The NZ Super Fund

February 25th, 2009 at 8:35 am by David Farrar

The growing debate over the , is an excellent example of how politics has to manage perception, as much as reality.

I doubt even Dr Cullen would disagree that if we did not already have his “Cullen Fund”, he would not propose one in today’s circumstances.

I mean could you imagine getting up, just at the time credit rating agencies are warning that they may downgrade our credit rating, and saying “Hey I have a great idea – let’s borrow an additional $20 billion over the next ten years, so we can invest it in a loss making fund”? I mean, you would get laughed out of the House.

The NZ Super Fund was agreed to on an assumption that we would have a permament structural surplus, and out of that surplus could put aside around $2 billion a year. Maybe there would be the occassional year of deficit, but the consensus was that from 2000 to 2020, there would be lots of large surpluses, and hence why don’t we save some of that money to help pay for the cost of future from 2020 onwards, when an ageing population will make it harder to cover the cost.

So the whole idea was to save money now, to avoid having to borrow money later.

But we have the stupidity (highlighted by Michael Littlewood this week, but something I have been campaigning on for some time) of borrowing $20 billion over the next decade, to put into the NZ Super Fund. So we are borrowing money, so we can save money, so we won’t have to borrow money? Confused? You should be.  Sounds more dodgy than a hedge fund.

But we now have the politics. In an ideal world, everyone would understand that continuing to borrow money to put into the Super Fund will not in any way affect whether or not future pension levels stay the same. has made a “promise to resign” signed pledge that he would resign if they ever cut the pension level. And in fact his atx cuts have helped boost pensions.

But if he does the sensible thing and say “Oh it is stupid to borrow money (and risk a credit downgrade) to try and save money” and we are going suspend contributions until the books are back in surplus”, then Labour and others will launch a campaign of fear and confusion (remember their 2005 one about National evicting state house tenants) telling pensioners that this means their future pensions are at risk. And some people will believe them.

We see this today in the Herald with demanding the PM come clean on his plans for the Super Fund. And this is simple because Key said they have not changed their position, but they have yet to discuss the issue yet.

John Armstrong warns National to tread carefully:

John Key and Bill English ought to think very carefully before tampering with the New Zealand Superannuation Fund – even if the political risks of doing so may seem relatively slight at first glance. …

A short-term stop on contributions would avoid English having to borrow the money to fund the annual payment into the six-year-old fund. That would make it just a little easier for him to write a Budget which gets international credit rating agencies off his back. It might not be too difficult to convince people that it does not make much sense to borrow money to build up the fund – especially when world financial markets continue to nosedive.

Indeed. But …

There are further reasons not to tinker with the contributions. The first is whether the Government will have the political wherewithal to restart them them once they have stopped. More important, however, is the (mostly) all-party consensus on superannuation policy. It took an age to reach. It will not take much to dissolve it. …

Labour know it is daft to borrow money to save money. Phil Goff is not stupid. But Phil Goff wants to be Prime Minister. So sure as hell he’ll try and politicise what should be a sensible non-controversial move (a temporary suspension of contributions until we are back in surplus) into the equivalent of slashing pensions.

And Martin Kay in the Dom Post reports is saying don’t do it:

Government support partner Peter Dunne is urging National not to tamper with the New Zealand Superannuation Fund, warning that it would again make state pensions a political football. …

“There’s an argument that because, at the moment, this might have to be funded out of borrowings rather than surpluses, it’s a bit dumb to be doing it. There’s some truth in that, but at the same time, it seems to me that if you’re going through a slow patch economically, given the role that superannuation has long-term, this is the one time not to be putting its future into some jeopardy or doubt.”

So you have the perception in conflict with the reality. You know borrowing to save money achieves nothing in terms of making future super more sustainable. But you know it will lead to a nasty campaign of fear if you suspend contributions.

So I guess you ask, the question the other way around. Sure borrowing to save money doesn’t actually achieve anything, but does it actually do any harm? The cost of the borrowing will be pretty close to the returns from the fund. So it isn’t like a bad policy which actually costs the taxpayers money. It’s just a bad policy that achieves nothing.

