Suspending the Cullen Fund

Written By: - Date published: 8:00 am, May 5th, 2009 - 47 comments
Categories: national/act government, superannuation - Tags: ,

Bill English seems set to suspend the government’s contributions to the Cullen Fund.

Here’s a little-known fact, one that Bill English probably doesn’t want you to know: The Cullen Fund made money in March, the sharemarkets are rising and we’re making money on that. In fact, the Cullen Fund out-performed the market.

The markets might go down again before the recession ends but, unless you believe the economy is going to remain in recession forever, this is a great time to invest to make money in the long-run because assets can be bought at such cheap prices. Long-term investment is what the Cullen Fund is all about.

Here’s another little-known fact: the law says that if contributions to the fund are suspended, they have to be made up with larger contributions in the future. We pay either now or later but we pay. That way, it’s a sure thing that we will have the pot of money when we need it.

Put these facts together. We have to put the money in some time and if we put money in now we will get a great long-term return, far better than normal = if there was ever a time not to suspend payments it’s now, we should be buying while the buying’s good, not waiting until prices are higher before we start buying again.

The reality is that National doesn’t like the Cullen Fund, and they would get rid of it if they could. When they nicknamed it after Cullen, they meant it pejoratively (like the John Key Memorial Cycleway). Their long game is to reduce the costs of public superannuation by cutting entitlements, rather than fund those costs with the Cullen Fund. That’s what really underlies English’s move to suspend payments to the Fund because he knows once they’re suspended, it will be politically hard to start them again.

In his valedictory speech, Michael Cullen bemoaned the press gallery’s lack of understanding of fiscal policy and economics. When English cries poverty as an excuse to suspend contributions to the Cullen Fund, he will be counting on it.

47 comments on “Suspending the Cullen Fund”

  1. Yeh right 1

    these guys are fucktards.

    can we just give the keys to the corporates and at least stop the charade? Lets stop pretending that any decision that they make is to make anything better for the majority of New Zealanders.

    no economic stimulus package. Slashing the public sector, while claiming to be protecting jobs. cutting our retirement schemes and our improving savings record. selling ACC. supercity. 90 day fire at will. Exams for 6 year olds. Gutting the RMA. Ignoring rail and public transport. reexamining the science. Russell Norman….


    • Tane 1.1

      Yeah. Just so people know, we’ve delayed this one til tomorrow morning. Slipped out by mistake during scheduling.

      • bilbo 1.1.1

        “At just over $11 billion, the Super Fund is New Zealand’s largest pool of investment money but in international terms it’s tiny and doesn’t yet carry that much bargaining power, particularly with offshore managers.

        The Fund has been declining of late and publicly lashed for doing so – dropping from a high of about $14 billion last year to its current level. But there is some good news in the latest monthly figures with the Fund reporting a positive return of 1.12% in March, outperforming its benchmark by 0.89%.”

        The real question is what rate would we need to borrow at to continue contributing to the fund during the next 12-24 months and would we be likely to exceed that with the returns from the fund ?

    • Zaphod Beeblebrox 1.2

      You forgot to mention selling off corrections. Victoria did this in 1993, the had to pay a fortune to buy the prisons back eight years later. It was a disaster.

    • The Voice of Reason 1.3

      “… Russell Norman…”

      There’s only one ‘l’ in sel out.

  2. BeShakey 2

    The real question is what rate would we need to borrow at to continue contributing to the fund during the next 12-24 months and would we be likely to exceed that with the returns from the fund ?

    Thats one question. Another is what the impact of having to make up one/two/three years non-payments would be, and if it isn’t feasible to make up those payments how we are going to deal with the huge payments we will have to make for superannuation.

  3. BLiP 3

    And so the National Party finally has the keys to the treasury and flings open the doors to be looted by business which has had its eye on the treasure ever since the Cullen Fund was founded. Villains, the lot of them.

  4. Big on supposed facts, but no balance as expected.

    As noted above, given the state of the books inherited by National coupled with the recession, we would need to borrow. Surely that’s an inconvenient truth given your pre-determined position (anything National does must by nature be evil).

