NZ Super Fund returns

February 7th, 2013 at 12:00 pm by David Farrar

James Weir at Stuff reports:

The New Zealand Superannuation Fund has beaten the cost of debt by $346 million over nine years, according to a new analysis.

That “modest achievement” was not enough to justify the risks run by the Government’s Super Fund, according to an analysis by the Retirement Policy and Research Centre co-director Michael Littlewood.

The research centre is based at Auckland University.

The reality is that the impact of the NZ Super Fund on future affordability of superannuation was always going to be fairly modest, and that was even with optimistic levels of returns. When the level of returns is barely more than the cost of debt, it does raise issues over its importance.

The only proper way to measure that was by comparing the fund’s return with the cost of long-term government debt.

“That’s because the Government, if it wished, [could] sell the NZSF investments and repay that debt,” Littlewood said.

The Government had the choice with each contribution to either cut debt or ask the fund’s guardians to invest the money.

Like a household, it was not sensible to raise a mortgage on the family home and invest the proceeds in shares and other investments, unless the before-tax returns were better than the cost of debt.

Against that measure the Super Fund’s returns were “less than comforting”, Littlewood said.

In the year to June 2012, the Super Fund lost $645m based on what it could have saved by paying off debt instead.

That loss was based on the 5.04 per cent yield on 10-year government stock, against the fund’s guardians’ published return for the year of 1.1 per cent, giving a loss of $645m.

My concern is that we still have a high risk of significant failures in the US economy and the EU – and that would drive down returns again from the Super Fund.

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A solution for Clayton

July 5th, 2012 at 4:00 pm by David Farrar

Clayton Cosgrove has said:

Buying shares in the Government’s sell-off of state assets would break the bank for most New Zealanders says Labour’s State Owned Enterprises spokesperson Clayton Cosgrove.

His comment follows an analysis of figures which show the median Kiwi household has only $1700 in savings and would be struggling to buy shares in Mighty River Power, the first of the SOEs to be floated.

I have an easy solution, based in fact on Labour Party policy. Labour have spent three years attacking the Government for not borrowing more money from overseas, to give to the NZ Super Fund to invest in shares and bonds.

Using Labour’s logic, then obviously the solution is that every Kiwi household should go out and borrow $2,000, so they can buy shares in Mighty River Power. It’s a win-win.

Now some of you may say it is daft to borrow money to invest in shares. I might even agree. But that is what Labour spent three years advocating, so I am sure they want households to go out and do it. Plus that way, more shares will stay in local hands!

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Some economic sanity from Labour

May 4th, 2012 at 10:29 am by David Farrar

Danya Levy at Stuff reports:

Labour is scrapping its plans to resume contributions to the Super Fund, saying New Zealanders told the party they were uncomfortable with borrowing to invest and it now understands the need to be thrifty.

Leader David Shearer this morning told the Wellington Employers’ Chamber of Commerce Labour had listened.

“We’ve decided that until we are back in surplus, any new spending will have to be paid for out of existing Budget provisions, new revenue, or by re-prioritising.”

Labour’s insistence that you should borrow to save was idiotic. It also went against what NZSF founder Michael Cullen stated when he created the NZSF. Contributions from the Government were to come out of surpluses, not out of borrowing.

Of course it is quite another issue, as to whether we would ever get back into surplus under Labour. Their opposition to every single spending freeze or cut suggests they lack the fiscal discipline to do so.

But still it is good to see them adopting more sensible economic policies.

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RPRC on NZ Super Fund

November 14th, 2011 at 10:00 am by David Farrar

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.

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Borrowing to save

November 7th, 2011 at 9:00 am by David Farrar

Radio NZ reports:

ACT Party leader Don Brash is dismayed that Labour wants to borrow a lot more than National, saying it’s imprudent.

“This makes no sense at all. Why would any householder with a large debt borrow more money to invest in shares? No prudent householder would do that – the Government shouldn’t be doing that either.

“Personally, I think the Government should be selling the assets in the Super Fund and using it to pay off debt. Why the Government should borrow money to invest in shares is simply beyond me.”

The Green Party is also critical of Labour’s plans to borrow to feed the Super Fund, also known as the Cullen Fund. Co-leader Russel Norman believes such a move is economically irrational.

“The Cullen Fund is a repository for surpluses, so when the Government’s running surpluses it makes sense to stash money away for the future and we really applauded Labour for that.

“Whereas, when you’re running a deficit, the logic of borrowing to put into your savings doesn’t make so much sense to us.”

I’m pleased to see some economic sanity from Russel Norman on the issue of Labour’s plans to borrow to save. Norman is correct to call it irrational.

Readers should be aware that Labour’s promise to borrow for the fund perverts its original intentions, as set up by Michael Cullen. I blogged what Cullen said when it was launched:

How will the government pre-fund future New Zealand Superannuation costs if there are insufficient surpluses?

The government will make contributions to the Fund from available surpluses. Where these are insufficient for making the required contribution a reduced contribution would be made.

So what Labour are proposing with their goofynomics is not what Cullen said would happen. He never proposed borrowing money to stick into the Cullen Fund. It was explicitly a fund whose contributions would come out of surpluses.

Now Labour are proposing to borrow an additional $6.1b off China over the next three or four years and to give it to the NZ Super Fund, who will promptly invest it mainly in international sharemarkets (that is where 58% of the Fund is).

Now Europe remains on the brink of a debt crisis. If Greece goes under, this will snowball. French banks especially will be massively hit and may go under. That in term will push some US banks under, and what happened in 2008 could look mild. If this happens, expect global sharemarkets to plummet.

And the economic geniuses in Labour say this is the perfect time to borrow $6.1b and invest it mainly in international equities!!!

As Russel Norman, said it is irrational.

Yes, in theory sharemarket investments will get you a higher return than sticking money in the bank. But do you know why that is? Because they are riskier. And as individuals we may choose to take those risks, but it is not the role of the Government to borrow money on our behalf and risk it on overseas (or domestic) investments. The world’s financial markets are fragile, and there is no guarantee that the returns of the past will ever be achieved again.

