By Bernard Hickey
How should New Zealand save for its retirement?
This is a simple question that gets more complicated the more you think about it, but it's something New Zealand needs to do because at the moment we're thinking about it the wrong way.
Firstly, let's use the framework the government currently uses to explain its actions to today's voters, which is to describe the government's finances as if it was a household.
The government has argued that, just like a lot of New Zealand households, it needs to reduce the risks from future global financial crises or physical shocks by cutting the government's debt load.
It is completely focused on dragging net government debt below 20% of GDP.
This is superficially appealing, particularly if you are an older household. Once the heads of the household are into their 40s and 50s they naturally focus on debt reduction, which for most means paying back their mortgage as fast as possible.
They personally want to reduce their risks as they get closer to retirement and create an asset they can live in or on during that retirement.
It's the classic Kiwi family retirement plan and it works particularly well in combination with the universal payout from New Zealand Superannuation.
It means New Zealand's elderly poverty rate is one of the lowest in the world.
So it seems to make sense for the government as a whole to be doing the same thing, particularly as the dominant baby-boomer chunk of the population nears retirement and they are currently the ones in charge of the government.
But this is where our policymakers, who are mostly in their 40s, 50s and 60s, have fallen into the trap of seeing New Zealand's finances through the lens of their own generation's finances.
Their job should be to make policy for all generations, including those yet to vote or even be born.
The best way to think of the problem is to ask what would a government do if it was a young household just starting to build its financial future.
The Government and the Opposition know the answer to this question because they have been preaching it for the last month when arguing against restrictions on first home buyers borrowing more than 80% of the value of their first home.
When you are in your 20s and 30s it make sense to borrow to buy an asset like a home because it regularly produces the value of a place to live, can rise in value and can eventually be sold or downsized to supplement your pension.
It makes sense to borrow to buy an asset when you're that age because the interest payments are often cheaper than any rent and you have solid and growing incomes.
As long as the house price keeps rising, your net debt position is actually low or non-existent.
It's this net debt that is crucial.
Given New Zealand has an aging population and a 'pay-as-you-go' pension and healthcare system, the government should actually be looking at this question about how to save for 'its' retirement through the lens of the generations who will have to pay for it, which means those now in their teens, 20s and 30s.
Using this younger version of the household analogy, it actually makes sense for the government to borrow to buy or create assets that will produce regular returns and grow in value.
In fairness to the government, they have actually done a lot of this over the last five years by borrowing to build motorways and rebuild Christchurch.
New Zealand already has the perfect vehicle to do this national 'household' saving, but for some reason all our politicians have chosen to put it back in storage in the garage.
The NZ Superannuation Fund was created to do just that job of being the nation's inter-generational 'household'.
The aim was to buy long term assets that produced better returns than just putting money in the bank and could be drawn down from 2030 as the baby-boomer costs really escalated.
Yet just when that household should be buying those long term assets, the government switched off the fund, suspending contributions in 2009.
It currently isn't planning to restart them until 2020/21.
Strangely, even Treasury decided not to include restarting contributions to the fund as an option in last month's Long Term Fiscal Outlook.
Just as it's a no-brainer for a household in their 20s or 30s to borrow to buy an asset appreciating faster than the cost of the debt, it makes sense for the New Zealand government to do the same.
The NZ Super Fund proved over its first 10 years it can earn more than the cost of debt.
Its annual returns since 2003 of 9% are comfortably over not just the cost of the debt of 5%, but over its own target of that debt cost plus 2.5%.
The New Zealand 'household' should start thinking of itself as if it was in its 20s, rather than its 50s, and resume those contributions.
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This article was published in a shorter version in the Herald on Sunday. This version is used with permission.
12 Comments
As well Central government should allow Local government to tax more so they can borrow and fix up our inadequate infrastructure. http://www.interest.co.nz/opinion/65197/brendon-harre-thinks-we-have-problem-poor-quality-and-inadequate-quantity-local-infras
50 to 60 years olds might think it is ok to stop improving the 'house' but the young folk know they need to upgrade the 'insulation' think about 'double glazing' and plan to replace the degrading 'roof'.
As you say Bernard this focus on reducing debt to the point you don't do what needs to be done is only sensible from a certain perspective.
When you under invest for as long as New Zealand has this is the sort of reputation you create!
Is it really a "third-world" place? Having travelled around a bit and seen a few things in this world, I can't agree with that. This place isn't perfect, but it does pretty well overall.
I think it's likely that the person writing this was under some influence of culture shock, probably in the negative stage (http://www.munich-business-school.de/intercultural/images/c/c6/W-Curve_…) (http://en.wikipedia.org/wiki/Culture_shock).
There's a thriving cottage industry seemingly dedicated to focusing on negative experiences of migrants and tourists (http://newzeelend.wordpress.com/) (http://e2nz.org/migrant-stories/) (http://emigratetonewzealand.blogspot.co.nz/).
That's not to say that there isn't plenty to criticise about NZ, as there is about every country, but it does seem that sometimes people mix up the reality with their expectations. The higher their expectations, the more they grumble...
Some of the objections of 1-4 & 7 involve objecting to the public underwriting private profit in various ways, either with privatising of profits, externalising of costs, or special sweetheart deals. All legitimate objections when a country is poor. Also legitimate when a country is rich, put these kind of things a less noticed when there is a lot of surplus for them to be buried in.
Had a trawl through those links and articles .. interesting .. what they don't say ..