    Second, what’s wrong with a bit of retrospective law changes? Seemed to work well for the last Government.

    • Eddie 4.1

      The law change wouldn’t have to be retrospective – it would be about future payments and, yes, that’s clealry the ultimate plan.
      First, stop payments,
      step two make starting them again politically impossible (flows easily from step 1),
      step three change the law/abolish the fund,
      step four cry poverty and cut superannuation.

      • bilbo 4.1.1

        Perhaps if the previous Minister of Finance hadn’t left the cupboards bare there might have been enough left to continue contributions to the fund

  5. infused 5

    Borrowing to invest… hmm yes… Makes about as much sense as buying Kiwi Rail… oh wait…

    • aj 5.1

      Borrowing to invest makes a lot more sense than borrowing for the recent tax cuts

      • infused 5.1.1

        Except they didn’t borrow for them.

        • r0b

          Except they will borrow for them.

        • Eddie

          Yes they did. If the government hadn’t cut taxes, it wouldn’t be borrowing so much, therefore, it is borrowing to pay for them.

          • aj

            Exactly. If there were matching spending cuts had been made then they wouldn’t need to borrow so much either. And this demonstrates National’s big problem. They want to cut spending to cover tax cuts but can’t find anywhere near the amount of fat in government spending to do it.

  6. lprent 6

    One thing that interests me reading other comments around the net is that I think that the same people who are decrying the idea of raising debt to keep building the super fund, are the same ones who still want their promised tax-cuts in 2010 and 2011- financed by debt.

    Both are ways of grabbing cash now while pushing obligations on to their kids in terms of future tax increases

    Daveski: I opposed the Labour taxcuts in 2008 and the subsequent one from National. They shouldn’t have happened for exactly the reasons that you specify. They screwed the government’s fiscal position with a economic change flooding in from off-shore. Something that was predicable to happen – just not the timing or severity. Tax-cuts are a totally ineffective way to distribute a fiscal stimulus.

    National should remove both tax-cuts and the future ones. They are after-all primarily irresponsible for raising them as an electioneering issue from 2004 onwards. They should take the political pain for their position. However I suspect that they will simply pass the pain down the generations. After all that is what National does best in government.

    • Daveski 6.1

      In fairness LP I think that’s a reasonable comment. Borrowing for tax cuts or super investments at the current time doesn’t make sense.

      I think there is a corollary to your comments tho – those that criticised the tax cuts which required borrowing are guilty of supporting borrowing to fund future super payments.

      • lprent 6.1.1

        I criticised tax-cuts period (apart from the business one in ? 2007 ?). They ALL involved raising debt as soon as we got hit by a recession.

        So you’re saying anyone going for anything but the ‘chewing gum’ taxcuts is guilty IMHO .. 😈

  7. vto 7

    “Their long game is to reduce the costs of public superannuation by cutting entitlements,”

    They should be cut. Clearly, poor taxpayers paying super to rich folk that don’t need it is simply a folly. The only logic box it ticks is the greed vote box.

  8. infused 8

    I don’t think anyone here is defending tax cuts anymore lp

    • vto 8.1

      I am infused. My family’s income is more important than the bloody govt’s income. Multiplied by 4,000,000 people.

    • Zaphod Beeblebrox 8.2

      Why not have capital gains tax? That way you could fund a decent retirement for all.

    • lprent 8.3

      Probably not, but the existing ones that went through last year and this year should also be removed. The Nats need to put in a tax increase back to the old levels. It is preferable to pay now rather than keep compounding debt into the future.

      The only one that is worth keeping is the change to company tax from a few years ago that drew us inline with aussie.

      I have to agree with Douglas, the ‘line-by-line’ waffle that English is talking about will not yield anything like what is required to stop the growth in debt. Douglas is wrong in suggesting that wholesale removal of services to the private sector will do much. There is little fat left there either (I think Douglas is day-creaming the 80’s again). English will probably move on to doing substantive effective cuts in benefits.

      These are debilitating and outright stupid as almost anyone who ran across them in the 90’s and their aftermath can testify. They institutionalize poverty, lock recession into the economy, and slow any up-turn.