The fund has now been going for eight years. That is more than a quarter of the time set aside for it to gain so much money, that it can start to subsidise superannuation from 2031. It has lost a whopping $2.8b in just five months. Over the entire eight years, it’s return has been just 0.5% higher than the average Treasury bill rate (the cost of borrowing). It’s not quite as simple as this calculation, but this means that the actual extra money available for superannuation in 2031 onwards is $2b (annual cont approx) x 0.5% = $10m/year or $80/m over 8 years. Allow some compounding and let us round that up to $100m.

Yes $100m is what eight years of the Cullen Fund has achieved, compared to the alternative of just paying off debt. Not going to make a fuck of a lot of difference to the sustainability of superannuation in 2031, will it?

National, the Greens and ACT all agree. Say no to borrowing to save under Goofynomics. We need less debt, not more.

UPDATE: The NZ Super Fund has e-mailed me to comment:

It is correct that the return on the Fund is 0.50% above Treasury Bills since inception to 30 September 2011 (or as you say about eight years).

But you have confused two calculations to arrive at your $100 million figure. The 0.50% p.a relates to the Fund’s return relative to Treasury Bills (which you do say), not to the contributions made by the Government and so should not be used to calculate the return on the Government’s contributions (which ceased in July 2009 and so did not cover the whole eight-year period in any event).

Yes the Super Fund overall has increased its contributions by more than $100m. But the point I was making was a comparison to if the contributions had been used to pay off debt.

Total contributions since inception are 14.88 billion. Our return since inception is actually 3.92 billion. Both of those figures are on our website. The 3.92 billion includes just over $2 billion in NZ tax (again, as on our website), which the Governments that received it over the life of the Fund (the bulk of which was in the last two financial years) would not have gotten otherwise. Clearly, we don’t know what the return on that $2 billion might have been had we invested it instead. The point though is that it’s a bit more than $100 million.

There is a debate about whether you include the tax returns, as the argument is that if the money was (for example) used to subsidise KiwiSaver more, then those funds would also have generated more tax.

Additionally, we believe that in taking a strongly commercial approach to investing locally we produce social and economic returns for NZ over and above the financial returns on those investments (e.g. the 50% investment in Shell, the 40% investment in Kaingaroa Forest, the millions committed to locallthy-managed funds providing growth capital to small and medium size NZ businesses, the investments in high-quality dairy land etc etc.) Now of course that’s not directly relevant to meeting the future cost of NZ Superannuation – but hopefully you agree it’s more broadly positive for NZ.

I should point out that in no way am I critical of the job the Guardians have done. My own superannuation funds have taken a beating also – every month I stick $1,000 in and they lose more than that, so my fund is dropping. My argument is around whether it is sensible to borrow to invest in the Fund.

Finally, a big part of the value of the Fund is that it exists at all. It is a part of the Crown balance sheet that has one specified purpose and one only – assisting future Governments to meet the rising cost of New Zealand Superannuation. We believe that does make a difference to the sustainability of superannuation from 2031 onward.

It does, but so does paying off debt. As I said in my original post, it is a balancing of returns vs risk. The events of the last three years have reminded us that the risk is real.

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The risk of debt

May 18th, 2010 at 7:00 am by David Farrar

The Herald reports:

The Government could face rising costs of borrowing and increased scrutiny of its debt as a result of the sovereign debt crisis in Europe, a global fund manager has warned.

Gerard Fitzpatrick, a bond portfolio manager for Russell Investments, said Europe’s €750 billion ($1.3 trillion) bailout had stopped the immediate liquidity crisis but there were still concerns about sovereign debt. …

However, he said there was a risk of debt being repriced which could make it more expensive for the Government here to borrow money internationally.

“That will put more pressure on the New Zealand budget.”

Maybe this may cause a bit of hesitation in the economic geniuses in Labour who demand that the Government increase its level of borrowing, so it can put more money into the Cullen Fund.

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The Cullen Fund

April 17th, 2010 at 9:48 am by David Farrar

Vernon Small at the Dom Post reports:

Halting contributions to the Cullen superannuation fund has cost the taxpayer more than $30 million.

If full contributions had been maintained, it would have earned almost $50m more, calculations based on the fund’s returns to the end of January show.

Even accounting for the extra borrowing costs the Government would have faced to keep up contributions, that would still have netted taxpayers about $1m a week during the past eight months.

First of all, it has not “cost” the taxpayer anything. The taxpayer may have been able to make a gain of $30 million if it had borrowed more money, for the fund to invest. That is certainly true, but it is a potential gain only.

You can not automatically assume that any additional investments would have achieved the same return as the existing investments. An extra $2 billion may have been invested in a stock that did not do so well, or may have meant a higher average price for buying such stock.

It is fair enough to talk about a potential gain or that was missed, but that is not the same thing as stating that potential gain as a loss let alone a cost. That is a sloppy short cut.

Also it is worth reminding people that reward is always linked to risk. One could borrow $10 billion a year to invest in stocks, and probably get a good return on them. But it would also be risky.

What we don’t know if whether or not we would have got a credit downgrade, if the Government decided to continue to borrow money to invest. And if we had, then that would have had a very real cost on every New Zealander.

It is also worth noting that over the entire life of the fund, the rate of return is still below the risk free rate of return. The NZ economy would be hundreds of millions of dollars better off if the fund had never been set up, and the money used to repay debt.

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Goofynomics

June 5th, 2009 at 2:36 pm by David Farrar

Matthew Hooton hits the mark in NBR today. Go buy a copy for the full column, but here are some extracts:

It’s embarrassing to even chronicle Labour’s descent into economic lunacy this week but it now seriously proposes that borrowing to invest in global sharemarkets is not only a good idea but a one-way bet.

Borrow no matter how gaping our fiscal hole, nor how long the books will remain in the red, Labour insists.

This and only this, it claims, will stop superannuation entitlements to those aged 44 or younger being butchered.
It’s sad seeing Phil Goff reduced to such nonsense. Clearly, he now has no expectation of ever becoming prime minister.

Basically Goff has said that no matter how fire the deficit or debt is, he supports borrowing to save.

Dr Cullen launched his fund when permanent surpluses were forecast. With zero gross debt being on the medium-term horizon, it made sense to establish a sovereign wealth fund.

