Income after work: comment on the “Missing Report” paper Chamberlain and Littlewood July 2017. This paper raises significant analytical questions about a topic that is too often and dangerously treated as a short term political play thing to grab votes. Here are some comments:
Michael Chamberlain and Michael Littlewood’s report The Missing 2016 Review: building trust for life beyond work provides welcome if demanding scrutiny of what is loosely termed retirement policy in NZ. Welcome because they probe issues which are all too frequently dismissed summarily with a shrug of the political shoulder. Demanding because in this area the ‘obvious’ is altogether far from obvious in many cases and sound thinking is required.
I comment below on some of the more interesting areas they examine.
Government – What it Can and Cannot Do (well)
Perhaps their most compelling analysis arises from the examination of the role of government in retirement policy. This is government, not the crop of politicians labelled collectively as ‘the government’ at any given point in time but government as a mechanism, a set of processes, a set of enduring arrangements. The institution of government if you will. That institution has certain characteristics, capabilities and limitations which determine its usefulness or otherwise in retirement policy and its execution.
The institution which is government is not synonymous with other entities. Most notably it differs from households and individuals as well as numerous other arrangements (trusts, limited liability companies, partnerships and so on).
Chamberlain and Littlewood state bluntly that government should do such things as it is well placed and can do while ceasing and desisting from doing such things as it cannot. There are certain things governments can do. They should do them. There are certain things they should not do. And they shouldn’t.
It may be worth going a step further. Government should act only where it can be shown not just that that it can achieve a given objective (Chamberlain and Littlewood) but that it can perform better than any of the feasible alternatives. This may be true for some things. Extending Chamberlain and Littlewood’s argument to requiring that government only does things where it can demonstrably outperform feasible alternatives allows ranking of government priorities.
The Oven and Freezer Problem
One reason governments are poor arises where they ‘decide’ what an ‘adequate level of income is’ or ‘the right age to retire’ should be or ‘what criteria should be used for this or that subsidy’. Problems arise since, by necessity, governments wind up dealing with averages of one type or another because they have little choice but to aggregate populations and their communities.
This leads to the averaging problem. This is best exemplified by one analyst who explained that by placing his mother’s feet in the freezer and her head in the oven he made absolutely sure that she enjoyed the correct average body temperature. Much the same effect arises where government allocation policies wind up working on various averages supposed to describe communities that are, in fact heterogeneous.
The key alternative – targeting subsidies or breaks toward specific identified ‘needs’ – runs the combined (and cumulative) risks of misidentifying targets (which even if identified correctly are ever moving), missing the target altogether and, at the same time, creating incentives for rent seeking groups to push for rules favouring them regardless of need and use electoral muscle to tilt targets in their interest.
Government roles and rules which improve the opportunity for private provision are more defensible. Such provision is necessarily customised to individual needs avoiding the averaging problem. Private provision is not designed to match government rules, and it avoids inefficient and inequitable target setting.
Chamberlain and Littlewood suggest that gathering of data and the use of an evidential base needs to underpin government interventions characterised by these issues. A useful step would be to place existing policies under the sort of scrutiny suggested.
Encouraging private provision would see governments ensuring that, amongst other things, tax rates are as low, flat and simple as is possible and that other interventions (for example interventions driving up the cost of particular goods or services as many local authority bylaws do) do not have the effect of distorting the efforts of individuals to provide for themselves.
Economic Growth and its Place
On the list of necessities for sound income beyond work policies, Chamberlain and Littlewood highlight the overwhelming importance of sound economic performance and growth. Strong economic performance and growth is stressed as being important so often that its particular significance in this debate is lost.
It is critical. The paper might have explained the way in which economic growth, i.e. an increase in the wherewithal to secure scarce resources is a tide that lifts all boats decreasing the sheer size of problem. It offers the chance, for example, to better trail the rising health costs faced during aging, long run it has the potential at least, to reduce the tax burden on individuals making provision for future income, and it offers less pressure to develop income transfer mechanisms whether private or public – a useful gain since these are ever complex and inefficient.
Moreover, economic growth is not per se dependent upon politically motivated actions (indeed inaction is frequently the more useful default).
In the spirit of the rest of the paper’s argument, the stress ought to sit on the way economic growth expands choice. Given that forecasting (as J.K. Galbraith had it) is a way of making astrology look good, less attention might be paid to economic growth as measured in various misleading indicators such as GDP growth or like indicators and in data than on whether or not various policies expand or contract choice.