      • vto 8.3.1

        lprent, why do you consider the govts income more important than an individual’s or family’s income?

        • lprent

          Because in the end we are the government and are responsible for the governments fiscal viability. Pushing too much debt on to it, simply transfers the costs to be paid to the future generations and causes far more pain later. Muldoon proved that quite conclusively.

          You give tax-cuts after you have achieved the required forward savings and covered forward liabilities. That may be because you have increased the economy, or it could be because you have achieved savings. As it stands at 2005 or 2008 we have done neither, just made a start on those processes with the ‘Cullen’ fund, Kiwisaver, WFF (the latter increased the birth rate – ie future tax-payers), and various infrastructure investments.

          To do anything else (like bloody stupid and unrequired taxcuts) was to push costs forward into the future in uncovered health costs in an aging population and rising superannuation bills.

          The point of view of the Nats was that decreased tax bills would increase productivity. My general view on that is that it is bullshit. Never seen it achieved in a developed economy where there haven’t been special circumstances (like Ireland’s proximity to the EEC for instance). What you do see is that government investment in R&D, and human and physical infrastructure did. We’d barely got started on that after we’d finished killing debt. Now the Nat’s have chopped it – eg the R&D, the Forward Fund.

          Frankly the Nat’s look like addicted gamblers. Didn’t work once – lets try it again… 1975 and 1991

        • Daveski

          Seeing we’re talking facts here LP, let’s acknowledge that even after the Nats tax cuts, the “rich pricks” are still paying higher marginal and average taxes in 2009 than in 1999. It’s therefore an interesting argument as to which “old levels” you’re talking about.

          • lprent

            Sure. I pay the top rate and have done so since 1999.

            It needed fixing to get rid of major fiscal drag. But the key to that was to start adjusting the boundaries to at least partially compensate for inflation. ie do ‘chewing gum’ changes frequently. The type of tax-cut that Cullen proposed in 2005 and that the electorate derided under National’s prompting.

            Politically that meant that process was stopped so a ‘decent’ tax-cut could be given for purely political reasons.

            Basically the Nat’s for their own political purposes made ‘decent’ tax-cuts a political football. Total dickheads….. I have zero sympathy for their current dilemma

  9. vto 9

    We are not the govt. It is this fundamental philosophy which sets political directions. left politics seems to see the govt as some sort of base or foundation to society.

    I completely disagree. The individuals and familys out here are the foundation to NZ society, not the govt. Once that foundation is strong then govt can strengthen. But to weaken the foundation by taking from it in order to keep the counting house on top shiny and new is a perverse logic.

    I think you get lost in the detail rather than take an overarching view of the role and position of govt in society.

    • r0b 9.1

      vto – you can’t have strong, safe, successful families without a strong, safe, successful society for them to be a part of. If the government falls apart, society falls apart, families fall apart.

      • vto 9.1.1

        other way around r0b. Families are the foundation block, not the govt.

        Govt is a subset of human society.

        I sincerely cannot fathom the reverse idea which you have espoused – that human society is a subset of govt.

    • lprent 9.2

      I’ll agree to disagree. Families by their very nature are inherently selfish when looking at other families. That is part of the biological function – ie the selfish gene.

      The problem is that our societies are so large these days and so interdependent that for the last 10k years we have been building bigger and bigger governments to handle the bigger and bigger interdependencies between families. If some families are disadvantaged to favour others, it impacts upon all families in some form. Could be crime, war, disease, famine, recession, or any of many other things.

      The problem is that a lot of families view ‘government’ as a common that they do not have to support. Typically this happens at both economic ends of society – the affluent and the totally impoverished. Both are stupid attitudes, but more understandable at the bottom than the top. The top usually justify it by ignoring the part played by government and society in their affluence.

      Damn I’d better get some work done… *sigh* blogging is more fun

      captcha: rebuffs the

      • vto 9.2.1

        Agree with some of what you say but maintain my position. I suspect our views diverge at this point here ..”Families by their very nature are inherently selfish when looking at other families.” I disagree. People are not silly and recognise that they are best served by looking after their neighbours. The very survival of human society to this point in tiome points to this truism.

