OnPoint by Keith Ng

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OnPoint: The Super Fun(d) Shell Game

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  • Sacha,

    I believe some would simply argue that the place the money should be "sitting" is in the pockets of taxpayers. Just sayin.

    Ak • Since May 2008 • 19745 posts Report

  • Gareth Ward,

    Sure Sacha. For it to be taken back in 15 years through much higher tax rates to pay for the inflated super bill.
    You could do that but Treasury, Cullen et al decided that wasn't fiscally prudent.

    Auckland, NZ • Since Mar 2007 • 1727 posts Report

  • Keith Ng,

    Given all that, if you make a forecast of what the risk-free rate might be and what the market average might be you get a small margin and you can then "forecast" the difference between them and come up with a number.

    In this case the Treasury has come up with $8 billion, which sounds reasonable but is not a very large amount in the context of the issue - it is less than the negative turnaround in the Crown finances over the last year, and it has to be put into the context of the Fund being worth over $100 billion in nominal terms by the mid-2030s even with an 11 year contribution holiday. Change your assumptions even a tiny amount and the $8 billion can become $16 billion or can disappear altogether.

    That's not true. The margin (6% vs 6.53%) is small because 6.53% is after tax. The estimated pre-tax rate of return is 8.65%. Rubbing that out takes a hell of a lot of changes to assumptions.

    Of course, tax revenue goes back to the government, so it has to be counted.

    The $8b figure is for 2021/22, so comparing with the mid-2030s balance is unreasonable. The same figure for 2030/31 is $23.5b.

    Got to go, but I'll respond to the rest later.

    Auckland • Since Nov 2006 • 543 posts Report

  • Jeremy Eade,

    One of the whole premises of john key, international money trader as prime minister was that he understood the nuances of the world market. However if we are read into this, English and S&P are saying in the future they will be impossible to study . So what tools did John Key and the like use to build personal and professional fortunes and was it just a fluke? Are we to believe in market fundamentals or just fear that Enron fever is everywhere, that is business is so bent it defies analysis.

    auckland • Since Mar 2008 • 1112 posts Report

  • Sacha,

    Understood, Gareth. I think the other approach gambles that NZ taxpayers will be prosperous enough to afford the increased taxes. Something like that.

    Ak • Since May 2008 • 19745 posts Report

  • Gareth Ward,

    The margin (6% vs 6.53%) is small because 6.53% is after tax. The estimated pre-tax rate of return is 8.65%.

    And yet even if the margin was zero (post-inflation) the Fund would still be fulfilling it's duty - which is to keep aside some money for the future (and it would be negating the financial cost of any debt incurred to do so).
    There's possibly even an argument for indulging a slight loss over time - if that cost would be "less significant" than the cost of having to pay a much higher percentage of spending on Super in the future.

    Auckland, NZ • Since Mar 2007 • 1727 posts Report

  • Matthew Hooton,

    Geoff Pritchard - yes, sorry about length of the earlier comment.

    Gareth, sorry to say this, but the idea it would be worth setting aside money even if the margin were forecast to be zero is absolutely insane (let alone there "possibly being an argument for indulging a slight loss overtime).

    Yes, I know you can't compare govts to households when it comes to the rate at which they can raise money but the following analogy is still fair on the basis of a zero margin:

    Imagine you know you face a major cost in 2030 (say you need to paint your house) - let's call it $20,000. You don't have the $20k and you worry you may not earn enough in 2030 to meet the cost. In fact, you predict you'll only have 90% of the money, so you expect to be $2k short.

    POSSIBLY, if you were expecting to be able to secure returns above the cost of borrowing it could make sense to borrow a lesser amount now and invest it so you have your full $2k in 2030 (this is Labour's assumption) - but you would have to be pretty confident to do this.

    However, on your assumption of a zero margin it is a straight choice of borrow $2k now or borrow it in 2030. Nobody would borrow now and carry the risk (or even the hassle) associated with it. The only rational choice is to wait and borrow in 2030 (because, for all you know, you may be earning more by then so you don't need to borrow at all) and if not you are still no worse off.

    On the assumption of a loss - that involves borrowing MORE than the $2k now, losing some of it, but then being able to paint your house. This is truly loopy.

    This "debate" seems to be becoming a boring old "Super Fund Good" vs "Super Fund Bad" argument, with the Labour side saying "We are proud of the fund, it was Michael Cullen's legacy and we are going to put money into it come hell or high water just to make a point, even if it doesn't make sense."

    And, as I said earlier, that is playing into the hands of the far right who are ideologically opposed to universal super - they can say "look, its unaffordable, even Phil Goff" says so, when the whole issue relates to whether the taxpayer has to meet 89% or 92% if the total cost of Super at the peak, and that is a difference not worth taking any risks for.

