Kiwiblog

The retirement policy and research centre at Auckland University has published its annual review of the performance of the NZ Super Fund.

This helps inform us for the election, as Labour’s policy is to borrow an extra $6b off China and have the NZ Super Fund invest the majority of it on international sharemarkets. Not even the fact that Europe stands on the brink of financial disaster, has put Labour off their borrow to save policy.

The RPRC compare the returns from the NZSF against the “risk free hurdle rate” of the yield on ten year government stock at the start of each financial year. This measures whether the NZSF has actually made NZ better off financially.

They find that as at 30 September 2011, the NZSF has made $1.22b less than the ten year government bond rate.

So why are Labour persisting in arguing that we should borrow money to contribute to the fund, when that was never its intention as set up by Cullen. Our priority has to be to get our debt down first.

Tags: Michael Littlewood, NZ Super Fund, RPRC

Michael Littlewood argues in this paper that neither ACC nor Superannuation should be pre-funded.

He argues that pre-funding of ACC should not just be delayed until 2019 (instead of 2014), but is inappropriate for a Government entity.

I suggest people read the full paper, bus his points in summary are:

• The ultimate owner of the provider, the government, will never disappear. Also, the government has the power to tax to meet future liabilities, expected or unexpected. The ACC has therefore no apparent need to maintain a pool of invested assets to pre-fund its expected, contingent future obligations.
• By maintaining the ACC Fund the government is effectively in the business of portfolio investing.. That is because, when the accounts for the ACC are consolidated as shown in Chart 1, the ACC’s investments become the government’s. The ACC does not itself
  need to address the issue (whether or not to be a portfolio investor) but the government should.
• Borrowing to buy portfolio investments (shares, bonds etc) is speculation – again, not necessarily a bad thing in itself. The borrower takes on the risk that the returns from those investments will be at least as great as the cost of the debt used to acquire them.
  Borrowing to invest magnifies the yields and the losses. It turns a good return into an excellent return; and a bad return into a potential disaster.

Interestingly both Labour and National support pre-funding of ACC.

Tags: ACC, Michael Littlewood, pre-funding

Michael Littlewood writes:

From the post-Budget rhetoric, it appeared the National-led Government’s first Budget had struck at the heart of future retirees’ security. Here is what Phil Goff said:

“And the biggest dishonesty is to talk about a commitment to superannuation because there won’t be any money to pay for it – they’ve taken away the certainty New Zealanders rely on.”

According to Mr Goff, “[T]he net result will be that future entitlements to super are put at risk.”

After a week of headlines, let’s look at Labour’s claim. Was Mr Goff right? No, he wasn’t even a bit right.

Not even a bit right.

Now is the time to be putting money into share markets, he suggested, when markets were at their bottom.

Really? There is in fact no guarantee that markets haven’t further to fall. The super fund will be doing really well if, in the next few years, it recovers the losses it has already suffered. All fund managers are in a similar situation so that is no criticism of the fund’s guardians (they were doing what they were asked to do). But the question is, do we really want to borrow $2 billion a year for the next 10 years and put it all into sharemarkets in uncertain times?

If the US economy has another crash in five years time, and agains billions of dollars gets wiped out of funds, will Goff then insist we borrow even more money to invest into the US economy?

It’s scaremongering to suggest that the incomes of future retirees are put at risk by last week’s decision. Task forces of the 1990s concluded that New Zealand is relatively well placed to afford all the costs of an ageing population, including pensions and health costs.

Taxes will increase because the number of retired people will about double but even then, in 50 years, New Zealand will probably be paying quite a bit less than some countries are paying today for their retired populations.

The talk of a crisis, is just talk.

New Zealand can afford New Zealand Superannuation with or without the New Zealand Superannuation Fund, so we don’t have to change superannuation just on account of the Budget’s decision to suspend payments.

To suggest otherwise is to ignore the major independent reviews of 1992, 1997, 2003 and 2007.

That doesn’t mean we have to preserve New Zealand Superannuation in all its respects for the next 50 years. In fact, the country needs a proper, research-led debate on whether the scheme that was set up, essentially, in 1938 is the one we should still have in 2050.

A research led debate would be nice.

There are still cash deficits to finance, so why not sell the fund’s assets to finance these?

This is a risk issue for the Government’s balance sheet – we know the cost of debt but we don’t know what the super fund’s assets will be worth in one or 10 years’ time. In theory, they should be worth more than the accumulated cost of debt, but that hasn’t worked over the last seven years.

Here Michael and I differ on our views. I agreed the Super Fund could be wound up. Higher economic growth will do more to make future superannuation affodable, than the Super Fund.

But I would split the Super Fund into individual KiwiSaver accounts – so it gives people a boost in their private retirement savings.

Tags: Michael Littlewood, superannuation

Superannuation expert Michael Littlewood has five proposals for the Government:

1. Review the need for the New Zealand Superannuation Fund
2. Change the NZSF’s investment strategy
3. Stop pre-funding the ACC’s liabilities
4. Remove the rest of KiwiSaver tax breaks
5. Fix the income tax system

I very much agree on (1). We are now borrowing every dollar we invest in the fund. At a minimum contributions should be suspended.