Connecting it with superannuation, though, was entirely political. Even Dr Cullen made clear there was no link to future entitlements and future taxpayers were always going to have to meet 89% of costs.

Bill English’s decision not to borrow for the fund will increase that by just 3%.

Moreover, in national-income terms, Mr English’s decision relates to just 0.2% of GDP from 2030.

It is ridiculous to worry about such a number. The smallest economic shock over the next two decades – positive or negative – could double or eliminate it, as could small productivity changes.

The media hysteria over the suspension has been put into context by Matthew. 0.2% of GDP.

Failing that, maintaining current entitlements would simply require reducing our surplus or increasing our deficit by 0.2% of GDP, 20 years hence. That hardly justifies the preposterous notion that we should borrow more now to invest in stocks.

Yet that is what Labour is demanding we do.

In reply, Mr Goff says governments can’t lose. He bases this on the banal observation in a Treasury paper that long-term returns from a diversified portfolio are likely to match the market average which, most probably, will exceed the risk-free rate over time.

Armed with these Corporate Finance 101 assumptions – and apparently with certain knowledge that sharemarkets are about to bounce back – Mr Goff demands that Mr English borrow another $20 billion over the next decade, and calculates it will deliver a net return of $8 billion sometime in the future.

No other politician in the developed world would contemplate such lunacy. Take Mr Goff’s argument to its logical conclusion and why stop at $20 billion?

Why not $200 billion to get $80 billion profit, dead cert?

Make it $2 trillion or more and perhaps tax could be abolished altogether with all government services being funded through the sharemarket.

This isn’t Goffonomics. It’s Goofynomics.

A name is born.

Mr Goff should ask why no other political leader in the history of the world has proposed this before.

Perhaps it’s because they understand it’s not government’s role to borrow from taxpayers yet to be born to risk on Wall Street with the promise of free money in the future.

What amuses me most of all is how Phil Goff treats a 50 year Treasury prediction of returns on managed funds as the holy writ, when Treasury can’t even predict from month to month what the deficit will be.

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Dom Post editorial on Super

June 3rd, 2009 at 9:26 am by David Farrar

A somewhat mixed editorial from the Dom Post:

Last week’s suspension of contributions to the Cullen superannuation fund has made one unpalatable fact painfully clear. The age of eligibility for national superannuation is going to rise.

The suspension has not affected that fact significanly. It has always been likely at some future stage. Even Dr Cullen said so.

That is not what the Government says. Both Prime Minister John Key and Finance Minister Bill English say NZ Super will continue to be paid at a minimum of 66 per cent of the average wage from the age of 65.

And that will be the case while they are in office.

The reason the scheme will have to change is that there is a $31 billion hole in the government accounts. That is the hole that will be created over the next decade as a result of the Government’s decision to “temporarily” halt contributions to the fund established by former finance minister Michael Cullen to partially pre-fund the superannuation costs of baby boomers.

No, no, no, no. This is just crap. Even ignoring the reduced debt by suspending contributions, the impact on future superannuation is minimal. Taxpayers in 2050 will fund 91% of super, rather than 88%. The so called hole has minimal impact.

Our level of economic growth is what will determine future affordability.

Stopping contributions to the fund was the right thing to do. Despite the protestations of Labour, it makes no sense to borrow money to speculate on the world’s sharemarkets. Doubters should consider the performance of the fund since it was established in 2003 with the objective of exceeding the risk-free rate of return the interest rate on Treasury bills by 2.5 per cent. Its annualised rate of return is 3.26 per cent about half the Treasury rate and, in the year to April, the fund suffered losses of almost 30 per cent, more than double the average losses of retail managed funds.

Indeed. If the Fund had never been set up, NZ would be in a better position to fund future superannuation. That is a fact – not a projection.

Sure, the world is in the midst of the worst economic downturn since the Great Depression; sure, markets will eventually bounce back; but there is no certainty about which ones or when.

Politicians who think they can read economic portents are free to play the markets, but they should use their own money.

I think it is quite possible that there could be another crisis in five or six years when the level of US Federal Debt gets so high the Government effectively defaults by printing more money to pay its debts.

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More on super costs

June 2nd, 2009 at 6:17 pm by David Farrar

At midday I blogged about the hysterical nonsense claims that a suspension of contributions to the Super Fund would endanger future superannuation. In fact at worse it means that future taxpayers will pay 92% of future superannuation, instead of 89% – a mere 3% difference.

Now to show how trivial this difference is, look at this answer in the House today:

Peseta Sam Lotu-Iiga: If the Government were to make no contributions to the fund for another 11 years, how would the future cost of pensions compare with that expected when the fund was established?

Hon BILL ENGLISH: Whether there are contributions to the fund, and for how many years they are made, has no effect on the future cost of pensions compared with what was expected. When the fund was established back in 2000, the Government did projections that showed that by 2021 the total cost of New Zealand superannuation plus contributions would be 6.75 percent of GDP. Today’s projections available on Treasury’s website show that the total cost is now 5.43 percent of GDP in 2021. Maintaining New Zealand superannuation has actually become more sustainable because of changes in assumptions relating to demographics and rates of return.

So the cost of future superannuation as a percentage of GDP has dropped in relative terms by 19%. And this suspension of contributions increases the future tax burden by just 3% or so.

Yes one can make a but of a difference around the margins by pre-funding through a Super Fund. But the overall sustainability will be decided by economic growth, and demographics.

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Hooton and Harre on Super Fund

June 2nd, 2009 at 3:23 pm by David Farrar

If you have a few spare minutes I recommend you listen to Laila Harre and Matthew Hooton on Nine to Noon discussing the Super Fund.

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Some Super Facts

June 2nd, 2009 at 12:00 pm by David Farrar

The Dominion Post appears to have a front page jihad against the Government. On Friday their front page boomed that it was the slash and burn budget, with holocaust fire type illustrations on their billboards.

Yes the budget that (despite the global recession) protected every existing social entitlement, boosted health, education and justice spending, and cancelled future tax cuts was headlined “slash and burn” as if it was the 1991 Mother of all Budgets. It has been years since I saw such a misleading front page. There are many criticisms you can make of the budget – but calling it slash and burn is not one of them. Disgraceful.

