Sir Robert Muldoon painted Labour’s fledgling super scheme as a step on the way to turning New Zealand into a Soviet clone.
A dreadful political decision, announced on December 15, 1975, transformed New Zealand from the potential Switzerland of the Southern Hemisphere into a low-ranking OECD economy.
Without this decision we would now be called “The Antipodean Tiger” and be the envy of the rest of the world. We would have a current account surplus, one of the lowest interest-rate structures in the world and would probably rank as one of the top five OECD economies.
We would still own ASB Bank, Bank of New Zealand and most of the other major companies now overseas-owned. Our entrepreneurs would have a plentiful supply of risk capital and would probably own a large number of Australian companies.
Most New Zealanders would face a comfortable retirement and would be the envy of their Australian peers. The Government would have a substantial Budget surplus and we would have one of the best educational and healthcare systems in the world.
What destroyed this potential on December 15, 1975?
That was the day Robert Muldoon, the newly elected Prime Minister, announced the abolition of the 37-week-old compulsory New Zealand Superannuation Scheme, introduced by the previous Labour Government.
The scheme was innovative, remarkably similar to KiwiSaver and well ahead of its time. It would be worth more than $240 billion today and would have transformed the New Zealand economy into a world beater over the past 30 years.
The basis of the scheme was outlined in a white paper published in September 1973. The paper’s recommendations were reflected in the Superannuation Act 1974, which was passed on August 26, 1974.
The main characteristics of the scheme were as follows:
- It was compulsory for all employees between 17 and retirement age.
- Money could only be taken out early when a contributor left the country on a permanent basis.
- Each contributor had their own individual account and these accounts were portable.
- After a short phase-in period contributions were 8 per cent of gross income, 4 per cent by employees and 4 per cent by employers.
- The scheme was not taxable except for stamp and cheque duties.
- Contributors could receive a lump-sum payment up to one-quarter of the value of their individual fund on retirement with the rest distributed as income on a regular basis. It appears the lump-sum payments were tax free but the regular income was subject to normal income tax.
The scheme started taking contributions on April 1, 1975 after the formation of the Superannuation Corporation. The corporation’s role was to manage the money although private schemes could still exist as long as they complied with the provisions of the 1974 act.
The new scheme was a major issue in the 1975 general election, which was held on November 29.
The National Party, which got a drubbing in 1972, argued the new scheme was socialist. It said the state, through the Superannuation Corporation, would eventually control most of the country’s major assets even though contributors had their own individual accounts. The proponents of this viewpoint failed to anticipate that offshore investment would mitigate this potential problem.
The famous dancing Cossacks TV ad, aiming to give the impression that the scheme was turning New Zealand into a state-controlled economy similar to the Soviet Republic, was highly successful.
The National Party overwhelmed the incumbent Labour Government and just 16 days after the election Prime Minister Muldoon announced the termination of the Superannuation Scheme, which formally ceased to exist on August 5, 1976.
It was replaced by the taxation-funded National Superannuation, which will cost an estimated $7.2 billion this year and is rising.
The first and only Superannuation Corporation annual report, for the year ended March 31, 1976, showed that contributions of $36.5 million were received during the first 12 months and it had year-end investments of $41.3 million (see table).
All of its investments were in New Zealand but the corporation was a long way from owning most of the country’s major companies and properties. Rumours were rampant during the 1975 election campaign that the corporation had already bought most of the country’s major buildings, yet four months later it owned only 13 properties at a total cost of $5.1 million.
There is little doubt the abolition of the Superannuation Scheme was our worst economic decision over the past 40 years. The economy would be in a much stronger position today had the far-sighted scheme stayed.
The scheme would now be worth more than $240 billion based on the following assumptions:
- An annual contribution of 8 per cent for every employee.
- A balanced portfolio of 50 per cent invested in New Zealand Government bonds and 50 per cent in the New Zealand sharemarket.
- Annual returns based on the performance of Government bonds and the NZX benchmark index.
- Two per cent of the fund withdrawn every year for retirees.
The $240 billion figure is conservative as no dividends are taken into account until 1995, offshore returns were higher over the past 30 years and no account is taken of the ability of investment managers to outperform the benchmark indices.
New Zealand would have led the world in terms of savings. Based on the $240 billion projection each worker would have $111,200 of superannuation assets compared with $6300 at present and A$74,400 ($86,821) in Australia.
The scheme would represent 146 per cent of GDP whereas Australian superannuation, which is considered to be a benchmark for the rest of the world, represents only 82 per cent of the country’s GDP.
It would have had major benefits in several areas, including eliminating the huge deficit between the country’s offshore assets and liabilities, making us far less reliant on the hugely expensive National Superannuation, supplying entrepreneurs with a large amount of equity to fund their business and helping New Zealanders to develop a more sophisticated approach towards investment.
The KiwiSaver scheme is remarkably similar to the old Superannuation Scheme except in two important areas – it is not compulsory and contributions will be allocated to a wide range of managers instead of just one central body.
KiwiSaver will have a positive impact on the country but it will take a long time before this is evident.
The 1975 scheme would have taken 16 years to reach the first $50 billion, five years to reach the next $50 billion and then six years and two years to reach $150 billion and $200 billion respectively.
The one concern is the attitude of the National Party, particularly deputy leader Bill English. For some unknown reason English is totally opposed to KiwiSaver and John Key is sitting on the fence as far as the issue is concerned.
It would be a tragedy if a new National Government, under Key and English, made the same dreadful mistake as Muldoon in December 1975.
NZ Superannuation Corporation: A low-risk approach (March 31, 1975)
|($ million)||Amount invested||Percent|
|Government & local authority stock||14.6||35.3%|