So maybe it just isn’t worth the hassle? Just keep the stupid status quo.

Mind you, I’d like a journalists to aggressively ask Phil Goff some questions, such as:

“Mr Goff, if you think the Government can guarantee superannuation by borrowing $2 billion a year to put into the Super Fund, why don’t you advocate the Govt borrow $20 billion a year to put into the Super Fund? Then we could triple the pension”

“Mr Goff, why did your party call for a WINZ staffer to be reprimanded for suggesting a beneficiary borrow money to pay off her debts, yet you advocate the Government borrow money for much the same thing ?”

“Mr Goff, do you think households should follow your advice and borrow money to pay off their mortgages, rather than suspend contributions temporarily”

I suspect the Government will stay with the status quo, as it is just too much hassle for too little gain.

UPDATE: I’m impressed and a bit amazed. The Greens have come out supporting a suspension of contibutions (as have ACT). NZPA report:

And Greens co-leader Russel Norman said any responsible government would reconsider contributions.

“I think people will understand we’re in a very difficult position,” he said on Radio New Zealand.

One can support the principle of the Super Fund, yet agree that it is stupid to currently pay into it, when we are forecast to have to borrow every cent we invest into it for the next decade. Will Goff now accuse the Greens of trying to undermine superannuation?

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23 Responses to “The NZ Super Fund”

  1. Glutaemus Maximus (2,207 comments) says:

    Don’t tell Gordon Brown, that there is spare cash anywhere.

    He is about to plunder a host of Pension Funds to pay for his sacred cow PFI schemes that has been stopped.

    Oh, and there is an Olympics to pay for!!

    Argentina robbed everyones Pension Money to pay off Overseas Debt and page civil service wages.

    Money for old rope.

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  2. Redbaiter (13,197 comments) says:

    All down to the left who have preyed upon the intellectually weak in society by promoting the false perception that government can provide free money, whereas those intelligent enough to see through this deceit, know the reality that there is never any such thing as a free lunch.

    John Key’s big problem is that in the NZ electorate, the former far out number the latter.

    So we approach the outcome that Sir Alexander Tytler predicted all those years ago, paraphrased as ‘a democracy will eventually collapse if citizens begin to vote themselves money from the treasury’.

    Way back then it was clear to Sir Alexander. How come today, the majority of politicians and voters still don’t get it?

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  3. glubbster (345 comments) says:

    Nice post DPF. Very good questions but alas I doubt the media will ask the hard questions to Goff.

    I must say I am a supporter of National suspending contributions.
    You say “So I guess you ask, the question the other way around. Sure borrowing to save money doesn’t actually achieve anything, but does it actually do any harm? The cost of the borrowing will be pretty close to the returns from the fund. So it isn’t like a bad policy which actually costs the taxpayers money. It’s just a bad policy that achieves nothing.”

    I doubt the fund will get close to the cost of borrowing in the next 3 years. This is the concern/risk in not acting.

    And what about our international credit rating?

    Its interesting that Labour think it is ok to borrow to save (long term benefit only if can earn more per year than the cost of borrowing), but not ok to borrow for infrastructure or tax cuts (both benefit the economy in the foreseeable future). My view is that it is not the right time to be saving for long term retirement. We have a global economic crisis on our hands and who knows if the worst has even struck our shores yet.

    The policy should be to suspend contributions on the basis that the fund is currently losing money due to the economic climate and that the National government undertakes to review the position in 12 or 18 months. Having some expert advice to this effect would be useful. National should spell out the dangers and the folly of not taking this course of action.

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  4. Gary2 (17 comments) says:

    It is a comprehensive post. There is one scenario where I would support the government borrowing to put into the super fund, and that is when the cost of borrowing is less than the capital gain to be made by the investment. Unfortunately we are experiencing major losses in every sharemarket around the world and no-one can be certain as to when that will turn around. There will be more falls yet.

