Salary Sacrifice. Ross Wilson to Super Summit

Salary Sacrifice - Is this a Real Option? Speech by Ross Wilson, president, NZCTU, to the Super Summit, May 2001.

I welcome this opportunity to discuss with you important issues concerning superannuation. This Conference is surveying a wide range of views and that is to be welcomed.

I have been asked to address the issue of - salary sacrifice. In other words, is it realistic to expect workers in the current circumstances to save for retirement by sacrificing part of their wage or salary so that it is not available for consumption, debt repayment or other commitments?

But before I come to that I should put the issue in context by mentioning the position adopted by the CTU in relation to the NZ Superannuation Bill. The CTU supported the general tenor of this Bill. The CTU does not however agree with the clause in the Bill which allows a possible conversion of the Fund to individualised accounts. We also expressed our concern that the commitment to prefunding superannuation might limit the extent of Government expenditure in other key areas. We oppose the removal of superannuation entitlement from those who have had an extended period on ACC.

The CTU recognises that security in retirement will not come for many people from Government superannuation alone. It is of concern that about half of all those aged over 65 rely almost entirely on NZS entitlements. But the amount of the payment in current terms is simply not adequate to achieve comfort in retirement. This will be accentuated if future generations have fewer assets at the time of retirement.

This means that prefunding is only part of the solution. The CTU believes that there needs to be an acceleration of employer-based superannuation to ensure that there will in future be many more than the current 17% of the labour force on workplace schemes. That is why we support changes to the prospectus requirements and tax changes in respect of employer contributions in the case of those earning below $38,000. The CTU also supports the removal of tax-induced distortions which disadvantage savings for superannuation.

Another reason why prefunding is only part of the solution is that at best it contributes around 25% of the cost of NZ superannuation in any year. The smoothed pay-as-you-go prefunding is not to cope with a temporary bulge so much as create a more equitable phase-in to a new and higher level of cost relative to GDP. While no doubt there will be other factors that emerge in the next 50 years that may affect the dependency ratio in respect of superannuation, it is clearly obvious, as it has been for some time that something has to be done to prepare for this added cost. The Bill is a good start.

,p>The CTU believes that prefunding will not act as a disincentive towards private savings. Employees recognise that there will still be a need for other tiers of superannuation in addition to the universal publicly funded tier.

The CTU does not support the provision the Bill makes for the Fund to be converted into a retirement account for eligible individuals. This does not fit comfortably with the nature of the scheme. It is not a contributory scheme but a smoothed prefunding arrangement. The intention of the Bill is to maintain a pay-as-you-go scheme but to require a degree of prefunding during a lengthy transitional period. A Fund of individualised accounts is an entirely different arrangement and cannot be reconciled with the intent of this Bill.

The point of universal superannuation is to guarantee for those New Zealanders aged 65 and above a modest pension. It is not to create individual accounts. While it could always be regarded as unfair if one person dies before another person does, that is not the point. If a state-funded death benefit was affordable in addition to current entitlements that could be investigated.

The CTU is concerned that prefunding may be favoured as a mechanism to discipline government expenditure as a stand-alone reason. We argue that there are significant lost opportunities for economic and social improvement if the discipline is too tight. There is in many respects still a massive "social deficit" after years of neo-liberal policies. There is also a need to address state sector capacity. It is important to get the balance right. There is a need for prefunding. But there are pressing issues which need resources now.

The CTU also made a number of comments about governance arrangements.But the topic for me to focus on is the matter of salary sacrifice.

At the present time, for many workers, even if there was an employer-based superannuation scheme, the rate of pay for employees is too low to ensure that adequate employee contributions are made to maximise benefits under a workplace scheme. This recognises that another significant issue is the extent of economic growth and the degree of equitable distribution of economic returns that will allow workers to build up superannuation savings during their working lives. This situation is exacerbated for those who are unemployed or out of the paid workforce for extended periods. The CTU strongly opposed the Retirement Savings Scheme promoted in 1997. One of the reasons was that women live longer than men but earn less. Therefore contributory schemes reflect this relative disadvantage.

But the nature of the labour market is also changing and is a far cry from the situation that pertained when we had much greater incidence of employer-based schemes.

There is a major churn effect in the labour market. This has created instability in that market. For instance, one study shows that between February 1987 and February 1996 there was a net total of 58,700 FTE jobs created. But this was made up of 1,451,000 new jobs and the loss of 1,392,700 jobs. There is a similar trend in many other economies. This means that employees are moving in and out of employment, and from one job to another. They are floating in some cases between employment and self-employment.

The quality and spread of employment has also deteriorated. Although in 1999 there was significant growth in full time compared with part time employment, statistics for the entire March 1991 to December 1999 period show there was a growth in full time employment of only 15.5% compared with 36% for part time jobs (a part time job is counted even if it is one hour a week). And, in the last 10 years there is increasing evidence that poor quality jobs have replaced better quality ones.

The extent of casualisation, very part time hours, family-hostile rostering, and contracting out of work has created a significant segment of the labour market in highly precarious employment circumstances. The growth in part-time and casual work has been accompanied by the development of a range of income support and tax credit measures to supplement the incomes of those in paid work.

