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The $8 billion robbery

Written By: - Date published: 3:44 pm, May 31st, 2009 - 42 comments
Categories: bill english, economy - Tags:

On Q+A this morning Guyon Espiner interviewed Bill English. Guyon had received papers from a treasury official that apparently show the cost of cancelling the government’s contributions to the Cullen Fund for 10 years will be $8 billion over and above the cost of borrowing to fund the contributions. $3.5 billion from lower value of the Fund and $4.5 billion from lower tax take. The Cullen Fund is one of the largest tax-payers.

Which makes a lot of sense. The long-run cost of borrowing government is 6% a year according to Treasury. That’s lower than the long-run return on the Cullen Fund of 6.57%, after tax (and on top of that there’s the tax that flows to the government). Even if the exact numbers are different in the end, the long-run return for a managed fund like the Cullen Fund is going to be higher than the interest rate on essentially risk-free debt issued by a government.

Put on the spot English couldn’t just say ‘Treasury’s wrong’ so his response was ‘well, the Cullen Fund lost money last year and was making 14% a year when it started’. Yeah, as Guyon pointed out, that’s why it’s called a long-run average. Some years are good, some are awful. The long-run is going to be better than the cost of government borrowing.

So, English had to try another angle. ‘If you have a mortgage and hire purchase and credit card debt , and you go to your bank manager and say ‘I want a hundred grand to play on the stockmarket’, see what kind of answer you get’.

Firstly, the government is not heavily indebted like English describes it. Our debt is actually very low by international standards (Ireland’s is over 45% of GDP, UK and US even higher, many OECD countries have more than 100% of GDP debt).

Secondly, the argument is basically that you shouldn’t have savings on borrowed money (as English said in his speech on Friday). Well, that’s plainly dumb. Anyone who has a mortgage and savings effectively has savings funded by borrowing. What’s more, if you extend English’s argument we should liquidate the Cullen Fund altogether, along with the ACC Fund, the EQC Fund, and any other financial assets we have to pay down our debt. Sometimes having an asset while also having debt makes sense. Especially when, like the government with the Cullen Fund, your expected return is greater than your cost of borrowing.

English is going to need to come up with a better excuse for starving the Cullen Fund to death and quick. Because right now it looks like he’s ripping off our country to the tune of $8 billion because of an ideological opposition to ensuring the future of superannuation.

42 comments on “The $8 billion robbery”

  1. rave 1

    National’s ideological opposition to public funded super is based on the profit motive. The bosses keep their ideology in their hip pocket. English figures that the loss of $8 billion to workers in retirement is a gain of $8 billion to bosses profits instead.
    They object to ‘savings’ going to pay for workers retirement when these savings could be creamed by the banks and siphoned out by multinationals.
    Workers are expected to save as private individuals out of their measly wages to pay for their retirement or work until they drop.
    These guys are bosses. English is a farmer/bankster. He has no interest in seeing the social wage increase at the expense of profits.

    • indiana 1.1

      If individuals can’t save because of their measly wages, where do they find money for Sky TV subscriptions?

  2. cocamc 2

    so why did the legislation get written to suspend funds, surely Cullen knew something about the pro’s and con’s of borrowing to invest in the markets to have that provision made

    • Eddie 2.1

      Because it would be insane not to give the government the power to suspend payments in truely exceptional situations – war, major disaster, etc.

      That’s a pretty last ditch defence there, mate.

      • Pascal's bookie 2.1.1

        “That’s a pretty last ditch defence there, mate”

        Yeah.

        “Hey look 8 Billion dollars”

        “Yeah but the legislation says we can, and Cullen wrote it, so um, gotcha?”

        “Not even close. 8 Billion dollars short in fact.”