Then on Saturday the Dominion Post cries out “Who will pay for our super?“, saying there will be a $37 billion gap in the Super Fund in 2030, making future superannuation unaffordable.

This is economic illiteracy on two fronts, and I will detail both. The first is ignoring that borrowing to contribute to the Super Fund will equally make future superannuation unaffordable, and the second is what proportion of future superannuation is funded by the Fund.

First of all, it is true that under the 11 year contributions holiday, the Super Fund in 2030 will be worth only $81 billion instead of $118 billion – a $37 billion difference.

But let us look at what the cost of those contributions would have been. Over the 11 years 2009 to 2020, there would be $19.5 billion of borrowing. Then the interest on the borrowing (calculated at 6.73% – the average cost of Govt bonds according to the Super Fund) would be $7.7 billion. So by 2030, the Crown would have an extra $29 billion of borrowing.  The difference between the extra debt and the fund’s level is estimated to be $8 billion – less than 1/4 of the $37 billion cited by the Dom Post.

An extra $29 billion of debt (costing $2 billion a year more in interest) makes future super almost as difficult to pay for, as having $37 billion less in the Super Fund.

And if we get a credit downgrade, leading to higher interest rates, you could end up with debt rising by far more than the shortfall in the Super Fund. Likewise of the Super Fund does not meet targets, you can end up with less money.

What the Dom Post failed to explain, is that what threatens future superannuation is not how much you invest in the Super Fund, but the level of economic growth New Zealand has. The $50 billion wiped off the economy is what has created the problem. You can not grow money – you need to earn it. The solution to future superannuation is increased economic growth – something worth remembering.

Treasury have done a useful report on the impact of the suspension of contributions. Now this only looks at the Fund, not at the overall crown accounts with the impact of an increase in gross debt. But even putting aside the debt issue, the viability of future superannuation is not greatly changed:

In 2050, without a contribution holiday, the withdrawal from the Fund would have paid for 24% of the increase in net NZS expenditure (to GDP) compared to 2009 (or 11% of nominal net NZS expenditure in that year).

This means that in 2050, the Fund would pay for 11% of superannuation, and current taxpayers pay for 89%.

In 2050, with an eleven‐year contribution holiday, the withdrawal from the Fund would pay for 18% of the increase in net NZS expenditure (to GDP) compared to 2009 (or 8% of nominal net NZS expenditure in that year).

And with the contributions holiday, it means that in 2050 current taxpayers will be paying for 92% of superannuation, as opposed to 89%.

So remember this. Even if you discount the reduction in debt and finance costs by suspending contributions (which you shouldn’t anyway), the long term impact is that future taxpayers have to pay for 92% of superannuation, instead of 89%.

So when the Dominion Post bleats on its front page, who will pay for our superannuation, the answer is future taxpayers – as always.

So again, for those who are really slow:

  1. It is the lack of economic growth, not the decision to suspend Super Fund contributions, that most impacts the future affordability of superannuation.
  2. The suspension of contributions will merely mean that the percentage of future superannuation not funded by the Fund will increase from 89% to 92%

Phil Goff’s (and the Dom Post’s) insistence on borrowing to save is bizarre. Think of the analogy if you are a household.

You earn $60,000 a year. However your living expenses comes to $70,000 a year. You have a $10,000 a year shortfall. Due to this shortfall you are not making any  repayments on your $200,000 mortgage. In fact you are having to borrow an extra $10,000 a year against your mortgage to cover your living costs. Now your house is worth only $350,000 so you know you can’t keep borrowing for much more than a decade before your credit runs out.

Phil Goff’s brillant policy is that you should borrow an additional $2,000 a year and invest it in overseas sharemarkets. That a household that already is borrowing $10,000 a year, is unable to make repayments on its mortgage, is being charged compounding interest – should borrow an extra $2.000 a year.

And Goff claims this will make your household more secure, as it will provide security for your retirement.

Now you might think – wait – we are going to lose our house if we don’t eventually start earning more than we spend. But Phil is saying no need to worry about that.

Now for those of you who agree with Phil Goff, I have good news for you. You as individuals can follow his advice. The Government has decided not to follow Goff’s advice – but you can.

So here is what you should do if you beleive Phil Goff. Head down to your bank manager. Show them your overdraft, your credit card debts and your mortgage. Explain to the bank manager that yes you are spending $10,000 a year more than you earn. Also explain to him or her that you want to increase spending even more, even though your income is unlikely to improve for some years. But then most of all explain that you want to borrow some more money fro the bank, so you can invest it on the sharemarket.

The manager may be hesitant, but explain that you are sure you will make more money in the long run. And offer to mortgage your house further to pay for the extra borrowing. So long as you offer security the bank will eventually agree.

Then after having extended the mortgage on your house, go off to your investment advisor and tell them to invest it in a fund that mirrors the Super Fund.

Now I don’t want to hear any excuses about why you can’t do this. If you want the Government to do this on your behalf, you should have the courage of your convictions and go do it yourself.

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Lies and Fearmongering

May 7th, 2009 at 4:15 pm by David Farrar

David Parker manages both with this press release.

The National Government has given its clearest signal yet that superannuation entitlements will be cut in the future, Labour Associate Finance spokesman David Parker says.

Fearmonger No 1

A reminder. John Key has said he will resign his seat in Parliament if he cuts superannuation entitlements. But not even that will stop Labour trying to prey on the insecurity of retired or near retired persons.

“The pensions of tomorrow need to be protected today. National said before and during the election they would continue with payments to the Super Fund, but have now resiled from this.”

And if Parker reads the announcement from Michael Cullen, when the Fund was established, he will see that Cullen explicitly said that contributions are funded out of surpluses and would be suspended temporarily when there is no surplus.

Not even Dr Cullen was foolish enough to advocate borrowing money to save money.

“Mr English argues that he’s not prepared to borrow to fund the investment in the Super Fund, but he’s already done that to pay for his tax cuts – an astounding third of which go to the top three per cent of income earners,” David Parker says.