There are also big issues to face in terms of income disparities. . Many of the income studies show that major income disparities and growth in unemployment started from the late 1980's. Briefing Papers to the Minister of Youth Affairs (November 1999) indicated that median incomes for those in the 15-25 year age group had fallen from $14,700 in 1986 to $8,100 in 1996). A study by Stephens, Waldegrave and Frater shows that from 1984 to 1998 the top 10% of households increased income by 43% and the bottom 50% of households decreased income by 14%. A recent Treasury Working Paper states that 90% of New Zealanders are worse off in 1996 than they were in 1981. Foodbanks in Auckland alone grew from 16 in 1990 to 130 in 1994. Another paper shows that the Gini coefficient has increased by 13% since 1986.

I am suggesting that, from a union perspective, this picture appears to create serious barriers to savings. It means that for many low income earners there is significant pressure to spend every last cent of the wage packet.

In New Zealand, we now have only 17% of full-time employees in employer-based superannuation. In Australia, 98% of full time employees are on a form of employer superannuation. This means that 80% of all employees including the self employed are covered by the compulsory system. Casual workers are less likely to be covered because the compulsory Superannuation Guarantee Charge doesn't apply on earnings less than A$450 per month.

In the USA some 1.8 million out of 6 million firms, provide some private pension benefits often as a result of collective bargaining.

In the United Kingdom, 46% of employed people are in occupational schemes. It was 53% in 1967.

The International Confederation of Free Trade Unions (ICFTU) Task Force on Superannuation has calculated that workers' pension funds have assets internationally of $US11 trillion (ie eleven thousand billion dollars), up from $6 trillion in 1992.

Internationally there is a recognition of 3 tiers - government, employer-based, and private.

But - it is a hazardous course to selectively quote from international comparisons. The level of the first tier has to be taken into account in any comparison of other tiers. And in some countries (e.g. Australia) superannuation contributions have at times been linked to complex income policies that included wages, tax, superannuation, inflation and employment aspects rolled into one annual outcome.

How can we get to a position where employees are more likely to contemplate "salary sacrifice"? Workers need decent wage rises in a low inflationary environment. It is hard for super contributions to get on the agenda (carving off 2% out of a 10% increase is not too hard - tagging 1% for super out of a 2.5% settlement is rather more difficult.

In the year 2000, this was not made much easier, although I believe that in the long-run the new Employment Relations Act will assist employers and unions to broaden the scope of bargaining. But real wages went down in the year 2000. For low-income workers, the increases in fuel costs and food bills have had quite an impact. Offsetting this for some households were more hours of work and more employment.

Despite these problems, I think that workers recognise that even with pre-funding, they need to make separate provision. For the emerging generation of workers I think the right approach is to start early and start small with regular contributions. That then makes it a normal part of the employment arrangement.

But, right now, the extent to which workers can sacrifice current earnings is limited.

So one issue is - can employers afford to be more generous? You will not be surprised to hear me say that I think the answer to that is - unquestionably yes!

Workers need employers who are prepared to support schemes (acknowledging prospectus and tax on employer contribution issues already raised) and make adequate contributions. I believe that workers are likely to support employer-based schemes provided they do not have strict vesting requirements, and possibly have options such as variable employee contributions to cope with other commitments and periods off work. Employers in the private and the state sector should recognise that employer superannuation contributions can play a role in settling wage negotiations and that employer contributions can assist with retention and growing the social capital (trust, loyalty) in an organisation or firm.

Workers would also need assurance that funds are secure.

Workers need good independent advice. The right approach will ensure that more and more workers join schemes.

Workers would be interested in proposals for a TEt regime.

Unions can play a significant role in the encouragement of employer-based superannuation. Although employees will have individual requirements, superannuation contributions can be part of collective bargaining. Therefore unions will need to balance the other claims in a negotiation against the claim for an employer contribution to superannuation.

Last year at the ASFONZ Conference I spoke about the Harbour Superannuation Plan established in 1986 as an industry superannuation plan for employees of Harbour Boards and Port Companies. The Plan was very much a joint venture between the union (now the Rail & Maritime Transport Union) and the industry employers with the Trust Deed providing for four employer nominated Trustees and four union-nominated Trustees with an independent Chairman.

The Harbours Super Plan is of course only one of several significant joint union-employer plans and others include the Waterfront Industry Plan and the Dairy Industry plan. However many plans, including the Government Super Fund have been closed to new members or wound up. There is a need to address this situation in both the public and private sectors.

Unions have a role in working co-operatively with the industry and Government on clearing the hurdles facing the second tier. We also need to encourage workers to include superannuation as part of the set of claims in collective agreement negotiations. This will be difficult in some cases. We need better information material which can be circulated to union members, in particular the delegates, and also put on web sites.

The issue of security of income in retirement is intrinsically connected to the issue of long-term economic growth. The CTU recognises that if there is consistent and strong economic growth which is equitably distributed, then many of the pressures we are discussing can be dissipated to some extent. That is why the CTU supports measures being taken on skill development, and general economic development. For employees, savings come from wages. The higher the wage, the more likely it is that savings will increase - all other things being equal. The CTU supports a high wage economy. We want to see an economy that can sustain a good supply of high wage, high skill jobs throughout the peaks and troughs of the economic cycle. I readily acknowledge that this is a long-term project. But the point is to make sure that we are moving strongly in that direction. To me, that also means, growing the domestic savings which can be available for investment. I know that funds logically go where the best return is, and that we are in a global economy. But I find it hard to accept that there is no link between a growth in domestic savings and a better investment environment in the economy.