitional Retirement Benefit, currently net $202.05 for a single person, $336.76 for a couple (April 2003).
FULL CHOICE
Individuals make the choice of what they do with tsavings available from their income (pay off their mortgage, invest in their business, buy shares or bonds, bet it at the TAB, etc.) and are individually fully accountable for their actions. They however have a strong incentive to ensure maximum return on their assets while minimising risks, but are assured that there is a minimum safety net if things do go wrong.
SAVINGS MINDSET
This proposal encourages the development of a "savings mindset", minimises the attitude that "the government will look after me", and also avoids the significant transaction costs that the rejected Peters scheme would have imposed on the economy.
IMPLEMENTATION
The proposal could start immediately as the ANS period would start at the beginning of the scheme. The rate at which people reached the ANS cut-off point of $166,000 (for an individual) would be fully dependent on the amount of their income.
The Inland Revenue Department already collects information on individuals annual income. The top-up amount could be automatically be derived and distributed with BGP.
CONCLUSION
It is considered that the above proposal is economically, socially and politically rational. The approach described is equitable, economically efficient, provides positive incentives to save, gives freedom of choice as to how savings are invested, allows for dignity in old age and provides a safety net.
NOTES
The amounts set by government for the BGP and the ANS cut-offs may be either higher or lower. However, they should be relatively consistent over time to maintain saver's confidence levels.
The original paper written in 1997 during the superannnuation referendum is here.
On 30 April 2002 Dr Cullen outlined five criteria that tax incentives to encourage people to save would have to meet. The above proposal satifies four of the five criteria. The remaining one is irrelevant.
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