Then we have the lie – the claimed borrowing for tax cuts. The extra tax cuts by National were fully paid for by reduced expeniture on KiwiSaver. This is a fact. Parker knows this. He just hopes if you repeat a lie enough times, people will believe it.

“Those tax cuts were not just unfair, but they are a substantial cause of the structural deficit New Zealand now faces and are behind the Government’s plan to now cut investment in the Super Fund.

And he lies again. National’s tax cuts are considerably less foregone revenue that the reduction in KiwSaver subsidisies. The structural deficit would be worse, not better, if National tax cuts and KiwiSaver changes had not been made. This is indisputable. The quantum of each is known and the foregone revenue from tax cuts is les than the reduction in KiwiSaver subsidies.

Everytime you hear Labour talk about borrowing for tax cuts – they are lying. They are desperate to have people beleive it, but it is not true, as National reduced expenditure by a greater amount than the tax cuts to pay for it.

If Labour were honest they would campaign on how National reduced KiwiSaver subsidies for tax cuts, and debate the merits of that. Of course they don’t want to, as anyone economically literate now concedes the KiwiSaver subsidies were far too generous.

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Absolute hypocrisy from Labour over NZ Super Fund

March 12th, 2009 at 11:12 am by David Farrar

I’ve been looking back through what Labour said when they established the NZ Super Fund in 2000, and it is gold. Their protests about the Government moving to reduce the level of contributions into the fund are hypocrisy of the highest order.  Let me quote from Dr Cullen’s Q&A when he launched it:

How will the government pre-fund future New Zealand Superannuation costs if there are insufficient surpluses?

The government will make contributions to the Fund from available surpluses. Where these are insufficient for making the required contribution a reduced contribution would be made.

John Key and Bill English are doing exactly what Michael Cullen said would happen. Not only do we have an insufficient surplus – we have a decade of deficits.

This also shows up those morons who argue the Fund is not funded out of surpluses, but is just like any other competing area of expenditure. In Labour’s own words:

The government will make contributions to the Fund from available surpluses.

And further:

What level of surpluses will the government need to run to pre-fund future NZS costs?

The actual contribution will be determined by the size of available surpluses. Future governments may, however, decide to make contributions at the required rate even when surpluses are less than this rate.

Once again a clear statement that the contributions are determined by the size of the surplus. And while they have indicated that yeah if the surplus drops a wee bit, you might have a slightly higher contribution than the surplus – there is absolutely no suggestion that if you are running a $6 billion deficit you’ll put in a $2 billion contribution.

Labour’s hypocrisy on this could almost enter the Guinness Book of Records.

But wait there is more:

What are the benefits of setting up a fund versus paying off debt?

We are balancing two fiscal priorities in paying down debt and pre-funding superannuation. It is important to keep government debt low and we have set out long-term objectives for debt that will ensure that it remains low. However, we believe we can achieve these debt objectives and smooth the costs of superannuation at the same time.

So the fund was linked to keeping debt low. Debt is now projected to increase by around $80 billion or so. It is set to treble in less than a decade.

Debate is now over.

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Orr on Super Fund

March 5th, 2009 at 8:31 am by David Farrar

NZ Super Fund CEO Adrian Orr has an op ed in the Herald. Interestingly the Herald notes he won’t do an interview with them – only an op ed.

Before I respond, I should make clear that I think the Fund’s “Guardians” have generally done an excellent job. The fact the fund has made less money than we would have got by paying off debt, is because of the global economic recession – not because of bad decisions by the fund managers. All funds have been hit.

They key issue for me is whether one should borrow money to invest in the Fund, when the whole rationale for the Fund was that it would be “surplus” funds that gets invested. Anyway Orr says:

Investing for future retirement income is just one activity the Government does. It is equally valid to talk of government borrowing in order to fund tax cuts, or pay for schools and hospitals. All of these activities are funded through tax revenue and borrowing. This is an everyday practice across households, businesses and governments globally. In fact, the New Zealand Government has done well, with one of the lowest government net debt positions in the OECD.

I think this is somewhat misleading. Investing in the Super Fund is not a core Government activity such as paying for schools. It was set up specifically on the premise that it would be funded out of operating surpluses. It is not just a competing expenditure like schools.

And if you look at th Treasury accounts, the contributions to the Fund are not expenditure. They are shown as the line after the Operating Balance, which is now heaving negative.

The Government has been running a public debt programme throughout the entire life of the fund. The fact that the Government’s operating accounts have gone into deficit makes no difference to the investment proposition of the fund.

I disagree. Borrowing to pay for capital expenditure is very different to borrowing for operating expendiiture. Let’s use a household example.

Household A has income of $100,000 a year and expenses of $60,000. So it has a surplus of $40,000.  It decides to borrow $400,000 to buy a house. So it is taking on debt, but it is running a surplus to allow that debt to be paid back. Hence while not stictly rational, it is quite reasonable that it may stick $10,000 of its surplus into a savings account and $30,000 into debt payments.

Household B has income of $70,000 a year as the husband has lost his job. And their expenses are $80,000 a year. And they still owe $200,000 on their mortgage. So every year they have to borrow $10,000 to just pay the household bills, and borrow $20,000 to meet the interest on the mortgage. Now in this scenario, would you also borrow a further $10,000 to stick into a savings account? Of course not.

The fund is a simple concept. The Government has legislated to invest money today to gain a return over the long term. That return is to be used in the future to smooth the tax burden of the rising cost of superannuation income.

Yes but it is not going to smooth the tax burden anymore. If we have a decade of deficits and debt, then we will still need to massivley increase taxes in the future to pay for it.

One measure of financial success is whether the returns to the fund over decades (not randomly selected days, weeks, months, or year-to-year) are above the cost of government borrowing.

Yes, and sadly the returns over the entire life-time of the Fund are around half the cost of borrowing. Now this is not the fault of the Guardians, but a consequence of the recession. But it is a fact.

When it comes to saving for the future, there is no free lunch. If we don’t save now the retirement payments time bomb in the future simply grows.

Borrowing to save, is not saving. It is like me borrowing $10,000 on the credit cards and claiming I am a saver as I have $5,000 in a low interest savings account.

