Voluntary and compulsory pension contributions
The former government liked to draw a distinction between voluntary and compulsory pension contributions.
A Ministry official illustrates the attitude cabinet ministers often repeated:
“I must take issue with your statement that overseas pensions are money that people have saved for their retirement. There is a common misconception amongst people receiving overseas pensions that participation in overseas contributory social insurance schemes is voluntary and that pensions arising from such schemes are private savings.
“However, in general, participation in a significant number of overseas social security pension schemes is compulsory. A person cannot choose to opt out of such schemes in much the same way as a person in
The former cabinet proposed to establish the distinction in law.
Even though the existing legislation makes no mention of these concepts, the New Zealand government has come to put so much weight on the distinction that one of the Proposals submitted to Cabinet (in the course of the government’s Review of the Treatment of Overseas Pensions) by Acting Social Development Minister Steve Maharey in 2007 is to:
“remove the proportion of foreign state pensions built up by voluntary contributions from the scope of section 70 of the Social Security Act 1964. It is desirable that voluntary components are not covered as they are essentially private savings.”
In some respects, this is a significant change. Where
Frequently, such contributions have made no difference to the application of section 70. Some pensioners made voluntary contributions for 45 years only to find their pensions captured by the direct deduction policy.
Social security agreements between
The commitment to honor private savings has proven hollow.
Although the removal proposal was accepted by Cabinet, Cabinet then failed to act on it. The minimal funding required - the commitment which would have given the government’s belated recognition of private property rights a little credibility - was denied in the 2008 budget.
Establishing a distinction between compulsory and voluntary pensions in law is ill-advised.
Redrafting legislation to establish a formal distinction between compulsory and voluntary contributory pensions only increases the government's exposure to risk of legal challenges. The reality is that there is no substantial difference between a pension based on compulsory or voluntary insurance - the premiums are the same.
For example,
The US Social Security program is considered a compulsory system, but it is not compulsory for everyone. Federal employees and persons receiving royalty income are not required to contribute to the scheme although some people do so, voluntarily. To apply section 70 to a person who has paid into US Social Security on a compulsory basis but exempt someone who has paid into the same scheme voluntarily is to draw a distinction that is both arbitrary and capricious.
The compulsory/voluntary distinction is spurious.
Many company-based employment schemes are compulsory, yet the government does not dispute that they are essentially private savings. And although
The distinction helped the former government to defend its direct deduction policy.
It is no accident that the Proposals identify voluntary components of pensions with private savings - even if the government baulked at making appropriate changes in the law. The link was critical to its justification of the direct deduction policy: the compulsory components of a pension can be likened to NZ Super.
The argument that the government relied on consistently is that insofar as a pension is compulsory, it is similar to - and can therefore legitimately be deducted from - NZ Super.
It was with this argument that former Social Development Minister David Benson-Pope dismissed a pensioner in 2006:
“I do not agree with you that the manner in which New Zealand and British pensions are funded makes a great deal of difference when both forms of funding are compulsory.”
Compulsory pensions are used to justify compulsory deductions.
The former
Pensioners accustomed to compulsion and financially dependent on NZ Super are much less likely to raise hell when captured by section 70 than those who “voluntarily” built “private savings”.
The government drew strength from a 2002 High Court ruling on pension funding which underlines the equivalence of NZ Super and compulsory overseas pensions:
“It is not necessary in terms of section 70 to (distinguish) taxation from another type of compulsory acquisition of a person’s income which the government chooses not to call taxation.”
The High Court has seldom been so wide of the mark than when it concluded that earners who are required to contribute funds towards their own retirement should have a lesser right to those funds than earners who are under no such compulsion.
The real distinction was overlooked.
By using the compulsory criterion to determine whether section 70 applies, the
It served the government’s purposes much better to obscure the issue further by emphasising the distinction between state pensions and private pensions. For a pension to be captured under section 70, however, it must not only be government-administered but also form part of a benefit program like NZ Super.
It is not difficult to show that contributory overseas pensions have much more in common with the “private” pensions that the
Most pensions from overseas are private in nature.
“The effect of section 70 is that, in general, pensions that are mandated by a government but that are nevertheless private in nature, eg pensions paid from the Chilean scheme in which workers make compulsory contributions into private accounts, are not covered by the policy.”
Such recognition immediately calls into question the carefully-cultivated voluntary/compulsory distinction, the countless reiteration of the relevance of compulsion in Ministers’ letters to constituents and the ruling of the High Court in 2002.
The former government ultimately admitted that its compulsory/voluntary distinction is irrational.
The Overview paper neatly sums up the contradictions in the
“The Review found that there are aspects of the policy that are arbitrary, particularly the way it treats the voluntary components of overseas pensions.”