In (2) Littlewood proposes that there be no minimum proportion to be invested in NZ (as National proposed) but instead it should be directed to “invest in new businesses or in the growth of existing businesses that, for example, have export potential.”

I disagree with both National, and Michael. I want the NZ Super Fund Trustees to focus on just one thing – maximising returns over the long term. This fund is designed to help fund future Superannuation.

If there is a desire to have the Government invest in businesses to help with job growth (I am not convinced), then that should be done from a seperate fund – maybe through NZ T&E.

Also not sure I agree on (3) but open to persuasion. I don’t think we should move to full funding of liabilities too quickly, but it is a desirable end goal. Partly because it would also allow private sector to compete fairly also.

On (4) I agree. The employer contributions provide enough of an incentive to go into KiwiSaver – an effective 1:1 subsidy.

And totally agree on (5) that the tax system needs a total overhaul.

Tags: ACC, KiwiSaver, Michael Littlewood, NZ Super Fund, tax

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.

Michael Littlewood has sent me a response to my post, which I’m delighted to publish. Michael is an expert on superannuation 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

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 www.PensionReforms.com – 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.

Tags: KiwiSaver, Michael Littlewood, NZ Super Fund, superannuation

Michael Littlewood has kindly e-mailed me a response to my comments on KiwiSaver. Michael is an expert on superannuation policy and is co-director of the retirement policy and research centre at Auckland University. He has been on almost every expert taskforce there has been on superannuation.

DF:And this law change will make it illegal to pay them more money if they do not go into KiwiSaver.

ML:I think the argument is rather to give KiwiSaver members smaller future pay increases to allow for the cost to the employer of KiwiSaver. The outcome may be the same but there is a different emphasis.

DF: So this is the head of the Unite union agreeing the the EMA Northern that the scheme dsicriminates agaianst the poor, young and old!

ML: McCarten is not completely accurate. The young do get the kick start and also the favourable tax treatment afforded by the PIE tax status of most schemes. However, they don’t get the member tax credit and the employer isn’t obliged to contribute. For the old, yes the employer doesn’t have to pay but the member tax credit continues for some (those who haven’t completed five years). However, all of this wouldn’t matter if the employer could pay members and non-members for the job they are doing, not based on whether employees joined KiwiSaver or not.

DF: Exactly. The overall costs to the employer should be the same.

ML: Non-members (who as McCarten and Thompson acknowledge will tend to be the young and the poor) will miss out in three potential ways – first, there is the direct difference in total remuneration that is the subject of this blog. Secondly, employers that are forced to pay more to members will compensate with lower future pay rises to all. That means both members and non-members will all get less but members will have the compensation of the employer’s contributions and the tax breaks that non-members won’t get. Thirdly, the non-members will, along with everyone else, be paying higher taxes to pay for the cost of KiwiSaver but won’t be getting their share of the taxpayers’ handouts.

DF: It is becoming close to de facto compulsory and I suspect it will become compulsory at some stage.

ML: But compulsion doesn’t magically make things “fair”. If young, poor employees can’t afford the 48 cents an hour now, how does forcing them to pay the 48 cents an hour suddenly make it affordable? It may remove some of the current inequity only because there will be no difference between different groups of employees. And then what about the other unfairnesses of a compulsory KiwiSaver? Will non-employees be forced to pay as well? (Not many countries with compulsion do that for good reasons). If not, their taxes will be higher to pay for the employees’ KiwiSaver. Then there will be the inequity between the old (whose taxes will be higher to pay for KiwiSaver) and younger taxpayers. And what about children who can join KiwiSaver now? (Why that should be so is probably best explained as a legislative accident).

DF: I support KiwiSaver partly because it is an effective privatisation.

ML: But only if you accept that KiwiSaver leads inevitably to an Australian style income/asset test on New Zealand Superannuation. If you really want to know why that’s a bad idea, you need to understand how the Australian system works and why it is that the incomes of most Australian financial planners are dependent, in part, on developing ways to avoid both tests.]

DF: And McCarten is right that it will inevitably lead to a move away from the current universal publicly funded superannuation scheme. A 25 year old today will earn more money in retirement from KiwiSaver and NZ Super than they will during their working life. That is nuts, and inevitably public superannuation will be made less generous as more and more people have KiwiSaver.

ML: think the more likely outcome will be a scaling back of the KiwiSaver incentives. We don’t yet know what National really thinks of KiwiSaver II. If the long term policy drift is back down towards a KiwiSaver I, the alarm about the impact on the future New Zealand Superannuation benefit might be lessened. However, I agree that future governments cannot really sustain both in their present shape.]

DF: Indeed. Employers should be able to offer a total remuneraton package where if an employees chooses not to go into KiwiSaver, the employer can pay them extra cash.

ML: The shame of it all is that, before KiwiSaver I or II, the best evidence we have is that most New Zealanders were saving enough for retirement – see here, here, here and here for examples. My fondest hope is that a new government might wish to adopt the radical notion of evidence-based policy making. Regrettably, there hasn’t been too much of that from either Labour or National in the last 11 years (since the second Todd Task Force in 1997

Thanks to Michael for his comments.

Tags: KiwiSaver, Michael Littlewood