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National U-turn: White flag or commonsense?

Tuesday, November 30th 2004, 10:55PM 7 Comments

by Philip Macalister

National's decision to support the NZ Superannuation Fund is long overdue.

While it could be construed as National running up the white flag on this issue, it is more a sign of pragmatism within the party.

National knew it couldn't win a debate on this one and it has essentially decided to neutralise a potential conflict point during next year's general election.

It's also a sign that its finance spokesman John Key is getting some traction within the party.

Pre-funding is a sensible option. It is supported by the IMF and a growing number of countries are adopting this approach.

It's interesting to note that recently Australia said it was going to set up a similar fund - The Future Fund - to partially prefund part of the state's future pension liabilities.

What is interesting across the Tasman, besides having a far more imaginative name for their fund - is the fact that there is bi-partisan support on the concept from day one.

To me that shows a far more enlightened approach from their politicians than the petty approach which our representatives have shown to this topic over the years.

Perhaps the most interesting point of Brash's speech was his comment that National would like the Retirement Commission to engage in a conversation with New Zealanders on the subject.

It seems to me that the commission has been doing a pretty good job on a very limited budget in this area over the years.

Perhaps what would be more useful is allowing the Commission to have a conversation with the government. Currently it has no official role into the policy making area, but in my view it should be a key player in helping shape policy in this crucial area.


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Comments from our readers

On 1 December 2004 at 12:17 am Jens Meder said:

Hasn't the Retirement Commission been a mouthpiece against the NZSF in the past, and self-contradictory in its publicity on savings by apparently supporting the need for savings through information on saving facilities, yet implicitly opposing a systematic effort to increase the savings rate for accelerated wealth creation and economic growth by commissioning and apparently accepting studies about the country's savings rate being "adequate"?


Also, the question has not yet been adequately discussed nor resolved: Would more NZSF investment in NZ be better growth and security econmics than its investment abroad, or not? This is a perfectly legitimate political issue, and the NZSF debate is not over yet, until a popular consensus is is achieved.


On 1 December 2004 at 12:50 am Philip said:

Hi Jens

In response to the second part of your post I would suggest that Mercers gave a very comprehensive answer to the question of NZ v International in the report it did for the fund. I'll find a link to it for you.

I think there is an interesting question being posed at the moment: Should some of the money be used for local infrastructure projects?

It seems to have a good deal to logic to it. However, if money is going to be used like this it is imperative that the investment is making good returns.

The hardest part will be to keep politicans out of the equation!

The Retirement Commission's message to New Zealanders has been, I believe, "don't rely on Govt super for your retirement."


On 2 December 2004 at 1:40 am Grant said:

Political expediency does not equate to economic logic. The NZSF is plain and simple a dumb idea. Borrowing money (by not repaying debt) and investing in overseas companies is not logical.

If investment is required in infrastructure (and it always is), then the Government should use our money and just do it. Don't funnel taxes through a fund. Or, the Government should promote and help fund PPPs.

If Cullen can't think of anything else to do with Budget surpluses other than to give them to the Guardians, then cut taxes and let us make our own decisions.


On 2 December 2004 at 7:00 am Jens Meder said:

OK,let's accept the Ret.Commission's message not to expect luxurious universal super - but if most of us want at least the present standards to be sustained, and are prepared to vote for policies to make them sustainable, the time for economically unsustainable bribing and foot-balling(1975 - 1999) is over, and the electorate is becoming too educated to be fooled.

In a democracy, there must be some political control over NZSF investments, subject to popular mandate. Thus, what is wrong with the Guardians' being instructed to invest more in NZ according to their, not a party-politician's judgement? Profitability differences between NZ and foreign investments are not an issue, because a lowest profitably possible domestic investment creates still many times more taxable income than the best possible dividend from aboad. Example: Say an Auckland Harbour tunnel is financed by the NZSF. Then - even if its cost is not recovered by tolls as would be likely with many infrastructure investments - its repayment by rate and taxpayers and consumers would with the same, single transaction also delver the cash flow for universal superannuation, which would not happen, if it all, plus interest, would have to be repaid to private, possibly foreign investors.

What is dumb about that, Grant?

While you, Grant, might be a very wise investor, Why are you so inimical or jealous of the fund, which introduces the only chance for our really poor to participate in investment creation and eventual wealth ownership, when the fund will be allotted to personal accounts eventually, on popular demand?

What are PPPs, I would like to comment on your support for them? Jens.


On 3 December 2004 at 9:47 pm Grant said:

I'm not sure everyone wants the present design of NZ Superannuation to be maintained - the nation hasn't really had a debate on it. Why should it be paid to people who don't need it? What is so sacrosanct about the so-called "65 at 65"?


Looking at the example of an Auckland Harbour tunnel, there is no real difference between such a project being funded directly by the Government or by the NZSF. Funds still have to be borrowed by the Government from NZ and overseas investors. The money being presently given to the NZSF is effectively borrowed because the Government could have chosen to reduce debt. Tolls collected from users of a tunnel would be used to pay interest and principal. If the NZSF is the financier, then retaining the tunnel tolls at that level doesn't mean this is "savings". All it means is the Government still has less funds to repay debt - it's all smoke and mirrors.