A government is in a great position to benefit from investing over decades, more so than any individual. It can focus on the long term and, hence, make investment decisions not available to many. It can capture this premium. It has the ability to ride out the tough patches and avoid “fire sales”.

Here I agree. Mind you the Iceland Government might not.

Right now, the earnings prospects for long-term investors have also just improved significantly. This is especially so for a young Super Fund like ours, with the weight of money ahead. The global recession has seen asset prices fall and the rewards for accepting investment risk rise to historical levels.

This is probably right, but have we hit the bottom of the market? I’m not at all sure. I think Europe is looking very vulnerable.

That’s not to say investment opportunities may be better again in 12 or 24 months’ time. But, as long as we are able to buy more as value opportunities arise, and not be forced to sell assets at “fire sale prices”, we will succeed in our task. History also teaches us that the best time for investment returns is after significant downward corrections. We must make sure NZ is positioned to benefit whenever this occurs. Stopping out now would ensure we suffer the downside and miss the inevitable leg up.

And in 24 months or so, maybe contributions could be restarted (if they are ever suspended – who knows what the Govt will do).  But until the Government can start to make inroads on reducing the deficit, so it tracks back to a surplus at some stage, I would rather have lower debt by not making contributions.

UPDATE: Brian Fallow makes similiar arguments to Orr in his column today. I think he is wrong also :-). He also argues that investign in the Fund is just liek any other sort of expenditure and that you not argue it is all being borrowed. Again I disagree – the contributions were designed to be funded out of operating surpluses.

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Editorials on Super Fund

March 2nd, 2009 at 10:00 am by David Farrar

Two differing editorials on the Super Fund. The Herald sort of supports maitaining contributions:

The fund has lost the last two years’ worth of contributions in the downturn.

But it needs to be remembered that these losses exist only on paper.

It is easy to say they are only paper losses, but the fact remains that the Fund has earnt less money since it started, that one would have got by paying off debt. It is about opportunity cost. The Fund has actually left NZ less well positioned to pay for future superannuation.

Equally, it is misleading to single out the fund when talking of borrowing. It is simply part of the Government’s spending programme, some of which will be funded by tax and some by resort to the debt market. It would be just as rational to talk of tax cuts, or health or education for that matter, being funded by borrowing.

I disagree with this analysis. The Fund is not just another type of spending. It was set up specifically to be funded out of surplus income – the whole idea was to save money now to prevent having to borrow it later. It was never about borrowing money now to save.

It is important to stress that this whole question is about payments into the fund, not payments out. It is highly irresponsible of the Labour Party leader to suggest that the level of pensions might be at risk, now or in the future. This fund, as Phil Goff well knows, will do no more than partially fund future pensions when the bulk of the baby-boom moves into retirement.

Here we agree.

The Government needs to estimate whether the accumulated debt from borrowing to make a contribution this year would nullify the fund’s likely earnings on the borrowed sum over the next decade.

By this logic, if the Government thinks it can make more in the fund, than the cost of borrowing, it should borrow say $50 billion, and that way make heaps of money.

The ODT starts better:

At first glance, it defies logic to borrow money in order to save, so those commentators now calling for payments to the New Zealand Superannuation Fund to be suspended – either indefinitely or until the economy turns around and the country is once again able to run budget surpluses – are advocating from a position of some strength.

When the country is stretched, as it is likely to be in the coming months when the worst effects of the recession hit home, with businesses failing, unemployment figures rising and true hardship beginning to reveal itself on our urban street-corners, can the Government really afford to be putting $2 billion worth of liquidity away into a leaking piggy bank – and to be borrowing for the privilege? In such times of economic hardship, the answer would appear to be a firm “no”, but then for some economists and politicians, the concept of a super fund was always undesirable and illogical.

Absolutely the answer is no.

Labour opposes a suspension of payments, as do others who argue for a long-term investment view.

Just as many ordinary householders pay mortgages and at the same time save for their own superannuation through investments in bonds and equities – when economic orthodoxy suggests they would be better off ridding themselves of the mortgage first – it does not necessarily follow that governments should never borrow to save.

This is a false analogy. The key difference is the Household is in surplus. In fact it is so much in surplus it is able to pay its bills, save for the future and repay debt. This is very different to the Government that is so badly in deficit it is having to borrow billions just to pay the day to day bills.

If a government is able to borrow at a low interest rate, and with a reasonable degree of certainty predict a generous margin on the return, might this not make sense?

As I said above, why stop at $2 billion a year. Let borrow trillions and make ourselves all really rich.

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Roughan on Super Fund

February 28th, 2009 at 11:04 am by David Farrar

John Roughan writes:

If your income is down in the recession and you are taking on debt to maintain the family’s living standard, would you borrow a bit more to put into a superannuation fund?

Nor would I. Nor would John Key, Bill English, Phil Goff, Jim Anderton or Peter Dunne, I suspect.

Exactly.

Goff, smelling fear, declared Labour opposed to suspension and called on the Government to make its position clear. Anderton called it “raiding the piggy bank”. Dunne, minister of tax collecting, declared it “a very bad idea”.

All of them know it would be sensible.

Yes I refuse to believe Phil Goff is that stupid. He knows it is the sensible thing to do, and why Cullen designed the scheme to allow a contributions suspension. But he is getting a bit desperate with his ratings, so punted for stupidity, even though he knows better.

Deficit adds to the debt loaded on future taxpayers, unless inflation erodes its value in the meantime. Either way, its a thankless legacy.

To increase public debt by a billion dollars and put that money in a superannuation fund risks presenting our tax-paying children with costs that could exceed the fund’s earnings on that sum.

And to date the Fund has generated less money, than if it had been in risk free Government bonds.

Roughan also has a go at tax cuts, saying it is unfair to cut taxes in a deficit. He forgets (or omits) that you can also cut spending to reduce the deficit, and longer term a low tax eonomy will have better economic growth than a higher tax one.

The problem is not the rate of tax. It is that NZ is not producing enough income to generate that tax. And you won’t generate more income by increasing tax rates. You’ll destroy it.