        But you are correct re the size of societies and the need for some ‘coordination’ given thte larger number of neighbours. Unfortunately this tends to discolour the true role of govt in society towards the left view.

        Gotta go work now too.

  10. vto 10

    Further lprent… Maintaining that the govt is more important than individuals or family implies very directly that we are servants or subjects of the state, rather than vice versa. You know where that idea can get shoved..

  11. gingercrush 11

    This reads completely as a SP piece. When National are having to suspend its tax cuts in the future and New Zealand’s debt is rapidly increasing and unemployment is rising. Yet you expect them to put in 2 billion dollars because prices are low? Not a credible position. There is a reason the legislation Labour put into the house actually allowed for the fund to be temporarily suspended. Surely, its for these very reasons. That when government is bringing in less and less money, debt is rising and the government has less money, that the right action is to suspend contributing to the fund.

    • lprent 11.1

      Actually I suspect (from memory) that you’ll find the amount is 1 billion. 2 billion was the amount that Cullen was putting it because he was able to.

      • gingercrush 11.1.1

        No its 2 billion. Though the legislation allows for less money to be put it or even be suspended. But you have to make the repayments in the future.

  12. SPC 12

    This government was an advocate for borrowing to fund infrastructure spending.

    The OECD/IMF think well of the “Cullen Fund” and would have no problem with borrowing to fund it. It’s borrowing money to spend it that they question. They would have more problem with borrowing to finance infrastructure (less so if tax cuts were being made to necessitate doing so) than for investment in this Fund.

    Now borrowing to invest in infrastructure during a prolonged recession is classic Keynesian economics and the right thing to do. Not that the Nats like Keynes, in fact they slight this great economist as someone “anti-market”.

    The fact is Bill English led initial opposition to the Cullen Fund. Another fact is that in February “he stated” that he was committed to continued funding of the Cullen Fund and he saw good opportunities for the Cullen Fund in the current climate. No doubt the letter was written on behalf of the Minister by a memebr of staff at Treasury – but he did sign it out. The change was made at the political level and after February (should I send a copy of the February letter to Goff?).

    Highlights of the letter

    The Bill English reply to my 2008 letter on funding the Super Fund

    He says that to sustain the present level of NZ Super in the future we need to establish a reserve now to mitigate the rising cost to taxpayers. He says the government is committed to continuation of the Fund as an effective vehicle for pre-funding NZS costs.

    (All very bi-partisan in tone).

    (As to my idea of transferring state assets into the Fund rather than cash),

    he says the government will not sell state assets and says the Fund would need to be able continue trading in its assets to maximise profits – so they must reject the option of passing on state assets into the Fund

    (I suggested the Fund only off-load them in the longer term to Kiwi Saver funds so they stayed in local ownership).

    (Given todays news the most interesting thing to note is this)

    “Indeed, the Funds liquidity in a time of economic downturn is one of its advantages in the marketplace, as it is able to exploit opprotunities to acquire assets while company stock prices are low relative to future potential earnings’.

    • gingercrush 12.1

      Your Green Party are against the Cullen Fund.

      • SPC 12.1.1

        It was, is it now?

        The initial concern at the time the Cullen Fund was suggested was that we still had unemployment at high levels and we should get sufficient growth in the economy to employ more people before we saved surpluses.

        As it turned out, the international expansion of low cost credit soon solved that problem and thus the Cullen Fund was a good counter-cycle economics as well as worthy in its own right. Much of the concern was over timing (English wanted more room to deliver tax cut led growth – this could only work as a Super affordability means if Super was de-coupled from the net average wage and raised against the CPI as benefits are).

        PS I am not a Green Party member.

    • SPC 12.2

      My suggestion regarding the state assets was premised on locking up to 50% of the ownership in state assets into the Cullen Fund (in the years we did not inject cash into the Fund) and then only transferring the assets to Kiwi Saver funds when the Cullen Fund was cashing up.