When migrants burst into print like that, circumstances must be pretty frustrating
That frustration comes through loud and clear
What they found when they got here didn't meet their expectation
Not one disenchanted grizzler articulated what they expected
Although many said the reality didn't match the "green-clean-advertisements"
Not one said they did a reconnaissance first, didn't do due dilligence
Not one said the came and explored first before packing up their entire family
And coming .. while
Expecting to find el-dorado within a 2 hour walk of Auckland International Airport
The comments following the "stuff" article sum it up
"There can be no keener revelation of a society's soul than the way in which it treats its children."
Nelson Mandela Pretoria 1995
There needs to be a little soul searching in New Zealand, the wholesale betrayal of our childrens future is to say the least, bordering on the criminal. Lack of government forsight and hand wringing politics is going to leave our children unable to afford homes, unable to retire and unable to live the life our forebears sacrificed so much for.
Borrowing from our childrens future (stealing, maybe?), so people who already have enough can have more is plain wrong. What happened to Kiwis caring? How can we be a beacon of what is good and right in this world when the care factor for our own children is non-existant?
This is a message to you the voter (ok, the three of you who read this)... you need to look long and hard at the character of our current crop of leaders and where their allegiances lie. It is up to us to stop this, to elect leaders who will make a change and who are able to look beyond their political careers and who care, really care about NZ and her people, especially the generations to come...
sermon out! Have a fab week
Maybe local government is a non- sequitur, but a lack of investment in infrastructure fits in the same pattern of running down funds for retirement and the housing crisis so it is relevant.
The group that suffers the most is the young. General Hub Hub calls it borrowing (maybe even stealing) from our childrens future.
A policy of compulsory KiwiSaver, plus later means testing, on the one hand, and a policy of resuming contributions to the NZ Superfund on the other, are both means by which present generations of workers would take on more of the cost of funding their own future retirement as well as continuing to fund present generations of pensioners.
In both cases there are big costs upfront, and the eventual benefits take the form of a lower cost to future taxpayers. In both cases some people will experience the costs and none of the benefits, since they will no longer be taxpayers by the time the benefits kick in (it takes a few decades).
There are also some difference, of which the most obvious:
- The up-front cost of having to fund your own Super individually would fall on everybody, although they might not mind an immediate drop in take-home income so much if they could see that the money was going into their own personal account and that the more they put in, the more they'd get out. That would depend partly on how stringent, and visible, the means testing would be.
- Whereas the up-front cost of funding an increase in contributions to a communal fund might fall on net taxpayers, ie mainly the high income earners (if it were funded through increased taxation), or on the recipients of public services (if the money were found by reducing services), or it might fall on those same future generations that we'd be trying to help (if the money were borrowed).
In the latter case, which seems to be what Bernard is advocating, any benefit to future taxpayers would come about as a result of the Superfund being used for the purpose intended and making a better return than the costs of repaying the debt. Neither is guaranteed. There are plenty of examples from around the world of national wealth funds making losses, and of Governments raiding a piggy bank intended for one use for another use instead. This latter would not necessarily be a bad thing; voter and societal priorities and preferences do change over time, and Governments should be responsive to that.
FYI here's an email from Michael Littlewood responding to this article.
"Bernard's analysis of the justification for resuming contributions is wrong on a number of counts. I wrote a paper in 2010 that analyses the gaps in the rationale that was also used, in part, by the government in 2001 when it started the NZSF. The paper used to be behind a pay wall but I see it is now accessible at http://www.freepatentsonline.com/article/New-Zealand-Economic-Papers/226361908.html A more recent analysis of the NZSF's investment performance and how much that had cost taxpayers in the nine years to 30 June 2012 is accessible here: http://docs.business.auckland.ac.nz/Doc/PensionBriefing-2013-1-Updating-the-NZSF-performance-numbers-2012.pdf The answer, for those who can't be bothered to read the whole paper is that, on a risk-adjusted basis, the NZSF had cost taxpayers an accumulated $2.8 billion to 30 June 2012. Without accounting for risk, taxpayers were just $346 million ahead by comparison with using the NZSF 'contributions' to repay debt. For a fund of $19 billion (at 30 June 2012) that is 'margin of error' territory over nine years. The most basic question to ask Bernard is: If it makes sense to borrow an extra, say, $2 billion a year so that the government can re-start 'contributions' to the NZSF, why not increase that to, say, $20 billion a year? Surely that would make New Zealand even better off? No; the answer is that the government should concentrate on doing the things that only governments can do. Borrowing to build infrastructure is an example of potentially 'good' borrowing. It should leave it to businesses, savers and their fund managers to put money into shares, direct investments in businesses and the like. The government cannot add value to those private investment decisions. This means that the NZSF should be disbanded and government debt reduced by the proceeds. It's simply too risky to keep it."Interesting comment, then he spoils it by going off the right wing end with "the government should concentrate on doing the things that only governments can do" mantra. Then you have to wonder if the opinion is as biased as its beginning to sound.
I do agree on the risk and impact, but because I see peak oil as destroying investing value while the debt value we have to pay back will remain.
regards
Do you really think the proposition that "government should concentrate on doing the things that only governments can do" is nothing but a right wing mantra?
For the purpose of discussion, could you give some examples of activities which it is right and proper that governments should do (bearing in mind that government activity involves costs to taxpayers, who have no choice but to pay their taxes) even though other entities could do them instead (bearing in mind that if they are left to other entities, they will be done at the expense only of those people who actually want those activities to be done)?
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