        • croong 2.1.1.1

          Haw haw haw

          • Pascal's bookie 2.1.1.1.1

            If you’re going to keep changing your handle you should try also changing the writing style. I’d suggest ‘smart’, or at a pinch, ‘not retarded’

            captcha: wilting doctor. Haw Haw

  3. Kelsey 3

    There are a number of things wrong with this article:

    1. “past returns are not an indicator of future performance”

    2. You use an analogy of someone with savings and a mortgage. Bad analogy. The only reason to do that is to retain some “buffer” money in case you have an emergency. These days people manage that with revolving credit, there by reducing the principle. Having the buffer costs money – specifically the difference between the mortgage rate and the post-tax savings.

    3. You ignore the risk profile, which is critical in analyzing investments.

    There are good reasons to criticize this budget, but this isn’t one of them. The point that nobody seems to be discussing is that the superfund is all about saving enough for future liabilities. Those liabilities have not gone away. If the liability were “on the balance sheet” the choice to put money in vs. not put in doesn’t change the total liability on the balance sheet.

    So by ceasing payments into the fund (which I support), we have not made a difference to our future liabilities. Given that govt spending is currently structurally higher than govt incomes, fundamentally something will need to change, sooner or later – reduced spending, higher taxes – or a larger economy (increased productivity). Fiddling with the Cullen fund is tinkering around the edges.

    CAPTCHA: The twigging

    • rave 3.1

      Yeah arent you being disingenuous? Liability?
      Its only a liability until Government can swing its repeal. a la Muldoon.
      Like preparation for privatisation elsewhere it is preparation for private pensions. Or raising the retirement age. Or shooting us at age 70.

  4. Bill 4

    Isn’t it odd that we, the workers, are asked to (and do ) invest a proportion of our wages into speculative schemes founded from the proceeds of the thievery perpetrated on us on a daily basis?

    Wonder how far a bag snatchers defence would get if they argued that although they had stolen the money, the victim seemed to be unaware of it and anyway, it was okay because they would use it to fund visits to the casino and return any resulting profit minus ‘administration costs’ to the victim?

    What if the victim could choose from a range of casino gambling games that moderated the level of potential returns and potential loss?

    I’m no lawyer, but reckon any variation on the above would be a lead balloon defence. And yet….

  5. wibblewithoutapause 5

    I grew up a Thatcher’s child. Saw the false promises from the UK Tories playing on peoples greed and delivering, to a small number of risk-takers, large wealth but the majority the loss of a real state pension and in many cases loss of any private retirement savings too. I saw first hand my working class parents work hard for everything they got and saw them lose it with redundancy when globalisation kicked in and jobs were off shored, bad financial advice for their meagre savings, and now minimum retirement since their private pensions didnt pan out like they were promised when taken out to supplement the lack of future planning for state pensions.

    WIth my experience of 80s Britain behind me I believe in a social contract between state and the individual. I am childless but am happy to pay the requisite tax levels to support the state benefit for parents, unemployment provision, health and welfare for everyone, education of the young. I I would like to think I would be able to call on the younger generations to provide a little for me in the future when I finally retire. If countries are being governed well then they will expand and their societies become more affluent through each generation.

    Why is a state pension system considered to be so wrong in the minds of the right wing..? The previous generations help the following generation grow up in a secure place so that the country grows and develops. Is it that bad for society then to help by paying into an ongoing social fund for retirement of the generation before them.

    The lack of ongoing government investment in the superannuation scheme is frightening. Isn’t a large shared pot better than many small investment pots? Given the dearth of trustworthy small scale financial managers available to the majority, where do you turn to to provide a scheme that may still be solvent in 20-30 years and doesn’t the shared costs of investment amongst many reduce the risks and charges to the individual? Why shouldn’t this be via the state?

  6. tsmithfield 6

    $8 billion is a mere projection. It doesn’t necessarily mean that if the money was invested there would be an $8b profit. If circumstances change, the Treasury projection could well change. Borrowing money to invest in the Cullen fund is mortgaging the future of us and our children for a possible return that carries a lot of risk.

    As someone pointed out on an earlier post, if it is soooo good, why do international lenders lend to governments for a low return rather than investing directly into shares themselves?

    Risk v Return people.