    Eventually things will improve and only a fool would say that he could pick the bottoming out of the markets. My preference, like glubbster, would be to review the situation regularly so the fund does not miss out on too much of the upturn when it happens.

    Until then, National needs to be decisive and to pre-empt any political criticism by Labour.

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  5. Bandycoot (29 comments) says:

    While of the same general opinion that we should consider holding off any further borrowings to pay for this fund, one thing does occur to me. As the sharemarkets around the world are all falling to low levels, now and the near future would seem to be a good time to be purchasing shares etc, as when the market picks up again, these investments will grow in value over and above the potential benefit of not adding to the fund.

    I guess this puts me on the fence, but would seem to be a better option than just throwing money around (as the US and UK seem to be doing).

    Either way, National need to be very careful to shut down any hysterics from Phil Goff (not to mention mad dog Bradford and co.).

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  6. Ross Miller (1,624 comments) says:

    Just remind me please how much the Cullen Fund has lost in the past 12 months over and above the $2 billion (I think) we contributed last year and then tell me why NZ shouldn’t take a ‘contributions holiday?

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  7. georgebolwing (496 comments) says:

    Two points.

    Firstly, the Cullen Fund NEVER made any economic sense. If you know that you are are going to have an expenditure hill in the future – a temporary increase in spending that will then return to the current level – then there is a case for pre-funding. You keep your tax rate constant, meaning that you build-up assets early and then use those assets to pay off part of the expenditure.

    But spending on NZ super is NOT an expenditure hill. We face a permanent demographic shift towards an aging population, driven not by a blip in fertility after the Second World War, but by a fundamental reduction in mortality across all age groups, the result of which is that the proportion of people over 65 in the population will keep increasing, albeit at a reducing rate.

    For details, see the Treasury’s Statement on the Long-term Fiscal Position: http://www.treasury.govt.nz/government/longterm/fiscalposition/2006

    The Cullen fund does NOTHING to reduce the future cost of superannuation. Those costs are driven by (i) demographics (the number of people eligible) and (ii) the rate of payment, which under current policy is driven by increases in wages and the tax rate.

    Secondly, the Cullen Fund was always driven by politics. It was Cullen’s way of stopping the Alliance and the far left of the Labour party from spending the surplus. Rationally, taxes should have been cut once net debt was reduced to prudent levels, which happened in the mid 1990s. National started this. Labour came to office promising to increase taxes on the rich and increase spending. But Cullen knew that the surplus was so large that the spending would be of low quality. OK, “low quality” is a relative term: most of what they did spend was of low quality: the money that went into the Cullen fund would have been spent on things that were even worse. It is seriously scary to contemplate what they might have done.

    So, basically, the Cullen Fund was the least worst of the options available to Cullen. Cutting taxes was ruled out. Paying off more debt was also not really an option, as the Alliance and the far left of Labour did not see this as a priority. So it was either spend it or put it “beyond use”.

    This all wasn’t that bad when the Fund was first established, when their were surpluses and returns were high. Cutting taxes would have been a lot better, but if that was ruled out, then the Fund wasn’t a bad option.

    But today, the lack of a policy rationale for the Fund is fully exposed.

    It does nothing to reduce the costs of superannuation and rather than putting the surplus “beyond use”, it is just making the deficit bigger.

    Key and English should be educating the public about the stupidity of the Cullen Fund as a prelude to its disestablishment. The money should be returned to taxpayers. Quickly. We will send it in much better ways than the government.

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  8. AG (1,727 comments) says:

    DPF:
    “I’m impressed and a bit amazed. The Greens have come out supporting a suspension of contibutions (as have ACT).”

    Is this really a surprise? The Greens haven’t been particularly supportive of the Super Fund from the get go … have a look at this speech by Rod Donald back in 2002

    http://www.greens.org.nz/node/15898
    “The Cullen super fund was appealing at first glance but we now know it will be a disaster. New Zealand will only be able to afford the future costs of superannuation by building a stronger, more confident nation. That’s why we want to dismantle the Cullen fund, repay what’s been borrowed and invest the rest in putting our nation on a just, sustainable and secure footing for this century and beyond.”

