DPF writes on the cost of cancelling contributions to the Cullen Fund:
First of all, it is true that under the 11 year contributions holiday, the Super Fund in 2030 will be worth only $81 billion instead of $118 billion – a $37 billion difference….Over the 11 years 2009 to 2020, there would be $19.5 billion of borrowing. Then the interest on the borrowing (calculated at 6.73% – the average cost of Govt bonds according to the Super Fund) would be $7.7 billion. So by 2030, the Crown would have an extra $29 billion of borrowing. The difference between the extra debt and the fund’s level is estimated to be $8 billion.
So there you have it. Plain as day. Cancelling the contributions costs $8 billion over and above the cost of borrowing that money.
Treasury says it. DPF says it. Common sense says it – over the long-run the return on managed funds exceeds the cost of risk-free debt. In fact, the loss from cancelling contributions is exponential and keeps growing long after contributions have resumed.
National is now falling back on some desperate lines.
Nobody buys the comparison between a household borrowing to save, not least of all because most households do borrow and save at the same time and, more importantly, because the government is not a household it can borrow very cheaply and invests over generational time-frames.
The new line is ‘the Cullen Fund has made a lower return than the cost of bonds since its inception’. That’s true but only because we have just had the worst financial crash in 80 years. Before that the return on the Cullen Fund was over 12% a year. Right now the Fund is making mammoth returns – 8% in in the last month. Unless the markets never recover (and I don’t think anyone in the capitalist rightwing believes that) the long-run return is going to exceed to cost of bonds, despite a bad year or two now and again.
The final, ridiculous, line is that the Cullen Fund barely has any effect on the cost of superannuation. It’s true that most of the cost of superannuation in the future will still come from taxation at the time but every dollar less in the Cullen Fund will need to be raised in extra tax later or cuts to superannuation entitlements. National dismisses the funding gap created by cancelling the Cullen fund contributions as ‘less than 1% of GDP’. Yeah, less than 1% of GDP, each and every year for decades. In just twenty years from 2030 to 2050, we will have to find an extra $40 billion to fund superannuation that would have come from the Cullen Fund. On top of that, in 2050 we’ll have $58 billion less in the Cullen Fund kitty to pay for superannuation if we stop these contributions for 10 years.
PS. Gareth Morgan has popped up saying ‘hey, let’s make Kiwisaver compulsory and divvy up the Cullen Fund among everyone’. Firstly, that idea ignores the economies of scale that large funds like the Cullen Fund reap (reduced fees etc) that smaller Kiwisaver funds would miss out on. Secondly, there are inter-generational issues in giving the money from a fund with a hundred year life-span to today’s taxpayers alone. Thirdly, Gareth Morgan owns a Kiwisaver fund, so I think he might have interests other than the public good here.