Dr Cullens response re superannuation

At our meeting you argued that the current level of New Zealand Superannuation (NZS) is falling below 65% of the net average ordinary time weekly wage (NAOTWW), that this represents a breach of trust on the part of the government and no longer ensures an adequate standard of living for superannuitants.

You sought an assurance that the rate of NZS would never fall below 65% of the NAOTWW and further suggested that now was an opportune time to raise the wage floor of NZS to 70% of the NAOTWW.

The government does not accept Grey Power's contentions, for a range of reasons.

I believe the following points support the government's case to retain NZS rate adjustment procedures in their present form.

These points fall into three main groups as follows:

The Relationship between NZS Rates and the Wage Band Test

• NZS is one of several income payments that are regularly adjusted for changes in the cost of living.
  It is an inevitable consequence of such adjustments that the value of the new rate is likely to gradually erode until the next adjustment is made.

  This is true of the normal Consumers Price Index adjustments and it will be true of average earnings movements once the wage floor is triggered.

  The adjustment formula has to be operationally simple, concrete and unambiguous, and this is the case.

  It is unreasonable for Grey Power to expect rates to be at or above the wage floor at all points in time and to suggest that a regular annual adjustment is failing to protect people's purchasing power in the period between adjustments.

  • Accountability for the expenditure of public funds on NZS requires, as a matter of good practice, that calculations must be based on a formula using officially published statistics available at the time of the calculation.

    If we were to base NZS rate adjustments on forecasts of anticipated price and earnings movements, this would damage the credibility and transparency of the system.

    Forecasts would be open to challenge with "square-up" adjustments to rates, upwards or downwards, being required following the end of the period, when actual data became available.

• The government does not favour six-monthly adjustments to NZS rates.

  One of the advantages of achieving and maintaining low rates of inflation has been that New Zealanders no longer have to suffer rapid erosion of the value of their incomes. Increasing NZS twice a year would be administratively expensive, with only a small benefit to superannuitants.

  There are also equity considerations; any consideration of six-monthly adjustments would necessarily also involve income-tested benefit rates, where arguably the case would be stronger.

• It is worth noting that the setting and annual adjustment of income-tested benefit rates such as unemployment benefit is a matter of discretionary government policy, whereas superannuitants have the added assurance of a legislated formula that sets out exactly how the wage-band test must be calculated and applied.
  • The New Zealand Superannuation Act 2001 (the Act) clearly states that the annual adjustment of the standard weekly amount of NZS payable to a married couple will be "not less than 65% or more than 72.5% of net average ordinary time weekly earnings"
    ...."as determined by the last QES survey of wages published by the Department of Statistics before 1 March in each year".

    This means that, in practice, the December QES survey will be used, since the next survey is not available until after the 1 March date.

  • The timing difference between calculation prior to the start of the year and payments made during the year has always been an inherent part of the wage-band test.

    The 65% wage floor calculation has to be seen in this light.

  • The wage band test, spelt out above, required that the rate set for 2004/05 for a married couple should be no less than $379.08.

    The wage floor calculation that was made is set out below.

    	$ per Week
    Gross Average Ordinary Time Weekly Earnings (December 2003 QES)	$736.26
    Net Average Ordinary Time Weekly Earnings (based on December 2003 QES)	$583.20
    65 percent of NAOTWE (lower limit for April 2004 married couple amount)	$379.08

  • In fact the CPI adjustment to NZS rates on 1 April 2004 set the married couple rate at $383.22 per week, after tax, or $4.14 above the wage floor.

    In other words, the wage floor test was not triggered this year.

    It is erroneous for Mr Moloney to use the March 2004 QES to claim that the wage floor has been breached, since that simply is not the specified calculation.

• The encouraging news for Grey Power members is that current Treasury forecasts are that the 65% wage floor will be triggered as part of next April's NZS rates adjustment.

  NZS rates will then be boosted by a rising wage floor and provide an increase greater than the cost of living. Provided that average earnings continue to grow faster than price inflation, the rates of NZS should continue to rise in terms of purchasing power.

The Relation between NZS and Superannuitants' Living Standards

• Research conducted by the Ministry of Social Development in 2000 on the living standards of older people in New Zealand showed that, while some superannuitants experience low living standards, the great majority of older people appeared to be generally well off.

  Indeed, comparisons showed that older people tended to report fewer material restrictions and difficulties than younger people. The report concluded:

  • "Collectively, the results suggest that despite a small minority who are facing considerable material difficulties, the population of older people emerge as being generally quite well off and are likely to be less prone to poverty and material hardship than the working age population. "

• The sector of the retired community most likely to experience low living standards is those who are renting privately.

  People in this group are likely to be eligible to receive the Accommodation Supplement in addition to NZS.

• As I said in our meeting, raising the wage floor to 70% of the NAOTWW would be fiscally irresponsible and unsustainable.
  Moreover, I do not consider that any strong case has been made by Grey Power that superannuitants in general are suffering hardship as a result of the present level of NZS payments.

• Rather than increasing NZS rates by raising the wage floor or any other universal mechanism, the government believes it is more equitable and affordable to assist any older people who face special difficulties through other targeting mechanisms.
  For example, assistance such as the Special Needs Grant, Special Benefit and the Disability Allowance can be made available under some circumstances.

Other Provisions to Maintain Living Standards for Superannuitants

• The government has also taken other active steps to ensure older people's living standards are maintained. As of July 2004, more than 305,000 New Zealanders aged 65 and over who belong to a PHO will pay less when they visit their doctor. People aged 65 and over are now also eligible to pay only up to $3 for many prescription medicines, and can access higher subsidies for influenza injections.

  A report recently released by the Ministry of Health shows that the average patient fee charged for people 65 and over in Interim PHOs is $22.88, compared with $46 prior to the 1 July 2004 funding roll out. For the 65 and over age group in Access PHOs, the average patient fee is $15.

• This year's Budget also allocates funds to double the number of major joint replacements in order to reduce waiting lists for orthopaedic surgery; this money will mostly benefit older people.
  Although I can understand concerns that this initiative may be displaced by demands for existing services, I believe there should be no impediment to DHBs delivering the extra orthopaedic services.

  Sufficient funding has been provided for District Health Board's (DHBs) to expand their current facilities to deliver the additional operations, including capital provisions where these are required.

• The government has passed legislation to phase out asset testing for older people in residential care, starting in July 2005.
  The increased exemption thresholds substantially increases the assets that people can keep before their assets are used to contribute to the cost of their care - single and widowed people will be $135,000 better off than at present and married couples who are both in care will be $120,000 better off.

• The government has also undertaken to review the Rates Rebate Scheme, with consideration to be given to raising the maximum level of rebate paid and income threshold for eligibility for the scheme.

Yours sincerely
Hon Dr Michael Cullen Minister of Finance

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