Reference: Rankin, Keith (1997) "Teach your Children Well", New Zealand Political Review 6(4):8-12.

Editor's Introduction:

Teach your Children Well
Do We Really Need this Complicated Compulsory Retirement Savings Scheme?

August 1997

Retirement Transfers

There is nothing particularly complicated about retirement income. Retired people consume goods and services produced in the present, and not goods saved from the past. They constitute one of a number of "non­producing" groups who make claims on current production. The strength of their claim as a group must be placed in the context of all the other claims on current production. It depends on the nature of the prevailing inter-generational contract as to whether a generation of retired persons lives well or poorly, relative to other claimants. This is the same in a socialist country, or in a country wedded to laissez­faire capitalism. It is the same whether the retirement income is claimed through publicly or through privately contracted income transfers.

In addition to the aged, "dependents" include children, students, homemakers, beneficiaries and rentiers. Also, people involved in capital formation - producing goods and services which will raise the productivity of future workers - can be classed as dependents because they contribute nothing to the present fund of consumables. Caregivers of children are engaged in unpaid capital formation, investing their labour power in creating the next generation of workers. So are students and their teachers, adding to the stock of human and social capital.

As part of the post-war baby-boom generation, my prospects in retirement depend on the productivity of the labour force in the 2020s, and on the willingness of New Zealand's working population and New Zealand's creditors to be unselfish in their claims on the economic product of that time. To maximise my generations' prospects next century, we of middle-age should invest in our young, whose good­will we will depend on in retirement. A compulsory savings scheme that comes with advantages for today's older population - eg tax cuts and the removal of the "super surtax" - and imposes additional burdens on today's young is the worst possible strategy.

We will have a problem in the 2020s if:

  1. we encourage the post baby boom generation to become self-interested to the point of generational selfishness; that is if they learn from today's neoliberal opinion­setters to regard the national product - the "economic cake" - as the private property of the paid workforce to dispose of as they and only they see fit.
  2. we continue to build up foreign and domestic private debts, giving creditors prior claims over future production.
  3. the productivity of our labour force fails to grow as it has in the past; growth that has been generated by the ongoing accumulation of technology, knowledge, social capital and other public domain resources that constitute our social inheritance.

The tone of the current dependency debate is itself counterproductive, in that it promotes a view of the moral virtues of paid work and a nineteenth century concept of individual and family "self­reliance"; a view that suggests people "without private means" are second class, less deserving by virtue of their lack of adequate personal means. By depriving the young of income, as we are doing today - by legitimating generational selfishness - we seem to be doing everything we can to ensure that today's young will concede as little as possible to tomorrow's retired. This kind of policymaking is foolish for any generation, let alone a baby boom generation which sees itself as going to be particularly dependent by virtue of its size.

With respect to the growth of debt and the lack of economic growth, we need look no further for the main culprit than the Reserve Bank, which, by inducing high interest and exchange rate profiles over long periods, is expanding the group of advantaged rentier claimants; domestic and foreign holders of New Zealand's financial assets. The Reserve Bank - seeking to trade off increases in private foreign debt for lower inflation - is reducing the long run rate of productivity growth by raising financial costs. Even Telecom chief executive Rod Deane has spoken out about this tendency for monetary policy to suppress growth (news, 20 August).

Donald Brash, Governor of the Reserve Bank, is disingenuous on the matter of the impact of monetary policy on economic growth. In his 1996 Hayek lecture ["New Zealand's Remarkable Reforms", IEA Occasional Paper #100], for example, he emphasises that: "While monetary policy does affect the rate of inflation, it cannot be used to engineer a sustainably faster rate of economic growth or a sustainably higher level of employment." What Brash carefully neglects to state is that monetary policy can be used to engineer a long-run rate of growth less than the maximum sustainable, and can be used to generate a sub­optimal level of employment. Milton Friedman, another monetarist, went so far as to claim that the Great Depression of the 1930s was caused by an insufficient easing of monetary policy by the Governor of the US Federal Reserve Bank in 1929­30.

The average living standards of tomorrow's retired depends on the productiveness of our investments today, and the nature of the social contract as perceived by today's young tomorrow. Increasing the private savings rate, per se, has nothing to do with ensuring adequate pensions for all. Private retirement savings only raise the claims of some members of a retirement generation over their peers. What matters for a whole generation in retirement is the size of the economic cake, and their ability to stake a substantial moral claim on that cake.


A Demographic Crisis?

How much do demographic circumstances actually affect the retirement prospects of a generation? Winston Peters' main concerns before the 1996 election were to secure the votes of today's old by removing the present NZ Superannuation surtax, and to build up a national investment fund not unlike that envisaged in the NZ Superannuation Scheme of the Third Labour Government. However, in now opting for a scheme more like that conceived by ACT, Peters, in order to justify this scheme, has fallen back on the discredited claim that universal public superannuation will become unsustainable due to future demographic pressures.