    If you’re borrowing the money, then you need to have a lot more certainty about the return than you would if it was money in the bank being invested. This is because the borrowed money plus interest still needs to be repaid if it all goes pear-shaped.

  7. albie 7

    So lets get this straight. You are arguing the government should be borrowing money at 6% to generate a 6.57% return. Are you serious or is this a joke? If the returns are guaranteed in the long run why stop at borrowing $2b? why not $4b or $10b?

    • Zetetic 7.1

      Just because you can make a profit borrowing a little more doesn’t mean you should borrow up to any level. Borrowing for the Cullen Fund would add a few % to gross debt in return for an even greater improvement to gross assets. We don’t want gross debt to get too high without good reason though.

      I thought you rightwingers were meant to be the economically smart ones. YOu don’t even understand the basics.

      • SPC 7.1.1

        I agree that borrowing has to be affordable.

        The thing is, buying is cheap now (and borrowing is cheap now) and if we simply borrow at $2B pa for 10 years the stock values would have recovered by then and borrowing costs will be higher (the consequences of government debt rising around the world).

        Cash is king now and the Super Fund with $12B in assets has the ability to borrow (and repay interest from the earnings flow of its assets). Once the ability to develop savings for the capital investment is gone the next stage is to borrow to maintain growth. Borrowing affordable because of the historic capital invested (this is how businesses operate).

        This would not require any financial assistance from government.

        It should be able to borrow up to half its asset portfolio (50% capital/50% debt financed). A first step would be to borrow 6 to $7B now and ivnest that (thus 1/3rd of the asset portfolio would be fianced by debt). If the Fund forecast of its $12.5B rising to $18B over 5 years is right, then 18B should rise to 25-27B in 5 years.

  8. Nickc 8

    Ha robbery? Getting the money used to pay for the super fund is far closer to robbery than not putting money into the superfund. One is actually activily stealing something someone has earned. The other is simply not giving someone free stuff.

  9. tsmithfield 9

    I agree albie.

    On the news tonight they actually gave the interest rates.

    The government borrows at between 4% & 5% (or sometimes higher). The projected return on the Cullen fund was around 6%. That is not a safe profit IMO. I certainly would not borrow to get that sort of return, especially on dodgy Treasury projections.

    It also says something about the quality of investment management they are getting. As I said in another post, these are fund managers employed to manage other peoples money. If they were so damn good at this, why aren’t they all self-made millionaires by now? A 6% return is pathetic. I would be wanting around 20% or better on this type of investing before I would consider it worth putting any money in at all considering the risk.

    I have seen in earlier posts that some here are having orgasms over the fact that the fund has recovered $1 billion or so recently. Lets not lose sight of the fact that it has lost a lot more than that recently, so it is still well down.

    I actually find it quite amusing that those here with a socialist bent are suddenly becoming rabid capitalists (when it comes to other peoples money). However, it was not too long ago when there was a plethora of articles here about how the capitalist system had screwed the world. Talk about having your cake and eating it too.

  10. Pascal's bookie 10

    I would be wanting around 20% or better on this type of investing before I would consider it worth putting any money in at all considering the risk.

    Oh yeah. fascinating. Why twenty, rather than twenty five, or twenty plus a pony?
    The return for the risk is priced at what it is, that’s the way it works. There aren’t twenty percent options available for this level of risk. At twenty percent return the risk would be much higher. What the hell are you talking about? And what do you mean by ‘this type of investing’. Sovereign funds? Take a look around, plenty of countries have got them. Those that set them up a while ago, had a field day last year buying up the collapsing private sector assets in the US and other places.

    I actually find it quite amusing that those here with a socialist bent are suddenly becoming rabid capitalists

    OK, define socialism as you are using it here, and capitalist, and give me an example of an actual poster or commenter that you think your criticism applies to. Do you think the Labour party is of a socialist bent? They created this fund, so your accusation looks pretty stupid already.

    Learn what ‘social democratic’ means, and ‘mixed economy’.

