The Government’s Super Scheme: Leveraging Up

Most of the contributions to the Government’ s Super Fund are being funded by debt. The household sector equivalent is increasing the mortgage to punt on equities.

Thursday, November 1st 2001, 6:04PM

The Government justifies the approach, arguing the return on the fund will exceed the opportunity cost. The proposition that the Government (or some arm’ s length organisation) has a comparative advantage in net investment runs counter to all international experience and fails the simplest litmus test. Why not underwrite the fund completely with debt now rather than progressively increase contributions? Our bottom up estimates suggest returns on the funds would not exceed the opportunity cost (see annex 1).

The proposed scheme has little to offer on economic grounds. Competition and economic efficiency will be eroded, the sandwich generation pays twice, the scheme does little to address long-term fiscal pressure and self-provision will fall. The scheme adds to the plethora of policies that will negatively impact on savings, investment and potential growth, the keys to wealth creation and sustainable superannuation policy.

More recently, some clear costs have appeared, manifestations of the additional borrowing.

Market perceptions on the size of the Government’ s bond tender program are negative. The Government has indicated an unwillingness to reduce Super Contributions to protect the bond tender program from escalating further. As the scheme currently stands, there is no flexibility to permanently reduce contributions should medium-term fiscal forecasts not be achieved (i.e. potential growth may be over-estimated or spending growth under-estimated).

An evaluation of the economy-wide costs of staking the Super Fund via debt should have occurred. Costs are being imposed on the economy for a scheme that offers little.

Medium-term fiscal pressures are intensifying and it will be a struggle for the government to meet their Budget forecasts (annex 3). We expect fiscal slippage, with negative implications for the out-year bond tender program. The Government should condition the market to the expectation that Super Contributions will be lowered if fiscal objectives are not met.

A failure to lower Super Fund contributions could see bond tender programs head towards $6 billion and widen the risk premium further, placing additional costs on the economy.


Annex 1: Rate of Return

The Treasury expects the Fund to out-perform the opportunity cost. Returns on the fund are expected to average 9%, roughly 2% above the debt funding costs. Within the portfolio, equity returns are expected to be around 12%.

We disagree.

Annex 2: Fiscal Risk

Our estimate is based on an average of three methods.

Annex 3: Fiscal Accounts Under Pressure

The Treasury projected reasonable operating surpluses in the Budget but net debt was expected to rise by around $1 billion per year. Any additional spending needs to be financed by further borrowing. Treasury signalled a bond tender program around $3.5 billion for ‘ 01/02 and the bond tender program to sit around $4.5-5 billion for the following three years in the Budget.

In addition the GSF plans to tender around $2 billion worth of government stock (potentially $3 billion) over the next 2 years as it moves to a diversified portfolio mix. The change in GSF’ s portfolio mix (from roughly 85% to 14% NZ bonds) also removes a major bond purchaser going forward.

Pressure on the bond tender program is also intensifying and Treasury look set to signal higher bond tender
programs in the December Economic and Fiscal Update.

The official government forecasts invariably prove to be optimistic as spending pressures emerge. Consensus expectations are for the Government’ s medium-term projected surpluses not to eventuate and this will place further pressure on debt issuance.

This article is an opinion piece from the National Bank's Treasury department

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