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More on Super Fund

February 26th, 2009 at 9:47 am by David Farrar

The Herald canvasses the parties on whether there should be a freeze on contributions:

Should the Government suspend contributions to the NZ Super Fund?
* National: Won’t rule it out.
* Labour: No
* Greens: Yes
* Maori Party: No policy
* Act: Yes
* United Future: No
* Progressives: No

The best argument for common sense comes from Russel Norman:

But Greens co-leader Russel Norman said last night that in the present context, New Zealand should suspend its contributions.

“We are borrowing in order to invest in pretty uncertain financial markets at a time when the Government’s fiscal position is rapidly deteriorating and it’s really worried about its gross debt level.

The scond stupidest statement is from Phil Goff:

Labour leader Phil Goff strongly opposes any suspension of contributions of about $2 billion a year.

“The pensions of tomorrow need to be protected today.”

So Phil thinks borrowing today, which will need to be repaid tomorrow, will protect he pensions of tomorrow. That has to win some prize for stupidity.

Then we have Jim:

Progressives leader Jim Anderton said that “raiding the piggy bank today means there is less in the piggy bank when it is needed”.

Jim thinks you can fill up a piggy bank by borrowing money for it. This is like telling your child that even though they did not have any left over pocket money, they should go borrow some money, and stick that borrowed money in a piggy bank, so they will think they have saved some money.

UPDATE: Whale calls Labour’s borrow to save plan as their “Blue Chip” plan for our future. That’s a good way to look at it. I mean think if a finance company did what Goff and Anderton did, and said we will secure your future by borrowing money you don’t have, to save money for you. The SFO would be talking to those directors in very quick time!

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The NZ Super Fund

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

The growing debate over the NZ Super Fund, 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 superannuation 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. John Key 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 Phil Goff 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 Peter Dunne 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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Littlewood’s Five Suggestions

February 23rd, 2009 at 5:58 am by David Farrar

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.

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Cullen Fund loses 25%

January 13th, 2009 at 10:09 am by David Farrar

The NZ Superannuation Fund, known as the Cullen Fund, has lost 25% of its value in just a few months.

This $2.8 billion loss is more than $1,000 per household.

Of course all investment funds have done badly, but the Cullen Fund is compulsorily funded by taxpayers, which means you lose your choice of putting money in a bank instead of the Cullen Fund.

The Cullen Fund had some merit when NZ was producing large surpluses. Not a lot, but some.

Now that we are having to borrow billions of dollars, just so we can invest it into the Cullen Fund, it has almost no merit. Think about it – borrowing billions to invest in global sharemarkets.

We should wind up the Cullen Fund, and use it to give $6,000 to every household. That is the sort of fiscal stimulus that will help the economy.

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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.

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.

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Who to blame, and what to do with the economy

December 22nd, 2008 at 9:00 am by David Farrar

The set of economic forecasts inherited from Labour were bad enough reading last week. But then on Friday, I noticed that Finance Minister Bill English said that the economy is already nearly at Treasury’s worst-case scenario.

So how bad is the now likely worst case scenario:

  • Unemployment peaks at 7.5% in mid 2010
  • Economy contracts in year to March 2010 as well as March 2009
  • OBEGAL deficits of $32 billion from 2009 to 2013 – averaging greater than $8 billion a year
  • Gross debt to increase from $35 billion to $82 billion over four years – a $47 billion increase
  • Net debt to increase from $6 billion to $54 billion
  • Gross debt as % of GDP to go from under 20% to 39% in four years, and to 76% by 2023

This is a worse outlook than Labour left National in 1990. And you can’t even compare to the 1999 PREFU which was:

  • Operating Balances growing to almost $2.5 billion
  • net debt falling from 22% to 18%
  • Economic growth of over 3% a year
  • Unemployment to reduce from 7% to 5.7% over two years

Cullen was left with a wonderful set of projections.

So the next few years are going to be a disaster in fiscal terms. So who is at fault? Well of course the main responsibility is the global credit crisis – that goes without saying. But why are our fiscal fortunes so fragile, than a crisis such as this fucks our economy for the next decade or more? Let’s look at some of the possible culprits.

National’s tax cuts

If anyone blames the deficits and debts on National’s tax cuts, then they are incompetent or lying. The tax cuts were 99% funded from changes to KiwiSaver, and other expenditure savings. They have no impact on the deficit or debt.

In fact National’s tax cuts are (in hindsight) an even better idea than when first mooted? Why? Because they contribute towards a total fiscal stimulus package of 5% of GDP – this is one of the largest in the OECD and may help soften the recession.

But even better, the tax cuts are not funded from cutting current spending (which would detract from the stimulus) but by reducing subsidies into KiwiSaver which would lock the money up for decades.

We’ll come back to the issue of KiwiSaver.

Labour’s tax cuts

So how about Labour’s tax cuts? Is all this fiscal doom and gloom because Labour finally gave in and delivered tax cuts? Well it is certainly true that Dr Cullen has indicated he would have not cut taxes to the extent he did, based on PREFU’s numbers. And many people suspect Labour, if re-elected, would have cancelled some or all of their tax cuts.

The cost of Labour’s tax cuts over four years is $10.8 billion. So yes, if Labour did not cut taxes at all in their nine years of office, then the fiscal situation would be slightly better. Of course taxpayers would be worse off, but who cares about them!

But compare that $10.8 billion to OBEGAL deficits of over $30 billion and an increase in debt of almost $50 billion.  If Labour had not delivered tax cuts (and had not spent the money saved – a big if), it would have somewhat improved the fiscal outlook, but left households worse off, and made the recession worse.

Labour’s tax cuts were equivalent to a one off $3.3 reduction in taxation – the only personal tax reduction in nine years, where taxation went from $32 billion to $57 billion.  It is probably the most modest tax reduction program in the western world.

Labour’s Spending

What has really left us with a massive problem, isn’t Labour finally doing a $3.3 billion annual tax cut, but the massive increases in annual expenditure.

Expenditure has increased from $34 billion per year to $57 billion. That is a $23 billion hike – or seven times as great as the belated tax cuts.

Now of course some of this is necessary increases – even Sir Roger advocates you should increase spending in line with inflation and population growth. But off memory that is still $18 billion a year in extra spending.

