Written By: - Date published: 9:45 am, February 24th, 2009 - 42 comments
Categories: economy, welfare -
Tags: recession
Michael Littlewood has made a career of advocating superannuation privatisation and is part of an international organisation called Pension Reforms dedicated to the privatisation of superannuation. Yesterday, he was given a platform in the Herald and on the news (one or three, can’t remember), to argue the New Zealand Superannuation Fund (known as the Cullen Fund) should be abolished or put on hold during the recession. That advice is economically illiterate and shows no understanding of the nature of long-term investments. It is more of the short-term, dumb thinking that got the world economy into this trouble in the first place. It says (and I know I hit this point a lot) something about our media that this guy got to spout his ideological rubbish in the Herald and on the news without his credentials, his agenda, or the quality of his advice being questioned or even mentioned.
Let me put this simply: if you are in it for the long-term and you believe that the world economy will eventually rebound, now is a good time to be investing in assets because their future growth will be faster than their long-term average growth.
I’ve tried to show why this is graphically. The wavy red line is the value of an asset, maybe a share or a bond or a house. The blue line is the long-term average value of that asset, basically the boom/bust cycle flattened out. The green zone represents a boom, the orange zone a bust.
Now, if you’re a short-term thinking money-man, you want to be buying when the red line is climbing the most rapidly and selling before it starts falling. But if you’re a long-term investor, when is the best time to be buying this asset? During a bust, because the value is below the long-term average value, you are going to get a greater average growth rate than the average for the asset and much greater than if you were buying during a boom – check out the angle of the two thick purple lines compared to each other and the average.
Let’s take a real-world example. When you put your money in your Kiwisaver account what is actually happening is you are buying shares in your Kiwisaver providers’ Kiwisaver fund. In the last year, the value of those funds, and so the value of those shares has fallen. If you put in $100 today, it will buy you more shares in the fund that $100 did last year. You may have lost money on your Kiwisaver in the last year but, unless you are retiring soon, it doesn’t matter, what matters is the long-term return. Your long-term return on a $100 invested today, when the value of the Kiwisaver shares is below their long-term average is going to be higher than on $100 you use to buy shares in the Kiwisaver fund when they are above their long-term average value.
If you a investing for your retirement, or you are a government retirement fund designed to not even begin paying out money for ten years and then keep going for the next half century, or you are a sovereign wealth fund, or you are any kind of investor looking for a long-term gain who doesn’t have to worry about short-term loss (and you don’t believe we are at the start of a permanent period of economic decline), now is the time to be buying, while people are willing to sell you stuff for less than it is worth in the time-frame that matters to you. Sure, for now, we are borrowing, at low sovereign rates, the money we are putting into the fund but the long-term return on that investment will be much greater. To his credit, John Key makes much the same point.
My concern is that the hard right in National/ACT with the same privatisation agenda as Littlewood will see an opportunity to exploit economic illiteracy in the political media to kill the Cullen Fund, and cripple the future of superannuation in New Zealand.
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“5. If it’s a good idea to borrow $2 billion to put into the NZSF in 2009/10, why don’t we borrow $40 billion and really do a job on it? If that doesn’t sound sensible then perhaps we need to start thinking about the $2 billion for the coming year.”
Sorry, fucking what??
When I borrow money I have to calculate the amount I can afford to pay to service the debt. Is this not a factor in this case for some reason?
Apologies for cursing in the morning. Most uncivil.
Michael,
Well done for posting here and attempting to back your ideas.
Instead, we were rushed into both the NZSF and KiwiSaver by a government that thought it knew better what to do with my tax money than I did.
Oops sounds like a classic right wing talking point, but I’ll take it on face value. The problem is that until very recently the savings rate in this country was appallingly low, we treated our homes like ATM machines, racked up hundreds of billions of debt, and spent about $1.13 for every $1 we earnt.
Arguably Michael Cullen was merely trying to do the saving for us as a nation, that we had demonstrably failed to do for ourselves. Maybe he really DID know what to do with our tax money better than we do ourselves.
That is the whole point of government when you think about it.
Felix;
Fair point, but manners…tsk tsk.
“7. What I really want is for New Zealand to start a research-based discussion on what both public and private provision (including KiwiSaver) might look like in 2020 and beyond. We have never had such a debate. Instead, we were rushed into both the NZSF and KiwiSaver by a government that thought it knew better what to do with my tax money than I did.
Don’t take it so personally, Mr Littlewood, Kiwisaver wasn’t set up exclusively for you. It was actually set up for NZ as a whole, due to our awful savings culture. Seems to have turned it around nicely. The decision wasn’t made to benefit you, and individually and in the short term, it may have affected you negatively.
That’s fairly inevitable when a government makes any decision. If it’s better for society in the long term (and let’s be clear – what has been done clearly falls into that category) then it will also probably be better for you in the long term, whether you continue to gripe about your short term loss or not.
Redlogix – interesting we both saw the same in the same point there…
Matthew
Were you aware that most (about two thirds) of New Zealanders were saving enough or more than enough for retirement (before KiwiSaver)? If you go to http://www.PensionReforms.com, then to the Search & options tab and select “New Zealand” as the country, you will find several academic studies that back me up on that.
I would therefore like to understand what your evidence is for “our awful savings culture”. You mustn’t cite the CAD in this regard (what Michael Cullen used to do) – it says nothing about New Zealanders’ retirement saving habits, something KiwiSaver is supposed to fix. Again, there is an NZIER report listed on PensionReforms that explains this point.
You needn’t worry about me and KiwiSaver – I joined on day 1, not because I agree with the idea but because I know I will get more out of it than I put in, thanks in part to you. I just can’t resist the temptation of ‘free’ money but I still think it’s a bad piece of public policy – a ‘solution’ looking for a problem to solve.
You say that KiwiSaver falls clearly into the category of being better for society. The best evidence we have so far is that about 81 cents of every dollar put into KiwiSaver is in fact savings shifted from another place, not ‘new’ money (once again, there is a report on PensionReforms about that). That’s what happens when a partcular savings behaviour is incentivised. Again, there is any amount of international evidence on that point – choose “Taxation” as the topic sort on PensionReforms to see that.