The superannuation debate

The New Zealand Superannuation Fund – sink-hole or foundation of future older people's welfare? Age Concern brings you background information and the arguments FOR and AGAINST stopping the Fund. 

Budget 2009: Contributions stopped

The National Government, in its first Budget, stopped the annual $2 billion contributions into the New Zealand Superannuation Fund, saying it could not be afforded in the current climate.

The Treasury has estimated that by 2050, with an 11-year contribution 'holiday', the fund would pay for 8 per cent of New Zealand's superannuation bill that year, compared with 11 per cent if there had not been an 11-year holiday. 

> SOURCE NZPA 

Impact

There will be no immediate impact on older people, New Zealand Superannuation payments, or the age of entitlement. The debate is a long-term one, with Fund payments not scheduled to begin until 2031. 

Background

The Fund, which started investing at the end of September 2003, is designed to partially pay for the future cost of New Zealand superannuation.

Because the population is ageing, the cost of providing super is predicted to double over the next 50 years. The Fund was designed to make its first payout in 2031.

Also known as "the Cullen Fund" after its founder, former Labour finance minister Michael Cullen, the fund was valued at $13.1 billion at the end of May. 

> SOURCE NZPA 

Superannuation Fund Facts

• Commenced investing September 2003 with $2.4 billion

• Total assets (at 31 May 2009):$13.1 billion

• The Fund's rate of return since inception is currently 3.83% p.a. (compared against the risk free rate which is currently 6.67% p.a.)

> VISIT The website of the New Zealand Superannuation Fund 

> READ Latest monthly performance report of the Fund 

Purpose of the Fund 

Meeting the Cost of an Ageing Population

The increase in the number of retired people relative to the working age population will inevitably lead to a significant increase in the cost of providing New Zealand superannuation. Currently, the net cost is 3.5% of GDP. Projections indicate that by 2030 this cost will be about 5.6%, and by 2050 about 6.6% of GDP.

One way to alleviate this funding pressure is to move from a complete reliance on the 'pay-as-you-go' system to a partially pre-funded system, which is what New Zealand has done with the creation of the New Zealand Superannuation Fund.  

The Fund aims at investing the money in a way that maximises returns, without undue risk, over the long term, while avoiding prejudice to New Zealand's reputation. 

> SOURCE  New Zealand Superannuation Fund 

Intention of the Fund

"The intention of the Fund is to build up a portfolio of Crown-owned financial assets while the cost of New Zealand Superannuation remains relatively low. These assets will then be progressively drawn on to supplement the Crown's annual budget as its finances adjust to the much higher level of ongoing expense for New Zealand superannuation. 

In effect, the Fund provides a smoothing mechanism (or 'buffer fund') for what remains, fundamentally, a 'pay-as-you-go' system. In this way the Fund serves its purpose of reducing the tax burden on future taxpayers of the future cost of funding New Zealand superannuation payments. 

> SOURCE  New Zealand Superannuation Fund 

"Contributions were planned for investment over a very long time frame, over which returns on risky assets were expected to exceed returns on New Zealand Government debt (being the cost to the Government of borrowing to fund its NZ Super obligations). Government contributions were previously running at $2.4 billion annually. The New Zealand Government could have used the contributions to clear its debts, but decided to contribute to the Super Fund. 

> SOURCE Mercer on KiwiSaver.net.nz

Future taxpayers benefit

"Contrary to the impression some people have, the primary beneficiaries of the Fund will not be future retired people. They, after all, will not receive any larger entitlement to New Zealand Superannuation because of the Fund. 

Instead, the beneficiaries will be the taxpayers of the future, who will not have to face the steep rises in tax rates that would be otherwise needed to maintain New Zealand Superannuation. Given that the cost of New Zealand Superannuation is forecast to rise from the current 4 percent of GDP to around 9 percent, these tax increases would, in the absence of the Fund, be very significant…" Hon Michael Cullen in a 2003 speech

> SOURCE Beehive: Hon Dr Michael Cullen 

Opinions – FOR stopping the Fund 

1 The Government's case

"The Government is committed to maintaining National Superannuation entitlements at 66 per cent of the average wage, to be paid from age 65.

Far from putting entitlements at risk, the combination of measures we have taken in this Budget secures superannuation entitlements into the future.

Once surpluses sufficient to cover automatic contributions return, the Government intends to contribute the amount required by the Fund formula.

The required contribution will be higher than it would have been without suspending contributions, because of the Fund’s smaller size. The post-suspension contributions will average $2.5 billion a year for the first five years, compared with a pre-suspension average of $2.2 billion a year over the last five years."

“The government will make a partial contribution of $250 million to the New Zealand Superannuation Fund in 2009/10."

> SOURCE Beehive: New Zealand Super Fund - fact sheet

2 Don't borrow to keep saving

"The voices of the 'stop contributions' crowd have grown louder, urging the government to suspend payments.

Most who take this view ask us to imagine the Super Fund was our own personal savings account. If our investments were losing value and we were spending more than we were bringing in, surely we'd cut our savings so that we could live within our means. You don't save when you haven't got enough to put food on the table now, they say. That makes no sense. You certainly don't borrow to keep saving. That's irrational. And borrow to invest in the most volatile market ever? That's just nuts.

They make a strong case. It's tough enough to get by now, why make it harder?"

> SOURCE Tim Watkins in Pundit.co.nz 

3 Dream over, says Gareth Morgan

"The Government should dump the 'white elephant' New Zealand Superannuation Fund and give about $3000 back to people through KiwiSaver, says fund manager and economist Gareth Morgan.