      The state asset use to finance the retirement provision of New Zealanders – for some decades through subsidising the tax cost of over 65 pension super and then the private savings of New Zealanders for their retirment is much as state assets would do even if they remained in government hands directly (rather than the governments Cullen Fund vehicle or the Kiwi Saver Funds).

      Of course the other 50% of the assets would still be held by the government (in partnership with the Cullen Fund and then the various Kiwi Saver Funds). This would have made the government held 50% less able to be sold to buyers looking to takeover/control the SOE.

      It would have prevented the sale of state assets onto the market by National. I see their opposition to the idea as based on a desire to sell the assets on the open market (including foreigners).

  13. Gareth 13

    “the law says that if contributions to the fund are suspended, they have to be made up with larger contributions in the future.”
    Could you please point me in the direction of this piece of the law? Interesting, and I’d like to see what the intent is (e.g. a total of $25b invested over 25 years? a specific fund value target with assumptions around return)

  14. Gareth 14

    OK, having looked up the Act, there is no legal requirement to make up the shortfall later on at all?
    There is a stated calculation for the required capital amount, but that is followed by:

    44. Lesser amounts of annual capital contribution
    (1) If the Government intends to pay less into the Fund in any financial year than the required annual capital contribution, the Minister must include, in the fiscal strategy report prepared under Part 2 of the Public Finance Act 1989,—
    (a) the amount of the required annual capital contribution stated in the economic and fiscal update under section 42 in respect of the financial year; and
    (b) a statement of the amount of annual capital contribution actually to be paid into the Fund in that year; and
    (c) a statement of the reasons for the Government’s departure from the required annual capital contribution; and
    (d) a statement of the Government’s intentions regarding future contributions to the Fund; and
    (e) a statement of the approach the Government intends to take to ensure that the Fund will be sufficient to meet the payments of New Zealand superannuation entitlements expected to be made over the next 40-year period.

    So they need to state what they’re going to do about it, and the intent of the Act is to ensure a fully funded super plan in 40 years, but they do not legally HAVE to increase payments at a later date. Conceptually, they could claim an increase in the estimated return or a change in Super entitlements etc.
    None of this should be read as me accepting a reduction in Super contributions and it certainly is taking from future generations. But the statement about the law is incorrect.

    • SPC 14.1

      They could cut the entitlement of tax paid super back to 65% and place the amount saved with the Cullen Fund (it seems silly to pay above the 65% level now if one cannot afford the 65% payout level later because of a lack of Cullen Fund build up). The committment is to pay 65% of the net average wage now and in the future – if we cannot afford to pay above 65% and remain in surplus and or save for the future cost ….

      They could allow the Cullen Fund managers to borrow money for Fund investment when the government does not give them any or enough money. The only reason for this would be that the government would avoid the interest cost of bearing the debt and the cost of the debt would be easily covered by the dividends earned each year by the Cullen Fund). The downside would be less return for the Fund, the upside – at least they have money to buy assets while they are cheap (and buying now, even on borrowed money, is when you are not selling for 20 years going to result in a positive return).

  15. SPC 15

    Something which needs review is the misleading way the government accounts are presented in the media – shown to be in a $7.7 billion deficit for the 9 month period (after a pre-election forecast of a surplus).

    The way our accounts operate (including rise and fall in assets) the surplus in any growth period is exaggerated by a rise in asset values and any decline in asset values exacerbates the result in a recession. The extent of this swing, to and fro, is only going to increase with the increasing value of the assets funds.

    Already we have witnessed a build up of pressure for tax cuts partly because of the former rise in the asset value funds. To the extent that the way the accounts are currently structured place governments under electoral pressure to make poor decisions, there should be a change. Otherwise the current government which now blames the former government for spending too much (and being too generous in tax cuts 2008-2011?) might now over-react in the recession (as asset values fall) and make poor decisions on government spending levels.

    The important fact before making spending and revenue decisions is the long term trend and this should be made as clear as possible to the public.

    So there should be an attempt to use a simpler form of presentation the public.

    A financial statement – (government/household) budget in surplus or deficit.

    A balance sheet (assets/debts) – net gain/loss (Funds).

    ACC and the SOE reflect the “gray” area. Asset valuation and operating results needing to be separated.

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