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.

Monday-ising Waitangi and Anzac Days

The call to Monday-ise Waitangi and Anzac days “gaining momentum” as reported in the Herald seems to have been a bit of an overstatement based on subsequent coverage.

I’m interested in the validity of the arguments presented by the leader of the Labour Party, Mr Goff, and the President of the EMPU, Mr Little, as reported in the Herald article.  Essentially their argument is that as these two public holidays are on a fixed date, when they fall on a Saturday or a Sunday people don’t get the benefit of a day off and are deprived of their right to 11 public holidays per year.

Waitangi Day and Anzac Day have their own Acts of Parliament, and the particular piece of legislation that Mr Goff and Mr Little refer to – The Holidays Act 2003, while listing them as holidays, makes no mention of when the public holiday should be observed.  Section 4 of the Waitangi Day Act 1976 specifically says it should be observed on the day it falls including a Saturday or Sunday, and Section 3 the older Anzac Day Act 1966 also says it should be observed on the day it falls - and then rather quaintly refers to treating the morning of Anzac Day as if it was a Sunday (for those old enough to remember how New Zealand was on a Sunday).

There are other Acts – such as the Shop Trading Act and Sale of Liquor Act - which also refer to public holidays but have no bearing on this discussion.

The Holidays Act only applies to employees – so if you are self employed, such as a sole trader or in a partnership, or some other sort of working relationship, or a volunteer, or aren’t working, then you aren’t one of the “people” they are referring to.  But we can narrow it down even further.  If you work on a public holiday you are entitled to an alternative day, and if you normally work the day and don’t, then you get paid the day - and that’s whether or not it is on a weekend i.e. you do gain the benefit of these days if they fall on the weekend if it's one of your normal working days.  If this is the case you also aren’t one of the people Mr Little refers to when he says "It's an issue of fairness in that the Holidays Act says you are entitled to 11 statutory days off and the best you can hope for this year is nine."

In fact there are many workers who don’t get 11 public holidays as paid work holidays even in a normal year.  Section 44 of the Act lists the public holidays employees are entitled to and Section 46 says you should get a paid day off, but section 48 says that section 46 has been complied with if the day isn’t a normal working day for the employee – which is why Monday to Friday workers don’t get anything for the two days if they fall on the weekend.  Section 44 also says if two public holidays fall on the same day they should be treated as one (which is happening this year with Easter Monday and Anzac Day).  If you are a worker who doesn’t work Monday to Friday e.g. you work part time, or are full time but a rotating roster, or perhaps do three to four 12 hour shifts per week, chances are you already miss out on being paid for some public holidays per year.  

The wording of section 3 outlines the purpose of these sections of the Act.  Public Holidays are “for the observance of days of national, religious, or cultural significance”;

• if you normally work it but have the day off so you can observe this special day you are paid so don’t get penalised financially
• if you have to work it you are compensated for missing the day
• if it is already your day off then you get to observe the day and you aren’t penalised financially (since you’ve already got paid for your normal weeks work)

Annual leave is “to provide the opportunity for rest and recreation” for a fixed number of days, whereas public holidays relate to the nature of the day and whether they are paid days off is a matter of swings and roundabouts. 

The statement “the Holidays Act says you are entitled to 11 statutory days off and the best you can hope for this year is nine” is misleading – the Act doesn’t deprive you of a day off if it falls on a day which isn’t your working day, just a paid holiday, which is a different thing.  Monday-ising it actually exacerbates this issue for some workers, while benefiting others – and is simply irrelevant for many people.  The rhetoric doesn’t reflect this at all.

The old Holidays Act was a classic example of how not to Monday-ise a holiday, you could end up working the actual Christmas Day and if it was on the weekend, missing out on time off with your family and friends, and receive no additional financial benefit or day off – and that is a key point.  Mr Little suggests that "the point of observing significant days is you take time to reflect. That simply doesn't happen on a weekend."  The point of a significant day is that the DAY is significant – ask an American whether the 4^th of July is less significant on a weekend, or the French the same for Bastille Day, or a New Zealander whether they reflected more on Christmas Day last year on Monday the 27^th than on Saturday the 25^th.

The way this part of the Act operates already is consistent with its purpose.  Whether you feel that everyone should have a fixed number of public holiday ‘paid’ days a year is just a matter of opinion.  Let’s form an opinion based on good debate, not misleading statements.

