The Key government is clearly in a bit of a panic over superannuation. They know that their decision to cut contributions to the NZ Super Fund is deeply unpopular and they are desperately trying to soothe public opinion. This week Key has written to every senior citizen in my electorate repeating his pledge to maintain superannuation entitlements or resign from parliament. The problem for Key is that everyone knows that it’s a hollow promise. When the super ‘crunch’ comes in 10-15 years, Key will be long gone.
Key obviously knows that people can see right through his hollow promise, which is why he dismissively states “I can assure you that suspending full contributions to the fund in no way affects people’s entitlement to Superannuation payments, either now or in the future”. Of course, he doesn’t say how it will be paid for in the future! They must be pretty spooked by the public reaction to their cuts. A mailout to all senior citizens won’t have been cheap.
[Update: I've now had a chance to scan a copy of Key's letter]
Oh dear Chris…you clearly have a short memory. The Superfund was always going to be funded by surpluses. Thanks to your free spending mates surpluses are a thing of the past.
Sir—Two questions:
Q1: What proportion of superannuation payments in the period 2025–2055 were to paid out from the superfund specifically (and not from the contemporary tax pool)?
Q2: Please explain, with reference to any statistics and models necessary—don’t worry, I can understand them—, why you support continued capital contributions to the fund from the government at a time when the government books are deep in deficit.
Repost without the language and it won’t be deleted again. Continue with your approach and you will have to find somewhere else to comment for a while. Trevor
Yup, blind naked panic amongst the Gnats on this one. You only have to look at the riots in the streets.
The Q&A released at the time the fund was setup answers many of these questions: http://www.beehive.govt.nz/speech/questions+and+answers+proposed+nz+superannuation+fund
In particular there are a few points to note:
* if the govt are to reduce contributions at any time (ie due to lower surpluses) they have to provide a reason and state how they will make up the shortfall. National has not stated how they will make up the shortfall.
* the cost of borrowing is generally expected to be lower than the rate of return from the fund, and then of course the govt receives tax from the fund too. The Q&A canvases the fund contributions vs debt repayment issues quite well.
Thanks very much for the reply. I’m very sorry to nag, but the Q&A speaks to neither of my questions.
At inception, the Fund was estimated to cover 14% of NZS over its lifetime. With the capital-contribution suspension, that goes down to 8%. Here’s what I was getting at: when Labour says that the suspension puts super “at risk”, I tend to think it’s being wilfully deceitful. Even at the peak of NZS payments, the “hole” resulting from suspended contributions is hardly a credible threat to NZS. The Cullen Fund is about cost-smoothing: nothing more, nothing less.
And as to your second point, I’m very confused, and would like some guidance.
Do you honestly think that borrowing to invest in a time of deficit is just the same as investing from a surplus (regardless of other borrowing you do when in surplus)?
Are you certain you’re comfortable with the Cullen Fund’s risk profile? The fund’s excess return since inception over the risk-free rate is -2.84%. And you want to borrow on behalf of New Zealand’s toddlers to invest more? I understand that you expect the fund to make more than the costs of debt servicing, but that’s contingent on the fund performing according to projections. So far, it ain’t looking so hot: we’d have all been better off if the fund bought nothing but T-bills from the get-go.
And the tax thing is just about the silliest smokescreen I’ve ever seen. I’ll get to that some other day, but I think my venting at you is already getting over-the-top. Have a nice day
Is there a scan of the letter floating around?
I’m curious particularly about whose crest(s) are on it and how it was funded, and apparently I’m not old enough for Key to bother writing to
Future taxpayers were going to be paying for 88% of the cost of future superannuation before the Super Fund contributions were suspended. With the ten year suspension, that increases by 3% to 91%.
The affordability of future superannuation is only very mildly affected by the suspension of contributions. The level of economic growth we manage in the future will be vastly more influential.
It’s not the super for people NOW I’m worried about, it’s the super for the future. I wonder what Crosby Textor told the Nats what to say in the brochures??
Interesting points, Mr Hipkins.
1. Do you object to taxpayers paying to communicate government policy? If so, how do you reconcile that view with the decisions of the last government to spend millions of dollars communicating with voters, including on the working for families proposal?
2. Is it Labour Party policy to continue to make contributions to the Super Fund, despite the current deficits? If so, how would this be funded? Isn’t it the case that super fund contributions over the next ten years can only be funded through debt?
3. If funding through debt is the appropriate answer to partial pre-funding of the Super Fund, then why didn’t the last government opt to wholly fund future super liabilities through debt?
Well done on your new rating!
http://tumeke.blogspot.com/2009/07/nz-blogosphere-survey-new.html
So?
Just so long as the returns are greater than the expense of the debt it’s not a problem is it? If it was then people wouldn’t be borrowing to grow businesses. All indications are that the return on that debt would be the greater.
Deleted for being off topic
All indications? How about actual performance to date? If we use that as an indicator, then the fund doesn’t do better than the cost of borrowing.
The fund has already taken a hammering over the last year, and you would be a fool to have an expectation that we have seen the worst of the recession. Borrowing to invest at this time is merely borrowing to gamble. Gambling is a scourge on our most vulnerable, yet we have Labour in full force attacking National’s decision not to borrow to gamble.