    As for their attitude to how the Fund actually operates, see:
    http://www.nbr.co.nz/article/cullen-fund-s-principled-stand-doesn-t-go-far-enough-greens-37026

    So it seems absolutely reasonable for them to now want to put a halt to payments into it! No?

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  9. PhilBest (5,112 comments) says:

    There is something in what you say, Bandicoot. I wish our Cullen Fund had access to exactly what George Soros is doing, and merely copied that.

    One of the big problems with the whole current crisis is that politicians and political appointees, including central bankers, are invariably outperformed at every turn when it comes to predicting market movements, by people who have had a lifelong career as self-interested investors and who have got their heads around principles of economics that most others haven’t. The old adage is, it takes a thief to catch a thief.

    The “investment” game that has gone down in the last few years, has been like this. “Wall Street” and the investment industry all over the world, by and large, went along with the politicians beliefs that the good times were a result of good management, and were real and could be relied on. In a mass failure of imagination, from first home buyers to speculators to mortgage lenders to investors, huge financial positions were taken based on the assumption that house prices could keep going up forever and debt could keep expanding forever, regardless of how far behind incomes and production were left.

    The worst over-reach occurred in the selling of derivatives, which bluntly speaking, turned into bets on the financial situation. If someone in the financial industry was gambling on the good times continuing to roll, they sold derivatives, and earned themselves fat fees in the process. This underpinned a lot of the huge profits that were being made by some. Warning lights should have been flashing all over the place, about the fact that there was so much money being willingly put down on the table by BUYERS of derivatives, and in similar positioning that stood to benefit in the event of a downturn. These people were right, and the flow of profits has reversed and multiplied many times, from the institutions who were selling these derivatives, to those who were buying them.

    There is a fundamental assumption about the US financial sector “dragging down Europe and the rest of the world” because of their having invested in toxic mortgage-based securities. But this completely ignores the fact that the worst damage to the US financial sector has occurred because of the huge payouts they have had to make against derivatives. The holders of these derivatives, whether in Europe or wherever, are being fabulously enriched. Many buyers of the toxic securities hedged by buying such derivatives, and are in fact in a healthy position.

    And in so far as actual destruction of wealth in crashing asset values is taking place, this has everything to do with each nations monetary and fiscal mismanagement over the last decade or two and little to do with the positions taken by the various operators in the financial markets, who were merely reading the conditions correctly or incorrectly as the case may be. And those who were reading it incorrectly were virtually joined at the hip to the politicians and central bankers that were setting up the crisis. Actually, exactly the same sequence of events as has occurred in the USA, has occurred in the UK and Europe; they too have had house price bubbles, ballooning private debt, and the development of a massive financial casino over the resulting false boom.

    The world badly needs to work out who has gained and what they are doing with their new wealth, because it is pointless continuing to pour taxpayers money into a financial sector where there are huge transfers of wealth going on. It is pointless propping up failing institutions out of which huge amounts of money are flowing, when the necessary recapitalisation of the whole finance sector is already within the power of the clever operators who have gained so much. Their money must be sitting somewhere, or being used for something. This is a separate issue to the destruction of wealth that has occurred in the collapse of the world’s housing and mortgage bubbles.

    The idea behind the Cullen fund is the only valid “prosperity dividend” that governments might go in for. But lavish new welfare schemes and state churn of money, are never valid, because as we have found, not only do the good times not last for ever, they might prove to have always been illusory anyway. And then, all we’ve got to show for it, instead of a healthy balance in the nations savings accounts and super funds, including the State’s one, is a whole lot of money comitted to featherbedding and vote buying schemes that do nothing but harm to the economy and that we can no longer afford.