 

http://www.stus.com

Defense White Paper

photo: Navy Today

The Government has issued a white paper on the future of our defense forces.  Never in human history has the military technology developed so quickly or the cost of deploying it escalated so much.  The United States military have had to scale back or cancel many of their acquisition programmes for the most sophisticated weapons – such as their new jets.  Even new equipment which would save lives can be subject to budget considerations.  Traditional enemies (at least if you believe Yes Minister) Britain and France have just signed a 50 year agreement that will them to share their military resources, such as aircraft carriers, in order to save costs.  In all their cases purchase of equipment serves also to support their military research and production industries, which in turn provide their country with export earnings.  Even Australia has a defense industry, but for New Zealand the purchase of equipment provides little or no economic benefit – we've even outsourced our uniform purchase to China.

One of the major arguments being used against the continuance of 'business as usual' for the military is the current spate of asymmetric conflicts; terrorists (or freedom fighters depending on which side of the particular conflict you are spinning), cyber terrorists, and other irregular forces who won't put on a uniform and play by the rules.  Their impact in the news media has overshadowed the conventional conflicts that have taken place, both the initial invasion of Iraq (and of course the first Iraq war post Kuwait invasion), and the Russian invasion of Georgia.  The cessation of conventional warfare has been predicted before – after the 'war to end all wars' in 1918 much of Europe wound down their research, manufacture, and deployment of their military, and found it difficult to scale up to successfully defeat Hitler – impossible perhaps except for the intercession of an outside party.  The sophistication of modern conventional warfare puts this sort of escalation over a short period even less achievable.

Georgia particularly demonstrated one important aspect of modern warfare – even if your force is well equipped, if you can't field an integrated force that covers all aspects of operations (e.g. air cover for your ground forces), you will fail.   For a small country such as New Zealand, where the operational costs of even Vietnam era aircraft was prohibitive, let alone the cost of purchase and maintenance of modern equipment, this does present a problem. Even if you can afford it, as the USA is finding out, being able to sustain it for an extended period is also prohibitive.  If you ignore the furor over the mothballing of the expensive to run and totally ineffective Skyhawks, the military did quite well out of the previous government.  The airforce is replacing its Vietnam era helicopters for up to date ones and it acquired transport aircraft which can fly in commercial airspace.  The navy gained the ability to mount a limited expeditionary force, as well as significantly more ability to patrol New Zealand waters.  The army gained new infantry combat vehicles, modern communications equipment and a guidance system for its anti aircraft missiles.  Still not nearly enough though to independently mount a conventional war – or even defense of our own country.

The white paper recognises this by calling for interoperability with our allies – effectively becoming a limited resource within a larger force.  This makes good operational sense if you can't afford to do it yourself – and if Britain and France can't afford it, we certainly can't.  Militarily supporting other countries is also a good introduction for other aspects of a relationship -free trade agreements for instance - so it's also good foreign policy. 

US Coastguard helicopter operates off HMNZS Te Kaha during an exercise

The paper also categorizes other types of operation our military would be involved in and how it would achieve it.  It was disappointing that perhaps some ideas weren't explored enough.  Resource protection and other interception duties might better be done by a Coast Guard type service.  Surveillance might be better done through UAV's.  A joint rapid response force with Australia wasn't explored.  Counter terrorism might better be dealt with by a paramilitary force within the Police rather than an offshoot of the SAS.  Before the advent of firearms, Great Britain required its adult men to put a certain amount of time aside for archery practice – golf notwithstanding, and was able to field a fearsome and effective force at short notice.  Would it be more cost effective to expand the territorial army and reduce the size of our regular forces?

So why do we have a military force at all?  The origin of human warfare is still a topic debated by scientists and philosophers, but it is possibly a hand down from our common ancestor with the other hominids.  The aggressive acquisition of territory and resources appears to be common right through history and across all cultures, or at least all the successful ones who got to write the history.  Having said that, the requirement to have an actual army, navy and airforce shouldn't be taken as a given.  New Zealand is isolated geographically, and there are examples of less isolated countries which don't have them; Costa Rica for example eliminated its army after a particularly bloody coup and has since become one of the most stable democracies in South America (Fiji take note).  The level of health care and high rate of literacy is a testament to the good you can do with the money you save.