Perhaps you need to call the problem gambling hotline 0800 664 262.
Whilst I do worry about my superannuation being put at risk, I think the point outlined by Labrat above is critical. This is a risky time to invest: perhaps the markets might go strongly positive, but there’s a decent chance they might go strongly negative. Personally, I wonder whether the end of the recession will merely result in another oil spike and then another recession.
Is it really a smart time to be risky? Perhaps not.
Dam jarbury, you made me splurt my coffee all over my desk, I never expected you would agree with me
It’s a tricky issue Labrat, and one that I am divided over. However, I think a key statistic is that outlined by BK Drinkwater above:
Now, my question is: does that mean our future net financial position would have been better off if we’d not bothered with the Cullen Fund, but instead just paid off debt?
An opposing argument is that we really need a big pile of cash in 2030 to pay for superannuation. If we take that as a given we should really just be considering “what’s the best way to get there?” Given that there are no guarantees the financial situation of the world will be particularly much better in 2020 than now, and we’ll have to play a huge game of catch-up during the 2020s to ensure we have the necessary pot of cash by 2030, it flicks me back to questioning whether suspension of the fund is a good idea.
So yeah, a tricky argument that I am somewhat divided over.
Interesting idea, Draco.
If borrowing $2 billion a year is likely to increase the value of the super fund in the long term, simply by getting a larger return than the cost of capital, then why stop at $2 billion? Why not borrow $20 billion? Why not $200 billion? Why did Labour not borrow in the past for the Super Fund?
And likewise Tim if debt is always a bad thing, why has National budgeted for a decade of it? Why borrow for tax cuts? Why borrow for infrastructure? Why not debt of $0? Why isn’t National paying off all our debt right now?
What’s that you say? Extreme “strawman” positions are silly and we should judge borrowing and debt on a case by case basis in the context of realistic analysis of costs and benefits? I quite agree!
A family member mentioned she received the National leaflet on superannuation. She commented that it seemed so blatantly reassuring that there must actually be some secret agenda to change things.
I think r0b has hit the nail on the head. It’s basically a question of priorities. The Government was to have paid down $2.242B into the Super Fund this year. Meanwhile the additional cost of National’s tax package was $1.21B. They have also increased funding in other areas (eg private schools) while cutting in other areas (eg. adult night classes).
It a very curious letter. It appears to me that the Nats have the wind up regarding the Cullen Fund , Now to be known as the English non fund.
I suspect a Crosby-Textor move here . What I also find rather strange ; is that Key signs himself as the Hon. Instead of Right Hon. We must inform the future Superanuation
community that their Super is certainly in danger if the Nats are returned 2011. And we need to keep telling them ,
After all just imagine what the bloody Nats would be shouting if were doing this kind of thing.
Para 1: Not his Government actually (pompous git) – it’s ours for better or worse,
Para 2: Presumably the average wage after tax will rise out of site if his other (I’ll eat my hat) promise bears fruite – mind you, history of this Govt shows that it won’t be the average income tax bracket that will benefit – so he’s fairly safe betting!
Para 3: We have seen this Gvt interpretation of ‘committment’ to this very promise – ‘his’ Government did change the settings – how quickly can we expect his resignation (piece of paper and a pen for the PM!)
Para 4: Completely contradicts para 3 – Is this a promise that the temporary committment to suspend will be reversed when the economy rises? Is it temporary or a committment?
Does he know the difference.
Para 5: Um, didn’t they change the definition of ‘full contribution’ in the budget? So, who’s definition of ‘full contribution’ are we going back to when times are better – English’s or Cullen’s. Have we missed something? did this letter go out two days before an announcement we don’t know about yet? Wouldn’t be the first time……..
Para 6: Borrow? Why would the $30m be borrowed – and from whom or where was it destined to be borrowed when Cullen put it together in the first place – there was no borrowing.
Para 7: No thanks, if I wanted patronising, condescending, dressed up lies on a regular basis – I would have voted for them in the first place!
Because, as you’re quite aware, such borrowing would push up the cost of financial capital so that the returns would be less rather than more.
@Chris Hipkins
Forgive me, but now I’m even more confused. Do you think the government should be making capital contributions to the Cullen Fund over, say, the next five years?
@Chris Hipkins
Bzzzzzz wrong. Nationals tax package was fiscally neutral, again you show up Labour’s perpetual ignorance for simple maths.
@r0b
Borrowing for capital investment in infrastructure makes sense as it will help to enhance economic growth. Likewise tax cuts. Borrowing to invest in equities and bonds is a rather silly idea as you are relying on capital gains exceeding the cost of that borrowing and given the recent performance of the fund this has not been the case. Not to mention the cost of even government borrowing is significantly higher relative to benchmark rates with the level of debt needing to be raised as it is due to the decade of deficits Labour left us with. Even worse if we were to borrow even more a credit downgrade would have been a very likely outcome and the cost of such would be so big that it would outweigh any gains from an investment fund that we could make in the current environment.
If it’s such a brilliant idea why don’t you all borrow to the hilt and start investing? It’s worked so well the last for everyone who’s executed such a plan the past 2 years.