Littlewood on Superannuation

December 24th, 2008 at 2:53 pm by David Farrar

I blogged on Monday my thoughts on the fiscal crisis, and talked about the stupidity of borrowing money now, as a means of saving for the future.

has sent me a response to my post, which I’m delighted to publish. Michael is an expert on policy and is with the Retirement Policy and Research Centre of Auckland University.

My initials comments are shown in italics and quoted below, and Michael’s comments in normal text below them. My thanks to Michael for his contribution:

The Cullen Fund

The Cullen Fund was based on a premise that as we are going to have surpluses for the next 30 years, then we should save some of those surpluses to meet the future cost of superannuation, so we won’t have to borrow money in the future.

The fatal flaw was always the assumption about surpluses

Not the only flaw – there were at least three others: one that New Zealand in 2020 onwards could not afford to pay for NZS from tomorrow’s economy (there is no evidence of that, despite the ageing population); that somehow, partial pre-funding was better for the economy than the previous PAYG approach; finally that having higher taxes now (to create today’s surplus) was cost-free. This all evidences the previous government’s cookie jar approach to financial management. In fact the Cullen Fund does not change the cost of NZS by $1 but, as has now been demonstrated, can add significantly to New Zealand’s financial risks. And, if I wanted to appoint an investment manager to look after part of my future retirement savings, the government would be last on my list of contenders mostly because no Chinese wall can ever insulate the Guardians from the political process.

but as the years went on and they continued unabated, the opposition to the Fund diminished, and even National signed up to it

Only because it was one of those memorable “dead rats” they had to swallow. Bill English said that you have lost the argument on this kind of policy if you have to explain it. Somehow, New Zealand has to grow up so that we can sensibly discuss this kind of thing.

But we are now in a very different situation. We have a structural deficit, and face massive borrowing for at least a decade.

So the Cullen Fund is now based on borrowing heaps of money today, so we do not have to borrow heaps of money in 25 years? Anyone else see the fatal flaw? Borrowing money to save money is the sort of stuff that caused the credit crisis.

Yes, I agree that leveraging the Crown’s balance sheet to invest in financial markets is a silly idea. But increasing taxes to do the same thing (and creating apparently costless ‘surpluses’) is only marginally less silly.

The Government should seriously consider suspending contributions to the Cullen Fund. We can’t save money we do not have.

And we should also seriously discuss consider selling the Cullen Fund’s investments, even in today’s market. If it makes sense to stop contributions then it makes just as much sense to sell. Not selling in the face of increasing debt is similar to borrowing to invest.

KiwiSaver has much the same problem as the Cullen Fund. It is all well and good to help subsidise people’s savings

There is no credible international evidence to support the notion that tax subsidies increase saving. Your statement assumes that, in good times, subsidies are a good thing. They aren’t – tax subsidies to saving are complex, regressive, expensive but, worst of all, seemingly don’t work – based on the best evidence available.

but not if the taxpayer is having to borrow money to do so

No, having to borrow to pay for the subsidies is just a worse idea than having the subsidies in the first place – the need to borrow to pay for them should call their wisdom into question more dramatically.

Because who is going to have to pay back and pay the interest on all that borrowing?

The same argument applies to the higher taxes needed to create the ‘surpluses’ that paid for the incentives in the first place. The counterfactual should be no incentives/lower taxes. Apart from anything else, you ignore the deadweight costs of higher taxes to pay for the incentives.

Those same savers

No, all taxpayers, some of whom are savers.

So once again we have the stupidity of borrowing money today, to help people save. That is not sustainable.

So is having everyone, including the poor who can’t afford to save, paying higher taxes to feed richer citizens’ retirement savings.

I like KiwiSaver

see below

If we were going to continue with record surpluses, it would be great to have a scheme which provides massive incentives for people to save

especially if they don’t actually increase saving (as opposed to savings)?].

But we don’t. Does anyone think Labour would in 2009 have announced the KiwiSaver subsidies they did in 2007? Of course not.

National has wisely already cut the cost of taxpayer subsidies to KiwiSaver. Arguably they need to go further and also look at whether the employee subsidy is affordable. If we need to borrow to find it, then it isn’t.

And what about the tax incentives through the PIE tax regime? That should be up for debate as well.

You see the employer matching contribution is a 1:1 subsidy already, which is massive

but not cost-free to employees. All employees, including the poor who can’t afford to join KS, will help pay for that through lower future pay rises.