In the late 1930s, New Zealand seemed to be facing such a demographic crisis. A baby-boom generation, from the 1870s and 1880s, was just entering retirement. And the birth rate, which had been falling steadily for a number of decades, was particularly low during the 1930s. The solution adopted in 1938 was to invest in children and young families, by means of a universal welfare state which also provided a mix of universal pension and means­tested age benefit, enabling the elderly to retire in greater comfort than ever before and to make room in the workforce for the young.

The result was that, in the two decades after World War II (1945-65), the number of dependents - war disabled, retired, children, caregivers - was at an all­time high, while the working age population had been depleted by losses arising from war and low birth rates. With the average age of retirement being much lower than in the 1930s, with many more teenagers and young adults in education than in the 1930s, and with many more women married with young children, just 37 percent of the population was employed in 1960.

Were these years in which the New Zealand economy ground to a halt due to demographic pressure? Or in which inflation spiralled out of control as too many people asked too much of our workforce? Not at all. The economy grew at a steady four percent per annum for two decades. All groups in New Zealand society experienced marked improvements in their living standards compared to the 1920s and 1930s. Furthermore, there was a substantial public investment programme, which meant that many workers were producing capital stock for the future - schools, universities, hospitals, roads, power schemes, airports - rather than producing for immediate consumption. Only 30% of the population, if that, was producing goods and services for current consumption.

We need not aspire to a 1950s' style of economy, or lifestyle. But the experience of that decade does show us what is possible when a nation has few "workers" and many "dependents". Indeed, the productivity gains being made possible through long-term public and private investment in those years meant that by 1997, we could have been able to live at 1950s' levels of comfort with just half a million people producing for our current needs. At 2% productivity growth per annum, a workforce should be able to halve in size every 35 years. In fact, the workforce (the employed plus the jobless) in 1997 equals 1.9 million, over half of the total population. Yet many people - mainly young men - enjoy less income than in the 1950s. The median male income as revealed by the 1996 census is less than it was in 1956.

We appear to have squandered much of the growth potential that our parents sought to provide us with in the 1950s. The best explanation for our disappointing productivity gains in recent years has been suggested by economic historian and 1991 Nobel Laureate Douglass North, who, with John Wallis has written papers such as "Measuring the Transaction Sector in the American Economy", and "Should Transaction Costs Be Subtracted From Gross National Product?". Professor Tim Hazledine at the University of Auckland is also researching in this area. The basic idea is that workers can be divided into "transformers" who make goods and services, and "transactors" who finance, coordinate, manage, administer, count, advertise and litigate.

The thesis is that in both the private and public sectors, the proportion of transactors to transformers has grown rapidly since the 1970s. The reasons why our economies appear so unable to adequately support our populations lie in both the impact of the transactors in winning resources away from transformers, and in the reasons why the demand by government and businesses for transaction services has grown so quickly. The proposed RSS gives us some clues. The public and private administration costs associated with this scheme are vastly higher than those associated with a universal public pension. The RSS should be seen as part of a pattern of unnecessary financial complication that just happens to create profit­making opportunities for transaction service providers. Today's policy priority should be to reverse the growth of transactors relative to producers, and not to aggravate the problem by laying an administratively complex RSS over our administratively top­heavy income support, health and education systems.

While we know from our recent past that we can support all of our population in a more than adequate state of comfort with well under 40 percent of our population employed, it would nevertheless be sensible for us to take active steps to bring about a more balanced population structure. In 1997, the proportion of our population aged between 20 and 65 is unusually high. We have one "baby­bust" generation moving into retirement, and another in their teenage years. Investing in our future involves having more children, parenting them and educating them. Given the present age structure of our population, the 1990s and 2000s are both decades in which we should be providing incentives for New Zealand's twenty­somethings to have children, and thereby to raise the ratio of working age to elderly persons in the middle decades of next century.

In the absence of increased fertility over the next decade, there should still be more than enough New Zealanders to support the elderly. But there may be real problems if we neglect our young by not allowing enough of them to move into responsible jobs. We do this by clogging up the labour market with older workers not able to retire on account of the rising age of eligibility for NZ Superannuation, or on account of the unnecessarily harsh terms of the 55­plus unemployment benefit. Furthermore, there is also the danger that our young will leave New Zealand in even greater numbers than at present to pursue their working careers in other countries. This is just what will happen if they are burdened by compulsory savings schemes on top of student loan repayments and low wages.

Even if we continue to neglect our young, we still cannot argue on demographic grounds that we will not be able to afford an adequate public pension next century. Globalisation of the economy is discussed a lot, but rarely with respect to retirement income. The reality of next century is that there will be a single world economy, with essentially a global labour market and global capital markets. That means, inasmuch as we will depend on the quantity rather than quality of workers next century, that we should be thinking about the age structure of the world population, which is much more youthful than that of the "first world" nations.