I'm not aware there is any present intention to allocate the NZSF into individual accounts. And, even if there was, this is still smoke and mirrors. Taxing people at a rate higher than necessary, investing the tax in overseas shares and then giving it back to people at 65 makes sense? What if because of higher taxes people can't pay off their houses by then? Is that sensible policy? Taxpayers should be taxed at the bare minimum required and they should be left to get on and make their own decisions.

I see Russell has explained the acronym PPP - it's really a risk-sharing mechanism for Government.


On 4 December 2004 at 6:51 am Russell Hutchinson said:

My tuppence:


PPPs = Private Public Partnerships


Borrowing to invest CAN make sense - lots of companies do it. It's just that the NZSF does not forecast to make significantly more than the risk free rate of return (not enough to compensate for the risk) so its probably not adding value.


Why not just pay down debt now, and borrow more later, and leave the job of creating value to the people that do it best: the people.


However, Jens, I like your comment about "...our really poor to participate in investment creation and eventual wealth ownership, when the fund is allotted to personal accounts eventually," Although this is not the poor's "only opportunity" - there are others.


I would support the fund if it were allotted to personal accounts - but it isn't. Therefore to support it _supposing_ that it _may_ _eventually_ be split out - mybe you know something I don't, but its more optimistic than I am prepared to be.


Finally, do not confuse the job of the Retirement Commission in advocating greater personal responsibility for one's income in retirement with the job of the Government to fund the contribution to that known as New Zealand Super. I don't think that they are interchangeable.


Cheers

Russell.


On 5 December 2004 at 12:54 am Jens said:

Hi, Grant & Russell.

As the NZSF is not supposed to take a controlling interest in anything, I can only support PPPs as the natural way to go, especially if it gains popularity for the NZSF.


For a large long term investment it is realistic economics to keep saving/paying for it, while still carrying shorter term debts within repayment capacity. Think of a 25 year home mortgage with occasional overdrafts and car purchase debts delivering better living earlier, as long as sustainable within earned income.


So, regardless of a modest level of public debt, the NZSF is not smoke etc, as long as it is accumulated out of taxes paid, and not "invested" (evaporated) in public debt financing consumption. How can the reality of a tunnel and its genuine repayment through tolls or whatever be likened to smoke?


Actually, development capital from the NZSF is less inflationary than imported capital, and would not all of us be happier to pay tolls, taxes and interest to our own NZSF? And would this not accelerate a self-financing economic growth situation?


You are right in that many - including myself - do not think the NZSF is as good as it could be. But the most constructive answer to this is to amend it, not to oppose it without coming forward with a better alternative, and this is where our interactive discussions provide a superior public service compared to rigid party-political propaganda trying to evade public debate.


"65% at 65" is just a compromise on universal super. There are still many complaining 65% of the average wage for 2 is inadequate, but there is a huge majority who would insist on the freedom to carry on working without being penalised for it for as long as they like, without forgoing their super entitlemnt at 65, for the chance to relax before incapacitated by senility. All we have to do, is to build up our economy to make it sustainable.


The beauty of the NZSF is, that the whole nation - through GST even those without taxable income - participate in this constructive effort.


When the NZSF is allotted to personal accounts - the centre parties have it in their policies already - it will be a practical tax rebate in tangible wealth which cannot evaporate in petty consumption like an unspecified tax rebate/reduction, but can be consumed only at the rate of universal super from age 65, or be part of your estate in case of death before its consumption. There is nothing rational to stop these accounts being available also for accelerated home mortgage and student debt repayments. What "smoke" exactly, can there be in this?


"Adding value" through risky investment is best left to private enterprise, and let us remember there are likely to be mor losers in this than in lower return investments. So, not earning top returns is irrelevant in the NZSF context, because basically it the savings and even low return saving and investment rate is the more dominant wealth creator than the usually only marginally different earning rates of the investment rates. Without the savings and investment rate there is no investment earning rate at all, and $100 (10% of an income of $1000 invested earning only 1% is $101 of new wealth, whereas 10% earned on a 5% investment rate out of a $1000 income is only$55.- of new wealth?


So, unless you can show most of what I said is wrong, it is up to us, the public, to guide our politicians towards the NZSF as a permanent institution with up to 80 % of it to be invested in NZ until there are no more useful and profitable investments possible here (when we can justifiably become bigger exporters of capital to complement other exports)- with our citizens having the final say as personal account owners and political voters.


And thanks, Russel, for the observation, that the Retirement Commission's work is not, and should not, be interchangeable with universal super, a deplorable aspect that seems to be advocated through the "2nd tier" of pensions by the IMF, which should be merged with the IMF's "3rd tier", voluntary private super savings, as in principle adopted by the workplace savings proposal already, and because they would not be available for all.


Comments appreciated - cheers - Jens.


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