    Had our Cullen Fund been among the astute operators who were positioning themselves to profit from a downturn, it would be one very fat Cullen Fund today. But given the obvious beliefs of the people who set it up, what were the chances of that?

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  10. Michael Littlewood (15 comments) says:

    The New Zealand Superannuation Fund was started without consensus; even without a proper debate on its underpinning economic rationale.

    As georgebolwing says, the future cost of New Zealand Superannuation will be the benefits paid and that will be entirely unaffected by the amount of money in the NZSF.

    Although I have never been a fan of the NZSF (because I thought that it was a ‘solution’ to a different, more immediate economic issue than the future cost of NZS), I do not favour rushing to either suspend contributions; nor to unwind the whole arrangement. Instead, we need to step back and have the research-based discussion about the future size and shape of NZS that we should have had in 2001.

    The NZSF tried to lock-in NZS for the next 100 years. That was always a misguided, impractical objective but it is still not too late to talk about what really matters. A true consensus on the things that really matter is still possible and should be the sole objective of the review that we now need. If the politicians can’t deal with the issues (because of the implications of comments that Phil Goff has just made) then the task of moderating the required review should be taken out of the political process, as it was in 1991 when Jeff Todd led the national debate (I was a member of that Taskforce).

    KiwiSaver should also be included in that debate because we are now also borrowing the more than $1 billion a year in tax incentives paid to KiwiSaver members. A discussion on that issue might conclude this is a sensible idea but I can’t, for now, see why.

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  11. glubbster (345 comments) says:

    Now that the Greens have come out in support of suspending contributions a great opportunity for National has arisen.
    If National can get the MP onside as well, Labour will be isolated in opposition of the scheme (save for Dunne and Anderton). This support will be important in the eyes of the public when it comes to Labour’s usual tactic of fearmongering on National. Its also a good opportunity for National to cultivate a more supportive relationship with the Greens on certain issues.

    I think Dunne’s comments show he can be persuaded to follow National’s lead so long as National undertake to review the contributions in 12-18 months. He admits it might be “dumb” not to scrap but wants to secure its long term future, which if National commits to, I cant really see his credible objection (although he may want to play politics on this one).

    Georgeb: as for the wider picture, National have been vulnerable on super issues since 1990-1991 and Labour has been able to take advantage of this. The issue of scraping the Cullenfund is one which a party like Act should be differentiating themselves from National on. This is the kind of issue Act can make mileage out of. I doubt this National Government has any intention of scraping the fund in the next few years (if ever) though.

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  12. OECD rank 22 kiwi (2,787 comments) says:

    The current government would have to be retarded to not suspend contributions to the New Zealand Superannuation Fund.

    Talk about pissing money you don’t have against a wall.

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  13. s.russell (1,486 comments) says:

    I support the Super Fund. I think it was and is a good thing.

    We face a looming demographic crisis with an ageing population massively increasing the cost of super and health care while the working age population declines as a share of the total population. That won’t go away if we just bury our heads in the sand.

    Public policy must, perforce, be the best marriage of good politics and good economics that can be achieved. Options for dealing with the looming demographic crisis that were better economically were all more difficult politically. Politically nicer options were all more irresponsible economically. That logic still holds.

    Also, just think, what would Labour have done with the money that otherwise went into the fund? (As georgebolwing notes)

    Yes, it has just made a large loss. But in other years it has made large profits. That is the nature of investment. What counts is the long term results. It is quite possible that $2 billion invested in 2009 could be extremely profitable. Markets have gone down a lot, and it might now be the best time to buy (as Gary2 suggests).

    The Super Fund law specifically allows for a temporary suspension of contributions, and indeed if there was ever a time it was justified it is now. I am not sure that it is mind you, but it is arguable. But it should be temporary, ie invoke the suspension for a year only, with resumption being the default option.

    I must say too (agreeing with glubbster) that borrowing to invest is NOT a stupid idea. Business do this all the time: they borrow from banks in order to invest in themselves and produce growth. The Govt, with its high credit rating can borrow very cheaply, and (on average) get a far better return through investing it than is paid in interest on the loan.