And this is the problem Labour has left us. They massively increased spending in non-essential areas, on the assumption that we would have record growth and surpluses forever. They didn’t just keep funding and improving existing programmes (schools, hospitals) but they invented new schemes. Now these schemes were arguably good things – but they were funded based on an assumption of growth and surpluses. And together they combine to remove flexibility from future Governments.

Let us look, at just three of them:

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

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 cuased the credit crisis.

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

KiwiSaver

KiwiSaver has much the same problem as the Cullen Fund. It is all well and good to help subsidise people’s savings, but not if the taxpayer is having to borrow money to do so.

Because who is going to have to pay back and pay the interest on all that borrowing? Those same savers. So once again we have the stupidity of borrowing money today, to help people save. That is not sustainable.

I like KiwiSaver. 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. 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.

You see the employer matching contribution is a 1:1 subsidy already, which is massive. Hell most people are happy to get a 10% return on investment and the employer contribution gets you an instant 100% return. Now the employee subsidy gets you a further 100% return, 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.

Working for Families

This is another major spending commitment that falls into the category of unaffordable with hindsight. Basically whenever Labour had spare cash they hoovered it up into this targeted welfare assistance programme. And now taxpayers are going to have to borrow billions of dollars to fund this programme.

Unlike the other two programmes though, this one can’t be easily reformed. Families have grown used to having the extra cash, and in the midst of a recession, it would be quite wrong to take the money off them.

But what does need to be done, is some medium-term work on a better tax and welfare system that has less tax churn.

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$880 million loss for the Cullen Fund

September 30th, 2008 at 1:30 pm by David Farrar

The Cullen Fund has lost almost $900 million in the last year.

This suggests that PREFU will show the Crown has gone into deficit or is budgeting a deficit now – for the first time since 1992. However the more important figure will be the OBEGAL, which is the underlying surplus.

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A critical view of KiwiSaver

May 7th, 2008 at 4:06 pm by David Farrar

The Centre for Independent Studies has published a critical analysis of KiwiSaver. I am actually a reasonable fan of KiwiSaver (but not of how they did it with no consultation with business), so disagree with the conclusions in the CIS analysis. However I support most of their analysis, which I will summarise here:

  • Most people were already saving enough for retirement, with 80% of couples saving enough to maintain a level of consumption similar to or better than in pre-retirement.
  • With KiwiSaver and New Zealand Super combined, it is now possible for a someone on the average wage to retire on a higher income than they enjoy during their working life.
  • It is over the top to have a subsidised saving scheme on top of an age pension that is the most generous in the OECD.

This is a very strong point. People are being over-taxed and over-subsidised now. The NZ Super scheme is the most generous in the OECD as it is neither means nor asset tested. You combine that with a scheme that all bar the very stupid or very poor take part in with an average 10% of salary saved per annum, and you end up with higher incomes in retirement than during your working life.

  • KiwiSaver largely benefits the wealthy, who can afford to save more.

Yep, and every wealthy person I know is making sure they get the maximum subsidy from the taxpayer, and self employed people are upping their salaries so they get to claim their employer contribution as a tax expense.

  • KiwiSaver politically and economically threatens the future of New Zealand Super and makes means testing more likely in the future.

I reached this conclusion during the budget lockup, when it was announced. There is no way in 30 years time we will have both NZ Super (including Cullen Fund) and KiwiSaver. Dr Cullen has actually destroyed the consensus over publicly funded non means tested superannuation. If he was a National Minister, the left would be baying for his blood.

  • Evidence from around the world suggests that subsidies for savings schemes do little to actually
    increase overall savings. Instead, people tend to shuffle around existing savings to take advantage
    of the subsidies.

Yep. Most incentives change individual behaviours rather than change the fundamentals. However as the incentives for KiwiSaver are so strong, and as you have to opt out of it in a new job, I do think it will have some impact on overall savings levels.

  • It is now more rewarding for people to join KiwiSaver than it is to pay off debt or a mortgage, or
    to invest in business or an education.

The CIS paper actually quotes me as saying “You have to be very very poor or very very stupid to turn down an up to 2:1 subsidy”. And indeed, the level of subsidy is so high that it makes sense to borrow money so you can save it!

  • The requirement for employers to contribute 4% of a worker’s salary will put downward pressure on wages and job growth.

Of course. Employers look at the total cost of remuneration. What is unfortunate is those that do not join KiwiSaver may be punished for the cost of those who do join.

  • The total cost will rise to $2 billion a year, which is more than New Zealand spends on its entire defence force.

It is a lot of money, and not sustainable on top of the Cullen Fund and NZ Super. But it is not necessairly KiwiSaver which should go.

  • The easiest way to fix KiwiSaver is to scrap the generous incentives to contribute,

That is one way to fix the problem, but not my preferred one.

CIS are looking at this in terms of what is best for New Zealand, and they may be correct. But first let us look at this from the view of the left:

  1. Penalises poor people who can not afford to save
  2. Gives the greatest advantage to richer people
  3. Allows rich self employed people to avoid more tax
  4. Pushes wages down
  5. Undermines universal provision of superannuation
  6. Privatises savings from the state to the private sector

KiwiSaver is everything the left should hate. I guarantee you if Bill English had introduced this, it would have been denounced.

Now CIS are saying this is bad public policy, even if it is something the right should love (which demonstrates that they are not as ideological as critics claim).

I support KiwiSaver because it is inevitable that it will lead to means (and maybe asset) testing of NZ Super. And I believe in means testing.

I support KiwiSaver because in 20 years or so (once takeup is near universal) the $50 billion or so in the Cullen Fund will be dished out into people’s KiwiSaver accounts. And after giving over $25,000 to each family, no future Government would ever take it out of their KiwiSaver account.

I support KiwiSaver as I would rather choose my investments manager, than have the Government do it for me.

I support KiwiSaver as it will lead to a reduction in the size of the state.

So while I agree with much of the analysis of the CIS, I disagree with their conclusion to scrap the incentives and subsidies. Instead just wait for the Cullen Fund to be privatised and NZ Super to end up means tested, and probably CPI adjusted instead of wage adjusted.

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