OnPoint: The Super Fun(d) Shell Game
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Ooh, Steven Joyce is talking about our favourite issue right now in Question Time. My summary so far:
Citing the 2050 projection as being the difference between 8% and 11% of total payout. Doesn't dwell on 2030 much. Says by freezing contributions we get "much less debt" now, so interest rates stay down and businesses and people spend our way out.
Much less? Thought most of the difference was in constraining annual increases across all areas of public spending? Oh look, he says the total debt is 50bn without the Super fund.
Challenging Labour to say what they would do instead in face of global economic situation.
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Gah, Gareth, I think it's unhelpful to bring up a hypothetical zero-margin scenario, and it's muddying the waters quite a bit. The central point is that the returns on the NZSF is expected to be substantially higher than the cost of debt servicing. With that in mind, we can talk about what are prudent levels of debt...
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I wasn't very clear there. I meant what are those billions going to retirees going to be spent on?
I'm really not all that sure.
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Which they are clearly NOT.
I'm not sure either way -I was simply meaning that the contributions to date are not funded from borrowing - they were from the surplus.
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I meant what are those billions going to retirees going to be spent on?
If my country is any indication: decks of playing cards, spittoons.
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Has anyone offered modelling about the Nact alternative without superfund contributions - attrributable difference in private sector growth and consequent tax revenue improvement over the next 20 years?
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Sorry, not Question Time, the Budget debate.
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If abandoning the NZSF were in fact critical in avoiding a credit downgrade then the equation does tilt significantly against investing in the NZSF. Any downgrade would increase the cost of all the debt we must undertake to finance all of government and not just the costs of borrowing for the fund.
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I think it's unhelpful to bring up a hypothetical zero-margin scenario,
I disagree - your argument (equally hypothetical) hinges on the Fund making returns above debt. I believe THAT muddies the waters as it continues to frame the discussion around how well the Fund returns, rather than the intent of the smoothing of Superannuation payments and the fact that you want to do that at least cost.
But it ain't my blog!
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Matthew, your points are:
1) The $8b forecast is uncertain.
As I said in my last reply, the margin is actually quite large (6% vs 8.65%). Over the time period we're talking about, it is very likely that returns on the NZSF will be greater than debt servicing costs, and I doubt anyone in Treasury (or elsewhere) will put money on the reverse.
2) The $8b difference is insignificant.
The $8b was for 2021/22. By 2030/31 (when withdrawals from the NZSF begin) it will be $23.5b. This number will then grow even faster, as the lost tax revenue is combined with the lower rate of withdrawal.
The $23.5b by 30/31 figure takes into account the debt, including servicing costs. It uses the *exact* same methodology as the $8b by 21/22 figure. Same track, different dates - so it is wrong to suggest that one is right and the other is wrong.
3) If borrowing to invest is profitable, then it is more profitable to borrow more to invest more.
The key consideration is New Zealand's exposure to the international credit market. It is a risk that needs to be managed.
It is the same consideration that businesses face. Borrowing to invest is the foundation of most business. They do it because they can invest the money profitably. But it's not prudent to expand to the limit of what they can borrow, because then if their investment doesn't work out, they're screwed. They keep a prudent level of debt, a prudent level of liquidity, and they try to maximise profits within this range.
So, the question to English is that he's just foregone $23.5b of earnings. Did we really need to? Was it done to keep debt at prudent levels, or was it done to give future governments an escape hatch to cut Super (which I support doing, by the way)?
4) Why not more? Why not less?
Good question. The rate of return and the debt risks were assessed as part of the original fund design process. Treasury had deemed it a prudent level which also maximises return. Do they think so now? Well clearly, someone doesn't. We'll know more when all the Budget advice comes out as part of the OIA process.
Again, the onus is on English to explain why it's no longer prudent, not the other way around.
5) The difference is only 3% of NZS spending.
No.
First, the 8% vs 11% figure comes from the Treasury backgrounder on the contribution holiday's impact on the NZSF. This does not take into account the lost tax revenue, which is roughly half the size of the reduction in withdrawals.
Second, this difference is $1.5b in 2030/31. with another $750m in lost tax revenue. You speak as if $2.25b a year was a trivial sum. It's not.
The summed effect between 2030/31 and 2039/40 is an increase to debt (or foregone debt reduction) of $27.8b.
And that's just for 10 years. The trade-off for the 11-year contribution holiday is a lost that will have a constant impact for the foreseeable future.
Yes, you can divide it by many years, then you can work it out as a percentage of spending on a particular item, but it doesn't change the fact that it all adds up, and it adds up to a lot.
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If abandoning the NZSF were in fact critical in avoiding a credit downgrade...
No, it wasn't.
The NZSF contribution holiday reduced debt by around $21.5b in 2022/23 (or $27.2b, if you ignore the lost tax revenue).
The reduction in new operating allowance allocation reduced debt by around $128b in 2022/23 (according to the Fiscal Strategy Model - though don't quote me on this figure, I'll need to go back to check it.).