As always, market forces will allocate global labour to where it is most in demand, though not necessarily where it is most needed. If too many young New Zealanders emigrate, then there should be plenty of willing immigrants from elsewhere to take their places. If we feel uncomfortable about touting for immigrants in the future, then we should start investing in careers for our own young. In terms of the global issue, the biggest known demographic event is China's "one­child" policy; a policy that is likely to have a major impact on global migration patterns next century, and could lead to a situation in which today's rich nations have to compete for immigrants, just as they competed for immigrants and "guest workers" in the 1950s and 60s.

The global economy, so long as it lacks the apparatus of a global welfare state, is always going to be characterised by inequality. Thus, there may well be many poor old people in the world next century. But old age poverty will not be on account of an inadequate supply of younger people. Rather the global fate of tomorrow's old will be determined by the rate of investment in the world's children today, on their attitude to their elders tomorrow, and on the emergence of institutions that contest the de facto sovereignty of international capital. It makes no more sense to say that New Zealand or any other particular country faces a demographic problem than it does to claim that regions such as Otago, Florida, Queensland or Scotland have or may soon have too many old people relative to younger people. All are simply regions within an imperfect global economic order.


Contribution, Productivity and Sustainability

Because of the way nations compete for export markets and for transnational capital, workers everywhere are being asked to produce more while often being paid less. Their individual contributions to the economic cake cannot be measured by their wages or by their income taxes. All savings­based retirement schemes tacitly assume that individuals' contributions are measured by their earnings, thereby legitimating the fact that the best­paid individuals get the most in retirement. But the reality is that most workers contribute by accepting wages that do not reflect their worth, or, as has traditionally been true of women, by contributing without formal recompense. A pension should be a reward for wages foregone in working life. But only a public pension can act in this way. The need to recognise the contributions of those from whom "surplus value" has been extracted - the majority of working age women and men - is a powerful argument for a generous public pension scheme. And it is an argument that must be sold to each working generation in turn, to ensure that they concede enough of the product they control to their young and to their old.

The discussion so far remains unsatisfactory, because it seems that we depend on economic growth as well as a charitable workforce for an adequate retirement income, yet we fear the environmental consequences of economic growth. The key to future well-being is productivity growth, which can mean economic growth (more goods per person) or it can mean the creation of more free time through shorter working lives. While it is the latter case that is obviously more sustainable, we are in fact moving towards longer working lives. Even the Todd Taskforce on Superannuation, which opposes the RSS, suggests a further rise in the age of entitlement to a public pension. This tendency to work for longer on average must be opposed. It is overwork and the ensuing pressure on resources that is unsustainable; not a falling ratio of young to old in the population.

Seen from the light of a sustainable future with shorter working days, shorter working weeks, shorter working years, shorter working life-spans, an ageing of the population represents an opportunity to achieve this without having huge numbers of non-workers of working age. To put it another way, the ageing of the population gives us a great opportunity to reduce unemployment, given that the major dependency problem at present is that of unemployment and underemployment. The likelihood is that underemployment will still be with us next century, despite the population projections.

The obvious solution of taking advantage of demographics to help us achieve a reduction in the size of our workforce is difficult to achieve, however. It requires a recognition that economic life is not a simple matter of a workforce baking and owning an economic cake which is shared, at their discretion and on their terms. In a society that attributes its product to its workforce in such a way, there will inevitably be growing tension as the employed become a smaller proportion of the total population. In those accounting terms, a society with a workforce of say 20% of the population would have to rely on massive transfers from the working to the non-working.

The solution to such a redistribution problem is not to raise the level of employment, creating economic growth that might not be environmentally sustainable. Rather, the solution is to think of the economic cake as the property of everyone - of every "citizen" - and not just the property of the employed. This approach recognises the property rights of citizens to the fruits of their natural and social inheritance, as well as to the fruits of their diligence and their legitimately acquired private property. It is this inheritance and not the labour power of today's workers that constitutes the main ingredient of the economic cake. This approach also recognises the multitude of current contributions in addition to paid work that citizens make to the economic wellbeing of their society.

By allocating a citizens income as a citizens' property right - a productivity dividend paid as a form of universal basic income - the whole problem of having to transfer vast sums of money from "workers" to "dependents" disappears. That is not to say that a citizens' income would necessarily be enough to make an adequate pension. What it does say is that the scale of redistribution can be reduced dramatically by properly designating our income before redistribution takes place.

Taking my argument to its logical conclusion, in a future high productivity world where, say, only five percent of the population are required to ensure that all live in adequate comfort, then perhaps ninety percent of all income would be distributed as citizens income, and the remaining ten percent would be paid to the employed workforce.

The vision of a shrinking paid workforce reflects the kind of sustainable productivity growth we need to form a sustainable yet affluent economy. It is poles apart from Dr Brash's concept of sustainable economic growth, although even he validated the concept of growth dividends in his Hayek lecture. The move to a small "workforce" and a large "dependent" population is a solution, not a problem. The prospect of a large oldish retired population and a small young workforce is but a special case of this general solution. On the other hand, the RSS and schemes like it represent attempts to fix the solution by creating a problem.


© 1997 New Zealand Political Review

NZPR | Rankin File