Hell most people are happy to get a 10% return on investment and the employer contribution gets you an instant 100% return

Actually no because the 100% is spread over the life to age 65 – you can’t get the money until then.

Now the employee subsidy gets you a further 100% return

No, for the same reason.

so those earning up to $52,000 get a 2:1 subsidy or a 200% return on investment.

Unless the fiscal fortune improves, maybe the employee subisdy has to go also. Sure that means only a 100% return instead of a 200% return, but that is a lot better than the standard 10% return and I doubt it would discourage people going into KiwiSaver. Maybe raise the employer contribution rate to a maximum 3% so the total saved isn’t decreased.

A bad idea for the reasons already given.

We need, as a country, to discuss the retirement saving issue. We never had a proper discussion about these sorts of things in the nine years of the last government. What about the evidence that, before KiwiSaver, most New Zealanders were saving ‘enough’ or ‘more than enough’ for retirement? If you want to see some of the evidence, here is a sample from – you can see more by sorting the abstracts by New Zealand as the country:

New Zealand’s taxpayers will be spending a lot of public money on new retirement income saving initiatives after nearly 20 years of spending none. Was this decision based on sound analysis of data on New Zealanders’ savings behaviour? Is this policy shift likely to meet any of the stated objectives? Probably not.

Changes to the way retirement incomes are financed should be based on good evidence that is subjected to robust investigation over time. New Zealand missed those steps with its new KiwiSaver scheme, justifying its existence on seemingly dubious economic analysis.

For the last 20 years, New Zealand has had a two-pillar retirement income system – an elegant, universal, PAYG state pension plus voluntary saving. There have been no tax incentives or compulsion for the second pillar of private provision. So, how have New Zealanders responded? Apparently, mostly quite rationally. So what’s the problem?

Strongly negative household ‘saving’ might tell us something about the behaviour of New Zealanders but not whether they are saving for retirement, let alone saving enough. A ‘stocks’ measure of wealth is much more useful than the ‘flows’ of income and spending. more

And here is a report that shows how the existing retired are faring – the answer is “quite well thank you very much”:

The living standards of different types of households cannot be adequately measured without asking the people affected how they are managing and how they perceive their living conditions. That must be done in a systematic way. A new measure allows living standards to be compared across groups and over time. more

I do not favour the government rushing to change things (as it has done with KiwiSaver III). I do favour a full-scale, research based debate on all the things that should matter when we talk about financial preparation for retirement. And the objective of this process must be nothing short of consensus – on the evidence, on the things that matter and on the appropriate public policy settings. Anything less than consensus will sow the seeds for future policy uncertainty. We have had far too much of that over the last nine years.

9 Responses to “Littlewood on Superannuation”

  1. PhilBest (4,978 comments) says:

    Look, it is as simple as this. You want your people to start saving money for a change? Do a historical analysis: what was the number one cause of a decline in people saving money? What about that fateful decision by some petty socialists a few decades ago to start charging tax on interest? They might have thought there was a cash cow to be captured thereby; but what happened? The revenue base took flight, so that very little revenue now results from this tax anyway. Do you really think that there are other, more important reasons that people choose not to save money anyway? Try abolishing this immoral tax, and see what happens.

    DUH. DUH. DUH. I have been saying this almost all my life. Charging tax on interest is immoral. When someone earns money, they have paid tax on it, and it is then their call to do what they like with it, is it not? Why penalise them for deciding not to spend it, but to save it? If they earn interest on it, why should we take any fiscal position on that other than a neutral one? It is not as if the playing field is not already tilted against saving money, seeing that fiscal and monetary policy ensures that your saved money will decline in value anyway thanks to inflation, and all the incentives are there instead to do things like speculate in housing, which not only does nothing for productivity, but has outright destructive effects like making homes that much harder for the next generation to afford.

    Want to get NZ-ers saving again? Abolish tax on interest. It’s not rocket science.

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  2. infused (714 comments) says:

    Very thought provoking response. Thanks.

    That really is a good idea PhilBest.

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  3. PhilBest (4,978 comments) says:


    “…..Strongly negative household ‘saving’ might tell us something about the behaviour of New Zealanders but not whether they are saving for retirement, let alone saving enough. A ‘stocks’ measure of wealth is much more useful than the ‘flows’ of income and spending…….