    Auckland • Since Aug 2007 • 195 posts Report

  • Sacha,

    Matthew, you do not seem to be addressing the demographic factors in the the timing considerations, which Joshua mentioned above.

    There are more working age taxpayers to pay for the contributions to the fund now than there will be in 2030.

    Ak • Since May 2008 • 19745 posts Report

  • Gareth Ward,

    Absolutely insane? No, it's not. I'm not advocating it, but it's certainly not absolutely insane. You are still clinging to this "it's about making money" mentality when it isn't. The primary purpose is to SMOOTH the cost of superannuation because Governments (and rating agencies) prefer stability and cost control. The fund is an adjunct of that, one which should be run at least cost.

    The household analogy is STILL rubbish, no matter how you want to angle it (as Keith ably demonstrated). The Govt is faced with MULTIPLE demands on it's funding, which it can raise through taxes or borrowing. Superannuation as a percentage of GDP is going to be much higher come 2030. Under your model, we'll have to suddenly ramp up funding to deal with it (ceterus parabus with regards to other spending and tax levels*, even putting aside the much higher projected health costs). You're advocating doing that with lump-sum debt that goes straight into operations. Under a model that puts money aside (even at zero-cost/return) the change in spending is less disruptive and in fact lowers risk because you've locked in (a degree of) funding and are not relying on unknown quantities. Governments (and rating agencies) prefer to not have rapidly increasing spending and/or debt.

    I accept that my "small negative return" scenario was pushing out the boat, but it was simply to prove the point. It is based around the fact that there is a cost to uncertainty and rising spending and pre-funded super helps removes that cost.


    *which is the only way to do it - you have to presume Government spending and tax levels stay the same (because they are outside scope). And you can't invent either improved/declined tax bases or economic shocks that go either way because they are equally outside scope and equally presumptious. I note all your assumptions are conveniently upside for your scenario (growth of the tax base etc)

    Auckland, NZ • Since Mar 2007 • 1727 posts Report

  • Mike Graham,

    In all this discussion about the effect of the contribution holiday aren't some of the main points of the fund being established in the first place being lost?
    1- Effectively a user pays system - taxpayers contribute now for their super of the future
    2- This one is really a side-effect, that is having a fund that can be used as investment here and overseas, so that as a country we actually own something.

    As proponents of user-pays, I would have thought that my first point would have been quite important to the Nact govt.

    Auckland • Since Nov 2006 • 206 posts Report

  • Sacha,

    Actually your second point is really important too, Mike. It's not just about owning something, it's what you can do with the funds being held. Our critical local lack of venture capital and other investment opportunities will continue to hold back our innovative businesses unless savings vehicles are beefed up enormously.

    If sovereign funds are regarded as sensible in other countries then why not here? If other countries make sure their businesses have access to the capital to grow then why not here?

    I don't see any alternatives being proposed, just a yawning gulf between the rhetoric about ambition and productivity and what is actually being delivered by the tired grey men of the 90s.

    Ak • Since May 2008 • 19745 posts Report

  • Matthew Hooton,

    Sacha - there may be more working-age taxpayers now (relative to the retired) in 2009 and 2030 but none of us would have been making any contributions to the fund - it would all have come from borrowing. Which means that, in fact, it would still be future taxpayers who would be making that contribution.

    Gareth - the cost of Super (assuming no policy changes to eligibility which is Labour and National policy) is forecast to rise from 3.5% of GDP to 5.6% in 2030 to 6.6% in 2050 (but I think most people would accept that forecasts out to 2050 are largely measingless given the almost infinite number of unknowns).

    Using just the closer 2030 figure, that means the cost will go up by 2.1% of GDP. This may be a lot in dollar terms but, to put it in some context, Labour's Phil Twyford is advocating increasing New Zealand's aid budget by 0.39% of GDP from 0.31% to .7% of GDP (see http://business.scoop.co.nz/2009/06/02/national-gives-up-on-overseas-aid-targets ) - a single initiative which would be worth nearly 20% of what would be needed to meet the Super cost.

    Your extreme language of having to "suddenly ramp up funding" doesn't add much. It is just more of the extreme language that has made people believe meeting the cost of impossible, when it clearly is manageable.

    And what no one on the "borrow to save" side of the debate seems to achnowledge is that the Super Fund would, in fact, meet just 11% of the cost (with no holiday) or 8% (with the holiday).

    That means, the "Cullen Fund" was going to meet a cost equivalent to 0.616% of GDP in 2030 while the "English Fund" will meet an amount equivalent to 0.448% of GDP.

    The effect of the Budget decision is to change the economics by just 0.168% of GDP (and this is using all the numbers Labour is relying on).