Putting $12.5b from the Super Fund into KiwiSaver would effectively make KiwiSaver compulsory overnight, Dr Morgan said. The alternative would be to give the $12.5b back to people in tax cuts, though that may be too radical for the Government.

With a 10-year delay before contributions are expected to start again, Dr Morgan estimates 93 per cent of the pension costs will have to be covered by taxpayers."

Note:  Dr Morgan runs a KiwiSaver fund and would potentially benefit from NZ Super Fund money.

> SOURCE Dominion Post 

4 Breaking the Cullen Fund not so simple

"Gareth Morgan’s call for the New Zealand Superannuation Fund to be shut down is a good idea in theory but a fiendishly difficult one in practice. That's because former finance minister Michael Cullen built the thing so it couldn't be torn apart.

The idea is appealing because all the fund has really done in its short existence is export capital and expose New Zealand savings to increased economic and financial risks.

At the same time the fund has simply expanded the myth that the government is saving for our retirement, creating a moral hazard whereby people feel more relaxed about their future…"

> SOURCE Duncan Bridgeman in the National Business Review 

5 The buck stops here

"By international standards New Zealand’s government debt is still low. But the economy as a whole is among the most indebted in the developed world. New Zealand has an exceptionally high current account deficit (at 8.9% of GDP) and net foreign indebtedness (93% of GDP). 

Labour’s low government debt kept lender concerns at bay. But now, with government debt rising, New Zealand has caught the eye of international agencies, which are threatening to downgrade the country’s credit rating."

> SOURCE Ruth Laugesen in the NZ Listener 

6 No guarantees on the future of super

"The Government's decision to suspend its payments to the New Zealand Superannuation Fund exposes the limitations of state-inspired investment schemes with a clarity that is as educational as it is brutal…

In the same way that Phil Goff cannot guarantee future returns from investments, John Key cannot bind future governments. An ageing – and one hopes increasingly healthy – population should be able to make pragmatic changes with sufficient lead time to avert cliff-face decisions."

> SOURCE Simon Upton in the Dominion Post  

> RETURN to the top of this page

Opinions – AGAINST stopping the Fund 

1 Delaying the inevitable

"Scrapping contributions to the Cullen Fund for the next 11 years will send a chilling signal to baby-boomers in particular – the age group best placed to go forth and spend in these demand-starved times – to redouble their savings instead.

Suspending contributions does not reduce the fiscal cost of super itself. Only a change to the entitlement parameters would do that.

All the contribution holiday does is reduce the Government debt track over the medium term at the expense of a corresponding larger unfunded liability further out. 

> SOURCE New Zealand Herald Economics editor Brian Fallow 

2 No free lunch 

"Two points often get missed in this debate. First, the Fund is a great counterweight to the embarrassment that is the individual debt carried by New Zealanders, which is one of the highest in the world. The credit rating agencies are looking at downgrading us in large part because of that debt; those Super Fund payments might be the very things that save us. 

Second, there's no free lunch here. As Bill English has said, 'the way it [The Fund] works is if you don’t pay in this year or next year then you have to make higher payments later'". 

> SOURCE Tim Watkins in Pundit.co.nz 

3 Time to face up to looming pension crisis

"The Prime Minister is continuing to insist there is no need to look at raising the entitlement age to, say, 67, and says that superannuation will not be cut. He is far from reassuring. Indeed, his stance bears the hallmarks of a politician happy to postpone a difficult and unpopular solution to a looming problem.

The contributions holiday means, effectively, that the baby-boomer generation will unburden itself of a significant part of the future cost of its own superannuation. That load will fall on a generation fewer in number and grappling with its own priorities."

> SOURCE NZ Herald editorial 

4 'You've got to be in to win'

"Comparing the Super Fund to my or your personal savings is plain dumb. It's fuzzy logic. What's good sense for an individual is not necessarily good sense for a country. (For one example, check out Brian Easton on the Paradox of Thrift).

Businesses, for example, do borrow to invest. Earlier in the year I spoke to a clump of CEOs about surviving the recession. To a man and woman they said the smart thing is to invest in opportunities during a downturn, not just cut costs.

The argument made by those who want the government to continue funding is based around the old market adage, 'buy low, sell high'. Well, the market's low so if the Fund wants to recoup its losses and do some nice business for New Zealand come 2050, there are some bargains to be had. 

> SOURCE Tim Watkins in Pundit.co.nz 

5 Suspending Superfund contributions doesn't make sense

"The logic behind National's plans to suspend contributions to the 'Cullen' Superfund has been shot down by the positive signals sent by the Guardians of the fund today, Labour Commerce spokesperson Lianne Dalziel said.

The Guardians told MPs today the New Zealand Superfund (NZSF) is making good progress on clawing back losses it sustained on world sharemarkets. Unaudited results show that in a little over a month the NZSF has made $1.75 billion dollars." 

> SOURCE Hon. Lianne Dalziel, NZ Labour Party 

6 Adrian Orr* responds to critics of the NZ Super Fund

"The Fund is a simple concept. The Guardians are legislated to invest money today to gain a return over the long-term. That return is to be used in the future to smooth the tax burden of the rising cost of New Zealand Superannuation.

Underlying it is the principle that a government is in a great position to benefit from investing over decades, more so than an individual…

This is the same whether a government’s operating accounts are in surplus or deficit. And, the returns to the Fund from year-to-year do not impact meaningfully on the government’s debt program – the capital contributions formula sees to that.

* Adrian Orr is the CEO of the Guardians of New Zealand Superannuation.

> SOURCE Adrian Orr, Blog 

> RETURN to the top of this page

What's your opinion?

>VOTE in our online poll