    “………how the existing retired are faring – the answer is “quite well thank you very much”:…”

    There is another factor at work here; this is an important analysis:

    “The Housing Bubble and the Boomer Generation” by Robert Bruegmann

    Summary: The Boomer Generation got to buy cheap houses in a pro-development political framework; they have enjoyed unprecedented capital gains as anti-development policies and monetary and fiscal policy have forced the prices of houses up. The losers are the younger generation, who have had to mortgage themselves up to the eyeballs to buy a house at all, and many of them are now bankrupt as the housing bubble has burst. Bruegmann calls what has happened “The greatest wealth transfer in history”.

    Notice how the Left, who are mostly responsible for the policies that have brought this about, especially the anti-development policies, are not interested in any self-analysis on this. They will look at new intrusions of government, like taking equity in homes, but they are not interested in avoiding house price bubbles or allowing them to deflate once they have occurred. In fact, they will make everyone, including the young and the poor, worse off, by taxing them to be able to spend money on “bailouts” to prop up the price of houses, and by reducing the value of their hard earned money.

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  4. adamsmith1922 (1,004 comments) says:

    Excellent post with some good information


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  5. Viking2 (14,374 comments) says:

    Too much funding has been created from Superannuation funds. Funds that are given to fund managers who just have to get them spent. American funds have bombed two or three times in recent years and each time the excesses have got worse.
    The NZ property market has escaped the worst of the excess because our own funds are relatively new but we have been pulled into the Aussie orbit. Their funds have spent the last 4 or 5 years raiding the NZ market with the result that the NZ commercial property market has been radically over priced. Ridiculous that they will take a 5% return from a commercial building in an attempt to pay retirees 10%. Now that those same funds are in trouble elsewhere watch for the commercial to unravel. Beginning in the states and will be here before you know it especially as we are also losing the businesses that filled those buildings. So, good commercial buying around next year.
    Moral of all this. Let people keep their own money and don’t force them to contribute their money to funds. Aussie funds collect 10% of a persons earnings and so have a never ending supply of money. Americans have huge pension funds all looking for a home.
    And the worst part. Not one of any of those funds have a face to face responsibility with the donor.
    Would I belong? Not for anyones money.

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  6. LUCY (359 comments) says:

    A very insightful post DP. Thanks

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  7. LUCY (359 comments) says:

    And I agree with Philbest. Taxing interest on savings is just wrong!

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  8. Anthony (880 comments) says:

    I agreee with Phil about the housing comments.

    Also Phil, did you realise if you are a non-resident your bank can pay a two percent levy paid instead of deducting any interest – how unfair is that to residents who have huge amounts of tax withheld?

    Anyway, why is no one else pointing out to Bill English the utter madness of borrowing to save!

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  9. SPC (8,704 comments) says:

    I rarely agree with PhilBest, so will first agree with him on the tax of interest.

    My own take on this, is that tax on interest income should not occur until a deduction of the CPI amount occurs first – so only the real rate of return is taxed. Thus if interest received is at 8% while the inflation rate is 4%, only a 4% return would be taxed.

    As for the Cullen Fund, Bill English led the opposition to it initially. He preferred the “faster growth” strategy which would somehow allow us to afford future tax paid Super without saving for it now. I was of the opine that we should dealy the start, get growth first, then from a surplus save money for the future cost of tax paid super. As it was the economy grew so well we had surpluses quickly and we got good returns from the first few years of savings – so I think we should give Cullen some credit.

    And I support unreservedly the need for government to save now to afford a future cost (otherwise it will have to borrow later to fund tax paid super or cut spending in other areas – health care for those on Super or charge the younger generation for education).

    I realise some on the right want a lower Super payout (the CPI increase only of the continuous benefit clawback to lower and lower levels) or higher age of entitlement. Thus oppose the Fund on that principle of reducing a “tax paid welfare cost” instead. But that is an issue of itself.

    As for the mistake of the last year or two investing in a peaking market rather than just going into interest bearing bonds… not the issue either.

    The issue of the moment is going into deficit and borrowing to fund savings investment. The only good thing about it, is the stocks are at lower values and they may be good long term investments. And that is a good thing, if one has a good credit record and can borrow reasonably cheaply. The only alternative is to transfer assets into the fund instead of cash – assets in lieu of cash which could be onsold to Kiwi Saver later (to keep the assets in local ownership). Some assets could use a non government owner interested in their longer term value. Either way we should continue to save to reduce a future burden on the government. It is prudent management.

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