    Finally, New Zealand is sick of politicians mucking around with super. To make significant changes without broad consensus would be both bad politics for National and bad for the country. There should need to be utterly compelling arguments to take such a step, and I do not think arguments against the NZSF come anyewhere close to such a level.

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  14. Paulus (2,299 comments) says:

    Phil who!

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  15. gd (2,286 comments) says:

    DPF This is reason 568 why we gotta introduce IQ tests for potential voters.

    I mean if a citizen dont get the stupidity of it then they dont have the mental ability to chose who should govern them

    We are now in a situation when only a fool would say they can predict the economic outlook long term.

    To keep on borrowing money to invest it when there is no guarantee the end result will be more than the amount borrowed plus the interest paid on that amount is just plain crazy.

    its all about risk management and in this environment that strategy is off the graph of high risk.

    Fact is IMHO you cant point to the past as a determinate of the future. All bets are now off until we see a new pattern emerge

    the old rules and old paradigm dont apply any longer. We are in new unchartered waters and must therefore act very prudently and be able to change direction quickly

    Countries businesses and indiviuals who cant or wont be quick on their feet to react will sink like a stone

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  16. baxter (893 comments) says:

    The answer would be for the Government to borrow the money and pay it into the Cullen Fund and then amend the rules governing the fund directing that the whole amount be invested in essential National Infrastructure either on a Govt/Fund partnership basis or by lending back to the Government at cost of capital plus 1% per annum.

    To borrow and re-invest overseas at present is absolutely crazy and even if you take the average returns the fund garnered during the crazy bull market and average over the downturn I doubt whether the return would exceed a direct investment in Government Bonds over the period.

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  17. Brian Smaller (3,915 comments) says:

    Also, just think, what would Labour have done with the money that otherwise went into the fund? (As georgebolwing notes)

    They could have given me back the extra tax I paid over their tenure that I shouldn’t have.

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  18. stephen (4,063 comments) says:

    Looks like English isn’t ruling out stopping contributions now…

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  19. big bruv (12,386 comments) says:

    If Key and his people are smart they will contiue to call this the Cullen Fund for as long as it continues to be the bloody nightmare it currently is.

    The more they reinforce Cullen with the failure of the super fund the more people will quiet rightly associate Cullen and Clark with the mess we are in.

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  20. AG (1,727 comments) says:

    “gd:
    DPF This is reason 568 why we gotta introduce IQ tests for potential voters.
    I mean if a citizen dont get the stupidity of it then they dont have the mental ability to chose who should govern them”

    Ummm … doesn’t this rather undercut the National Party’s authority to govern? If people are so stupid, we respect the result of the 2008 election … why?

    Or is it that people are only smart when they vote the way you like, but too dumb if they vote the other way?

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  21. tvb (3,947 comments) says:

    The whole idea behind the fund was for Cullen to soak up $2 billion per annum or more to ease the pressure on tax cuts. Such was the extreme distaste Cullen had for tax cuts. So he wrapped it all up in setting up this phony fund, a piggy bank if you like, instead of giving people $12b worth of tax cuts.

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  22. getstaffed (9,188 comments) says:

    AG – Your beloved Labour made breeding dumbed down, hopelessly dependent voters and art form. That enough of them escaped the trap and voted Labour out is good news. That so many still blindly voted for perpetual subservience to the state under Labour is a real concern. Those are the ones who should be subjected to a minimum IQ test.

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  23. OECD rank 22 kiwi (2,787 comments) says:

    just at the time credit rating agencies are warning that they may downgrade our credit rating

    Maybe what New Zealand needs right now is a downgrading from credit rating agencies. Like a child who is held back a year in school and finds the process so humiliating that they completely turn their lives around. They become a successful, hard working contributor to society and fully enjoy the rewards of their own productive endeavors. A credit ratings downgrade would be character building for New Zealand. How else are New Zealanders going to realise the perilous economic situation their country current finds itself in?

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