KiwiSaver and the Dancing Cossacks

 

Between around 1946 and 1964 there was a “baby boom” – a significant increase in the number of babies born.  Sadly, we haven’t been so good at producing offspring, which will have a significant impact on our own future as that generation ages and retires.  Population projections indicate that while there were one in eight New Zealanders aged over 65 in 2009, by 2031 there will be one in five.  The number of people aged over 65 will exceed the number of under 14 year olds in the late 2020s.

NZ population projection - Statistics New Zealand (2009)

If the retirement age remains at 65, then as they move from contributing to the productivity of the country to being dependant on the country, our ability to maintain their needs diminishes with the proportional reduction in remaining workers.

The origin of our current superannuation system lies in the 1975 General Election.  The incumbent Labour government had introduced a compulsory superannuation scheme and the election was largely fought over that issue.  National introduced one of the first attack ads used in New Zealand, the Dancing Cossacks, suggesting it would result in the Government owning the New Zealand economy using the worker’s money – we would become a communist state.  Watch the Dancing Cossack ad here.

National’s solution was a “pay as you go” scheme, where instead of funding future superannuation requirements from current tax, it could be funded by future taxpayers.  National won the election, but as we’ve known now for some time, their plan was unsustainable.

Taking the pragmatic approach that people are demonstrably poor at saving for their retirement; parties don’t win elections by suggesting a reduction in superannuation entitlements; and we can’t afford to keep going the way we were, in 2001 the then Labour Government introduced the New Zealand Superannuation Fund – commonly called the Cullen Fund.  The intent was to prefund a portion of the Governments future payment of National Superannuation from those taxpayers to the current generation.  

Basically, the Government puts capital into the fund, which invests it and the income is used by the Government to then pay for National Superannuation.  The table shows the projected costs of Superannuation without the fund (red) and with the fund (blue).  The blue line is higher in 2009 and again around 2019 as it reflects funds going into the fund (funding being currently suspended by the government), dipping below the line where funds are projected to start to be withdrawn around 2031.

But that’s only part of the story.  Currently these are the rates for NZ Superannuation for earners on the “M” tax code;

Could you afford to have the retirement lifestyle you want on that? And what sort of % of the average wage will NZ super be set at in the future?  That means you may need to find additional funds if you want to have a secure and enjoyable retirement.  A good place to calculate what you need can be found at sorted.org, the Retirement Commission’s website.

There’s lots of ways you can fund this, you can sell your house and move into a smaller unit, freeing up some capital, you can own a rental property, you can invest on the stock market …..

This post however is about a specific method of funding that retirement income gap: KiwiSaver.  

KiwiSaver was introduced through the KiwiSaver Act 2006.  It grew quickly, after 3 months there were 200,000 members.  My anecdotal experience though, was that many of these people signing up for KiwiSaver were diverting money they were otherwise putting into an existing superannuation scheme.  In fact, some almost 65's join before they are no longer eligible, but after their last paid employment, and pay the minimum $20 per week.   In return they receive 100% subsidy from the government plus $1,000 at startup.  After the minimum 5 years, in a fund that guarantees at least what you’ve put in - that’s close to a minimum 120% return.  So the best return is actually short term, for people whom the scheme isn’t intended for, and relies on a taxpayer subsidy.  This demonstrates one of the issues with the scheme; some of its benefits (and other conditions such as when you can withdraw your money) are reliant on the provisions of an Act of Parliament rather than the provisions of the trust deed.  And KiwiSaver has to be one of the most amended Acts outside of tax legislation that I’ve seen.

The other issue with KiwiSaver is its complexity.  I’ve talked to people who were surprised that money was being deducted from their salary after they signed up for it at their bank, and very few people seem to completely understand how it works.  Part of the complexity arises because it’s a voluntary scheme – conditions such as its lock in and opt out provisions and attempts to ensure that employer subsidies are “real” employer subsidies and not being deducted from the employee. 

When you compare the complexity of the scheme and the resultant compliance cost with the simpler compulsory Australian scheme, you have to wonder why we haven't gone down this route.  The justification given at the time was that it isn’t guaranteed.  However no investment strategy is, so unless you don’t intend to save for retirement you will always have this risk - and these schemes are lower risk than say … investing with a finance company.  If it’s a compulsory employer contribution only it doesn’t preclude also putting surplus cash into another retirement investment.  Other than helping with savings rates, a compulsory scheme would also help deal with the high percentage of financial assets held by banks here in New Zealand.

Probably my biggest issue with the current scheme, with its requirement for an employee contribution, is the expectation being placed on the current generation of taxpayers.  We’re paying for current superannuitants in “pay as you go”.  We’re paying additional tax which goes into the New Zealand Superannuation Fund to pay for part of the “government” contribution to our own retirement – and we need to save for anything on top of that we may require.   Many are also paying back student loans – something previous generations didn’t have to do; we have some of the most unaffordable housing in the world, and even renting at a reasonable rate is now an issue in some cities.  Financially, we truly have a “squeezed” generation.