Modern conflicts seem irrational.  I can understand the Allied response to Hitler.  I don't understand the mindset of a suicide bomber and I don't understand the mindset of a President or Prime Minister who would lie to their citizens to justify military action, or consider water-boarding acceptable.  Religion, tribalism, nationalism, intolerance, racism, hate and hubris define modern conflicts.  How do you combat this without it costing life?

Another reason for the unease I feel when thinking about this subject has nothing to do with strategic decisions about the mix of our forces, but the removal of a major brake on our engaging in conflict.   Desmond Morris suggested a reason for our hesitancy to engage in face to face conflict;

“Every time one individual launches a physical attack on the body of another, there is a risk that both may suffer injury.  No matter how dominant the attacker may be, he has no guarantee of escaping unscathed.  His opponent, even if weaker, may be driven into a desperate frenzy of wild defensive actions, any one of which could inflict lasting damage.”

Of course, we've graduated to weapons which reduce this possibility but there is still the potential to die in conflict, and before sending in troops, leaders have to factor in the response to casualties in relation to the perceived gain e.g. attacking Iraq rather than another “axis of evil” power such as North Korea.  This remoteness was a major criticism to IBM's, but the potential response to such wanton destruction proved (so far) to be an adequate deterrent.  The next generation of weapons allows us to wage war without risking our troops, or causing massive indiscriminate damage, from a distance – “precision” guided weapons and cruise missiles have been joined by armed UAV's, remote controlled vessels and combat vehicles, which are now developing autonomous capabilities.  Where is the deterrent to our using them - and do we want to be part of that?

I guess the final argument on why it's necessary for us to maintain our military must belong to a wildly out of context misquoting of Ben Elton; if Albert Einstein was mugged in a dark alley, who would win - Albert or the mugger? It doesn't matter how sophisticated or civilised your society, or how idealistic your beliefs, in an irrational world sometimes you need to be pragmatic in your idealism and carry a big stick.

On arming the Police

Armed NZ Police make an arrest - photo from www.stuff.co.nz

Watching Detective Inspector Mark Benefield show a strong emotional response -twice- while making press statements regarding the Carmen Thomas murder enquiry I was struck with how far we are from our stereotyped model of detection; from the cold calculation machine that was Sherlock Holmes, through the “just the facts ma’am” of Joe Friday, and the cool science discipline of CSI.  Justice is supposed to be blind, with decisions made only on the facts: not the beliefs, prejudices, and emotions of the participants.  We have expected our police to conduct their enquiries in the same manner - to ensure that there is no bias.

This may seem to be an insignificant detail, but it came at the same time as the Police Minister announced that police would have more routine access to firearms while on duty – assuring us that “law abiding citizens will have nothing to fear”.  Unless of course they find themselves at the wrong time and in the wrong place, confronted by an Officer responding with heightened emotions instead of analytically.  The Ministers argument only holds water if Police Officers never make mistakes, but to be human is to be fallible, and to be emotionally engaged only increases that potential.

I am neither arguing for or against the arming of police.  I do however have an issue with how the argument and policy have developed.  Only in July last year there was an announcement  that training in firearms would be reduced within certain groups of Officers, largely because of costs.  It looks like these Officers will now be armed – and are less well prepared for it than they were a year ago.  Unstated was whether the training will be returned, and if so where the previously unaffordable concomitant costs will be met from.

The Police Association at the time referred to the fact that criminals were already armed to protect their property and against other criminals, and that police were often “collateral damage” , i.e. outside of the engagements such as warrant execution where there is already discretion about whether to carry firearms, the assaults on police which would require the use of weapons is unpredictable and opportunistic.  In that case would having the weapons stored in the car help?  We haven’t seen any analysis of how many of the Police Officers killed on duty would have been saved by a weapon in their car, and outside of foot pursuits or traffic stops where the officer proceeds with weapon drawn what they hope can be achieved.  It looks very much like the plan is to “baby step” our way towards fully armed police, using single incidents where each current policy fails as a catalyst to move public opinion and political will further down the path.

There is a danger that once a tool is introduced the carefully worded purpose will fall by the operational wayside.  Only in May 2009 The Minister said;

"I would much rather have the police able to be armed with Tasers than firearms."

It would seem they now have their cake having eaten it as well.