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Keith, excellent analysis of the numbers BTW and I'll avoid distracting from them (although I maintain that the debate is being framed incorrectly).
One point of interest though:
Good question. The rate of return and the debt risks were assessed as part of the original fund design process. Treasury had deemed it a prudent level which also maximises return.
By this you mean that Treasury decided the 40 year frame was prudent? Because it seems the design of the Fund (stemming from the Act) doesn't have anything to do with debt - it just demands that you put enough money into the Fund to cover the 40yr average super requirement less whatever it gives back
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Perhaps ratings agencies are more into rating based on our projected debt loading in 2010 than 2023 or even 2013. The savings for 2010 are dominated by the cut in funding to the NZSF. I do not know enough about the ratings to say one way or the other, but assuming they are short term thinkers then the governments decision makes sense.
If a downgrade was to cause a 1% increase on the rate of interest we have to pay on our $45billion debt (making that about 6.7%), because we chose to invest another $3billion in the super fund then that $3billion would have to return a rate of about 21.7% to break even.
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Gareth, I agree, I think this debate is being framed incorrectly.
Actually, the house analogy isn't that bad. I have a mortgage, but I also I pay into Kiwisaver, so effectively I'm borrowing to save. But the reason I'm doing it is to spread my risk - I don't want all my savings in the form of a house that may well be worth stuff all when I retire.
Have to say, the idea of popping $x,000 into Kiwisaver accounts could arguably have a similar effect, but it's going to weaken the position of NZ Super policy in the long term... and if there's ever a hint of means testing, my Kiwisaver fund will be straight off-shore, claw-back or not.
Raising the retirement age in, say, 20 years would have a similar effect of course - my fag packet reckons a shift to 68 would have the same effect as the NZSF. Giving 10 years notice that it's rising, and then doing it 1 year at a time... can't understand why people think it's so politically dodgy. But then I don't understand why a Capital Gains Tax is such a big deal.
Oh, and Matthew H? Lots of other countries run investment funds, but you're right, its for all sorts of other reasons...
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Not sure if anyone has already referred to this little gem of a letter to the Ed in the DomPost today.
"As it is the current Government's intention to make no further contributions to the New Zealand Superannuation Fund for at least the next 10 years, would it be too much to ask your reporters to henceforth call it the English Fund? Thank you.
Michael Cullen
Finance Minister, 1999-2008
Napier" -
I have a mortgage, but I also I pay into Kiwisaver, so effectively I'm borrowing to save.
Yay Slarty -- over dinner I was mentally composing a comment to enquire how many people both have a mortgage and some kind of savings, and how they justify diverting money to saving over mortgage repayment.
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Did you spot the snide response to that example from Dick Prebble to John Pagani on Q&A?
JOHN Look households do this all the time, I've got a Kiwi Saver account, I've got a superannuation fund and I pay into those even though I've got a gigantic mortgage. On the logic you're using I would never save for my retirement, I'd simple pay off the mortgage.
RICHARD That's probably why you're in the financial mess you are in John.
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Have to say it was the least biased episode I've seen so far. Hope they keep that up.
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I was pretty good at maths at school but these numbers do my head in , I hope to check all the math in a month. Jesus it’s despairing that we seem to lack the common fiscal vocabulary to actually solve this shit. Our markets are that mysterious….will the invisible hand help us or Norway, find out next episode, date to be determined.
In 1984 I thought we were promised Nirvana in 20 years. Economics is just bollocks because the market place is corrupt. Prohibition made the mafia as Inhibition has made our business generals. Fuck we so need good ,careful business law after New York had a financial heart attack , a jolt that could have killed america. We need smart people to be rewarded not obvious greedy people. We don't trust the invisible hand.Make it visible.
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Well said both Keith and Jeremy - and I think Jeremy's made the most relevant poignant point to all of this.
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Jeremy, this doesn't require anything other than multiplication and division to understand. It isn't mysterious or absurdly complicated.
People should learn about stuff. the world isn't going to get simpler. That's like saying that physics is too bloody complicated and we should go back to the Plum Pudding Model.
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Jeremy, this doesn't require anything other than multiplication and division to understand. It isn't mysterious or absurdly complicated
I'm not saying it's hard, it's just time consuming. Maths, i have no problems with. Economics is really got to get its shit together as a science.
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Given the recent global financial meltdown 'economics' is about as scientific as consulting chicken entrails.
That said, I'm sure there is a semi-solid mathematical underpinning to economic theory but it is not helped by the unrealistic assumptions about people being 'rational actors' and the sustainability of constant growth in economic terms.
And sadly the whole financial market attracts the sort of people that the rest of us should perhaps be a little leery of - the greedy, selfish bastards.
(Not saying everyone involved has those characteristics, but people with them are attracted to the markets.) -
Mmmm, plum pudding.
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That said, I'm sure there is a semi-solid mathematical underpinning to economic theory but it is not helped by the unrealistic assumptions about people being 'rational actors' and the sustainability of constant growth in economic terms.
There's maths and then there's invisibility.
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