    Why is Labour saying that a change of this magnitude would lead necessarily to changes in the scheme in 2003? It is absolute nonsense. And bridging rhe 0.168% of GDP gap hardly justifies taking the risk of borrowing to invest in the sharemarket - something no govt in the world would ever comtemplate.

    And

    Auckland • Since Aug 2007 • 195 posts Report

  • Matthew Hooton,

    Mike Graham - no, it is not a user payes system. The Fund would meet only around 10% of the cost so even when contributions are made out of surpluses, it is only user-pays (using a very broad definition of that) to the tune of 10%. But if all the money for the contributions is borrowed, then that is passing the cost to future taxpayers, so in no sense is it a user pays system.

    Auckland • Since Aug 2007 • 195 posts Report

  • George Darroch,

    Krugman seems to think that the US is going the same way Japan did. Not necessarily going to continue down that path, but no guarantees against it either.

    WLG • Since Nov 2006 • 2264 posts Report

  • giovanni tiso,

    Thank you George, that's the post of his that I was thinking of.

    Wellington • Since Jun 2007 • 7473 posts Report

  • Gareth Ward,

    A few points Matthew:
    - I'm no partisan hack of any flavour. My vote record is a freakin rainbow
    - I'm not referring to Labour's "changes in entitlements" statements (in fact, I think I've erred on the side of "everything else staying as it is")
    - I certainly acknowledge that the Fund is only a small percentage of the total Super bill. Arguments still hold though.
    - The difference is about $1.75b a year in contributions back from the Super Fund in 2030, based on Treasury's graphs in the analysis paper.
    - From 2020, net super expenditure will be higher under this model than the Pre-Budget one
    - Keith has handled the rest of the absolute numbers
    - Calling my statement absolutely insane, and then accusing me of extreme language is... poetic? :>

    Auckland, NZ • Since Mar 2007 • 1727 posts Report

  • Stephen Judd,

    "the risk of borrowing to invest in the sharemarket"

    But, that's not the only or necessarily even the main asset class for the fund. Cf the famous foreign pension funds and endowment funds buying up our forests right now. Shares are a very risk asset class, but a fund the size of the Cullen fund has many others to play with.

    Wellington • Since Nov 2006 • 3122 posts Report

  • Gareth Ward,

    George - his point there is that we are taking the same response to a crisis they did. The causation of that crisis is very different. And in a discussion about stockmarket returns, the causation of the crisis is very important.

    Although, certainly, we could end up with a "lost decade" on our stock exchanges. But the underlying causes wouldn't be the same as Japan's

    Auckland, NZ • Since Mar 2007 • 1727 posts Report

  • giovanni tiso,

    We could invest in mace just before society collapses, for one thing. (op. cit.)

    Wellington • Since Jun 2007 • 7473 posts Report

  • George Darroch,

    Ok, kinda seriously here - what all those billions going to be spent on?

    WLG • Since Nov 2006 • 2264 posts Report

  • Mike Graham,

    George - if the Kirk scheme hadn't been stopped NZ would have some good sized super funds (like Canada and Australia ?) invested in perhaps companies like our telcos, banks... The billions wouldn't be spent, they'd be invested.

    Auckland • Since Nov 2006 • 206 posts Report

  • Sacha,

    But if all the money for the contributions is borrowed

    As I said above, I'd welcome some discussion about that point.

    there may be more working-age taxpayers now (relative to the retired) in 2009 and 2030 but none of us would have been making any contributions to the fund - it would all have come from borrowing. Which means that, in fact, it would still be future taxpayers who would be making that contribution.

    Leaving aside my point above, surely the loan repayments represent an opportunity cost borne by current taxpayers?

    Ak • Since May 2008 • 19745 posts Report

  • Mike Graham,

    But if all the money for the contributions is borrowed

    Which they are clearly NOT.

    And, as Sacha points out, the interest on borrowings would be paid by current taxpayers, so it is user pays (in the broad sense of the word).

    Auckland • Since Nov 2006 • 206 posts Report

  • Sacha,

    Which they are clearly NOT.

    I'm not sure either way - have seen assertive statements in either direction but no one explaining themselves further in a way my untrained self can decipher.

    Ak • Since May 2008 • 19745 posts Report

  • Gareth Ward,

    But if all the money for the contributions is borrowed

    Treasury effectively treats the capital contributions as part of total superannuation spending for the country (they always graph Net super expenditure plus the capital contributions). This seems valid as it's a net super position over the years.

    So to try and separate capital contributions out from any other Govt spending and say "this bit is all debt funded, but this bit is all tax funded" is spurious in my mind.

    Auckland, NZ • Since Mar 2007 • 1727 posts Report

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