Hon. Hone Harawira M.P. and the four Virtues

 

Te Tai Tokerau MP Hone Harawira

The focus of this post is on the four virtues which form part of the Stoic philosophy - as New Zealanders have always admired people who display attributes associated with Stoicism; witness the legendary Buck Shelford playing on after ripping his scrotum and loosing teeth in a ruck, and the calm understatement in the face of difficulty displayed by Sir Edmund Hillary.

So it’s not entirely inappropriate to look at one of the most high profile Maori leaders, Te Tai Tokerau MP Hone Harawira, using this philosophy developed by Zeno of Citium in ancient Greece and then widely adopted in both Greece and Rome at that time.  If this approach seems far fetched, consider the Spartan Cleomenes III - who sought to engage in battle with Aristomachos of Argos at Pallantium.  Aristomachos deliberated over his army of 20,000 infantry and 1,000 cavalry and his opposition, listened to his advisors, and then decided to withdraw as he felt they would be no match for Cleomenes and his 5,000 Spartans.  Mr Harawira’s comportment in adversity bears comparison with Cleomenes, and his deep commitment to his culture also bears comparison to Cleomenes encouragement of traditional Spartan values.

 Zeno of Citium

Virtue isn’t a word you hear commonly any more outside of a reference to chastity, which is a shame, because it used to refer to living according to ethical and moral principles.  The four moral principles that were important to the Stoics are; andreia, dikaiosyne, sophrosyne, and sophia.

Lets start with andreia, or courage.  

The first component of courage is bravery – or “the ability to stand up for what is right in difficult situations.”  This could be physical, where you act in spite of possible physical risk and harm, or moral bravery where you act in a way you believe to be right in the face of popular opposition, or shame, scandal, or backlash.  Another component of courage is perseverance, where you continue to seek your goal in spite of obstacles and perhaps failure.  While perseverance overlaps with self control it more about long term action rather than the immediacy of self control.  Another way to look at courage is to consider it as being your ability to be true to yourself and your beliefs across all circumstances.

So, does Mr Harawira live up to this first ideal?  It would be hard to argue that he isn’t morally brave in the face of popular opposition, is persistent, and the column which started the current disagreement where he criticises the compromises made by his political party indicates his need to be true to his beliefs.

The next virtue is dikaiosyne, or justice.  Lets examine three aspects of justice;  

Legal justice is your obligations defined by the law of the land.  You are morally constrained to follow these unless the law requires you to do something that is morally wrong, in which case you must do morally and ethically right.  Over and above the requirements of law, a citizen should also be civic-minded, willing to participate in the political process and concerned about the welfare of the community.

Commutative justice requires fundamental fairness in agreements and exchanges between individuals or groups, so that resources are allocated by free choice and equal opportunity.

Distributive justice is about the proper allocation of things such as wealth, power, reward, or respect among different people.  To meet the requirements of distributive justice everyone would have equal protection under the law, for example.

Does Mr Harawira meet this test?  He is noted for his disrespect of parliamentary rules and of laws, but this seems to be because he believes they lack moral authority based on historic events which breached commutative and distributive justice for Maori, and his belief that Maori cultural rules and practices take precedence.  You can’t argue that he isn’t civic minded, concerned about the welfare of his community and fully participates in the political process.

The next virtue, and usually considered the most important is sophia, or wisdom.

Wisdom is more than just theoretical knowledge, it is the combination of knowledge and experience used deliberately to improve wellbeing, and is based on an understanding of what is of real value.  First you must understand all the options available, and then choose the best one.  Researchers in the field of positive psychology have suggested the following tests for determining wisdom;

• A wise person has self-knowledge.
• A wise person seems sincere and direct with others.
• Others ask wise people for advice.
• A wise person's actions are consistent with his/her ethical beliefs.

There was recent publicity over Mr Harawira’s comments about not wanting his daughter to bring home a Pakeha boyfriend.  Much less coverage was given to his rationale, which showed it was based on a reasoned and practical approach, albeit with what many would consider flawed logic and inherent racism.  While Mr Harawira seems to meet the above tests you have to wonder if he is not so completely immersed in his culture that he fails to see all the courses of action available to him, or rejects options by placing belief before reason, so his decision making may not always be wise. 

The stoics belief was that human beings will always have emotional reactions to events.  They also believed that emotions often lead to errors in judgement and they sought to transform their emotions using logic, reflection and concentration to developing an inner calm so that they could gain clarity of thought, reason and judgement.   

The virtue associated with this is sophrosyne, or temperance.

Temperance is “moderation in action, thought, or feeling; restraint.”  A lack of temperance undermines prudence.  A lack of emotional temperance is evidenced in many ways including anger.  The latest publicity regards a facebook comment made by Mr Harawira "It looks like these dickheads only have expulsion on their mind, if that's their plan then we may need to refocus,".  This statement indicates a lack of temperance, and that is perhaps Mr Harawira’s biggest flaw and his potential downfall. 

 The Toki - representing wisdom and courage

For all his courage and his sense of justice, without tempering his emotions Mr Harawira cannot make truly wise decisions - including ones which will ensure his own future ability to use his positive virtues for the good of his constituents.  And until he develops it he will lack the ability to be truly objective, have clear judgement, and maintain equanimity in the face of life’s ups and downs – what the Stoics would simply call having peace of mind.