Published in The New Zealand Herald, 9th July 2021
Matthew Hooton reviews Treasury’s 40-year look into the future. Yes, education, innovation, productivity, and added value to our commodity-based economy will make all the difference, but Treasury’s main focus as always is state expenditure not the underlying drivers of prosperity.
Health and superannuation are a strategic focus because these are not discretionary but mandatory expenditures. Unless something radical changes in our value system, New Zealanders will not accept old people living in poverty or low-income people unable to gain necessary health care. Same in Australia where the government has mandated private versions of health insurance (which requires a large taxpayer subsidy) and superannuation (which gifts large fees to fund managers and unnecessarily subsidies to the better off). These are mandatory schemes, but do not qualify as tax.
I made a submission on the matter of funding health and superannuation without incurring public debt to the Tax Working Group. Suffice to say my suggestions were not taken up! I argued that we should prefund these two areas with contributory social insurance schemes, thus avoiding future debt and tax increases (indeed we would envisage matching tax reductions as superannuation was progressively funded, while retaining the redistributive character of our system).
Pensions (superannuation) and health are two very large components of any developed country’s budget. Historically, these were introduced in response to clear “market failures” in a pragmatic fashion alongside other budgetary items in the tax take. Yet, these can be characterised as inter-generational transfers that have a strong insurable element about them. Thus, in a number of countries pensions and health are dealt with as predicable items of social insurance rather than subject to the vagaries of budgetary determinations through the standard tax system.
In New Zealand we have not done this. In consequence we have massive unfunded future liabilities associated with our state superannuation scheme and an annual wrangling exercise with the health sector with the potential either for unfunded future liabilities or socially unacceptable service cuts. Yet, at the same time, we also have the rudiments of social insurance schemes for both sectors – KiwiSaver and ACC respectively – which we could be in a position to formalise and develop.
And we also have the example over the Tasman, where the Australians have a levy-based superannuation scheme and a universal Medicare based on an income levy, together with the National Disability Insurance Scheme (NDIS). I propose that we progressively take superannuation and health out of the usual tax take, carry out actuarial estimates of their rates on a regular basis, set them up at some arm’s length from short-term electoral politics (a bit like ACC, but better), and underpin them with regulations and structures that will ensure their efficiency and flexibility.
- We should build on KiwiiSaver and ACC to establish twin social insurance schemes for future superannuation and health costs respectively. This would permit income and company tax rates to be lower, but in part be replaced by actuarial levies on employees and employers.
- KiwiSaver and the Superannuation fund should be considered together so that we can progressively transition our state pension scheme from a Defined Benefit to a contributory scheme with a guaranteed benefit (to match the current level of provision). For example, when Sweden made a similar transition, individuals were given notional accounts in their equivalent to the Superannuation Fund as a token and promise. Individuals would be free to save more than required for the basic superannuation, but the role of KiwiSaver and the Superannuation fund would in the first instance be to ensure that no citizen of New Zealand with the requisite residential qualifications would fail to gain the current “National Superannuation” pay-out.
- ACC should be extended to cover illness (as originally envisaged), but with the income support element taken out of it and placed in an entity equivalent to the Australian NDIS. ACC rates vary by industry risk. This could be extended to other harm-inducing industries such as alcohol, tobacco and sugar, which could be levied in proportion to their estimated impact on the health budget. It would be important to reduce the transaction costs of service payments, with the use of salaries, capitation and bulk-billing (as in Medicare).
This proposal builds on two current New Zealand schemes- KiwiSaver and ACC – that provide the rudiments of social insurance but that have failed to fulfil that potential. These schemes would provide budgetary certainty for their respective sectors and communities, they would improve the national rate of saving, and they would allow income and company taxes to reduce accordingly for superannuation as the system fully funded itself.
Emeritus Professor in Population Health and Social Science
University of Auckland