An example might be RMA reform. Freely granted permission for any growth and development might be made the default unless an identified reason not to develop could be demonstrated. This would stand in stark contrast to the current approach which sees prohibition in everything unless it is explicitly permitted via a regulatory regime. The former inclines behaviour toward expanding choice while the latter promotes a default roadblock.
Similar defaults apply in numerous of the micro economic regulatory regimes operating at present.
The Folly of the NZSF
Chamberlain and Littlewood lay bare the faulty reasoning behind the notion that saving up’ by investing in a strong performing NZSF is a good scheme. Very little critical thinking is brought to bear on this idea and the costs it has spawned.
The idea of the government ‘saving up by investing wisely so we have money to cover us in our old age’ is seductive.
As hammered again and again by Chamberlain and Littlewood, the major fallacy here is that the government is not an individual. It faces difficulties in running an investment fund that individuals and private sector funds do not. Whenever governments develop instruments like the NZSF these limitations impose costs on everyone.
Key to the imposition of those costs is the way government gets the funds to invest in NZSF. They come from taxes. Those taxes cost an outsize amount to raise – on Treasury’s (conservative) estimate some 20% of each dollar raised.
More than half a century’s research shows that if the NZSF management could beat the market cost of funds (and make a risk adjusted profit) and retain the profits over time, it would be achieving a feat which eludes over 80% of fund managers worldwide.
For the NZFS things are even tougher. Their starting point imposes a 20% disadvantage since it costs $0.20 to raise each $1.00 invested. Even meeting the market is an exercise in losing 20 cents. The conclusion as explained, is not to bother losing the 20 cents in the first place, close the fund and pay down government debt.
Not Just Doing Useful Things – Avoiding Doing Bad Things
Chamberlain and Littlewood’s paper was motivated by deficiencies they saw in the 2016 Review by the Retirement Commissioner. Their point is however, less about the deficiencies of that report per se, than the more general and important point that the debate (shallow and misguided in many instances), the level of rigour in policy development (not evidence based or thorough in many instances), and tending to take place driven by the wrong people. Those people tend to be either politicians seeking electoral benefits or rent seekers in the product sale and distribution industry.
Instead data assembly and debate need to take place in an apolitical environment characterised by analysis not anecdote and be based on evidence not presumption and myth.
A useful extension to the design considerations Chamberlain and Littlewood suggest would be to examine legislative instruments such as the Reserve Bank Act and the Fiscal Responsibility legislation. These mechanisms seek to place politicians and governments of the day at arm’s length from matters where the long run is important, where bipartisan commitments are important and where ad hoc responses for which no one is called to account (who is to get called to account if some arbitrary age trigger turns out to be wrong?) are dangerous.
Neither Act is perfect but as a means for creating a high(er) degree of autonomy and reducing ad hoc interference they both outperform vulnerable instruments such as ‘cross party accords’ and ‘bipartisan agreements’.
Something of a Horrid Concoction
Simplifying and standing back, Chamberlain and Littlewood’s paper has me concluding that we have something of a deluded retirement policy package, grown up through ad hoc adoption of policies which seem all too often to end up saying:
1. I have my KiwiSaver so I’m pretty much covered there especially with a house and a bit of saving;
2. The government is OK because it has the NZSF to make sure there’s plenty of cookies in the jar;
3. If it looks like turning to custard we can tweak age of retirement or a few rules as needed; and,
4. We have a Commissioner to keep beating the drum and telling us when we need to tweak.
So all’s well. This idea and its variants is not universally held but it’s dominant enough to be dangerous.
In contrast Chamberlain and Littlewood point out that:
1. There are some fundamental principles which are critical;
2. Their analysis is not the province of nor is it amenable to political process solution;
3. The principles need to be reflected in the design process used to devise policy; and,
4. How well we are doing at this needs regular rigorous examination.
Best we get on and do that.
Some responses to the paper have implied that the questions raised and the analysis offered is overly theoretical.
Careful thinking to the required depth, and seeking evidence to support policy conclusions, however pointy headed it may sound to some, still beats calls to politically driven fearmongering which seeks solutions purely in the comfortable Calvinist call to arms which characterises much debate both in NZ and elsewhere. The questions posed in Chamberlain and Littlewood’s paper is a good place to start.
Read the report here: The Missing 2016 Review – Building Trust for Life Beyond Work