  11. Zaphod Beeblebrox 11

    I doubt that National will be able to sustain this in political terms for very long.
    As Arsineau said on Q and A this morning- the one thing that governments are expected to do is look after the elderly.

    • Steve 11.1

      I think what she actually said was that in politcal surveys most people felt governments had a responsibility to look after the elderly. There is a subtle difference. This government thru Key, says it does but the likes of English et al behind the scenes don’t feel this same responsibility.

      • Zaphod Beeblebrox 11.1.1

        I’m sure they do take their responsibilities seriously, otherwise why go to so much effort to get elected. Personally, I’d prefer they lifted their horizons a little higher.

  12. SPC 12

    The Super Fund should borrow up to its debt free value.

    Thus 50% capital (now $12.5 billion) and 50% borrowed funds. The return (dividends, rents etc) from the $25B would cover the cost of borriwing 12.5B
    Thus the capital gain would be derived from the $25 B total. This should be done while there are good buying opportunities.

    Thus the Fund can maximise profits which are there to be made, but within its own capacity to sustain the risk (on-going cost of the debt).

    A more conservative strategy would be to borrow only 1/3 of the fund value (thus $6-7 in the short-term).

    I have no confidence in their (honesty, saying no changes on Super during their term in office while leaving future governments with a hospital pass) capability to do the right thing in economic management, more especially where they are agenda driven.

    The idea that 40% of the 12.5 B should be invested in New Zealand is a sure way to diminsih its growth potential and ensure tax paid super is unaffordable. Its just a way of boosting local shares held by National Party friends – its just a boost to private profots. Shame.

  13. Anthony Karinski 13

    There’s no reason to borrow for the Cullen Fund specifically. The government could easily fulfill it’s payment from non borrowed sources. They could choose to borrow money for other things, like the cost of the recent tax-cuts or the Waterview connection. Alternatively they could cancel these and put the savings in the Cullen Fund. Shows the government’s priorities. Tax cuts for those least in need: 1 Old blue collar workers: 0

  14. gomango 14

    Here’s a quiz….

    Choose a few asset classes – lets say NZ Govt bonds, NZ Equities, Global Equities, US Equities. Could be anything. Data from 1991 – guess what the highest returning asset class over that entire period is?

    (I’m using EFFAS NZ Govt bond index, NZX50 and certain predecessors, MSCI Global, S&P500 but pretty much any index tells the same story).

    Yes – NZ govt bonds have the highest returns for those market betas. Check out the data, it’s very easy to see. Thats the dirty secret of the funds management industry. On average, the risk adjusted return for any risky asset class has to equal the risk free return. Add in management fees and particularly performance fees and the risk adjusted return for risky asset classes will often be less than the risk free rate. We live in an arbitrage free world. You can find evidence of certain excess risk premia that tend to exist ie small cap premia for instance but this is most likely due to selection bias and survivorship bias.

    The best analogy for taking overweight positions in risky assets is the old options analogy – which makes sense as portfolio theory is essentially the selling of put options on risky assets – the analogy is “snatching nickels from in front of a steamroller.” Yes you can make money most of the time but every now and then you get your arm ripped off.

    Do a portfolio optimisation using long run historic data, with unconstrained allocations and a NZ funded investor will always get a portfolio constructed alomost entirely of fixed income assets.

    The argument about borrowing to invest only makes sense if the quality of your management or manager selection can consistently beat the average manager by a margin greater than the fee burden. Yet almost every piece of research I have ever seen shows that the number of managers who actually perform better than the market in the long run is exactly the number you’d expect to do so in a statistical sense. There are also studies that show the best indicator of a good performance by a manager next year is a bad performance last year, and vice versa. A Random Walk down Wall Street.

    The other point most people seem to miss about sovereign wealth funds is that there are very few globally that work like NZ and Aus, ie funded out of general tax revenues. Most sovereign wealth funds are either commodity revenue stores (Dubai, Abu Dhabi, Norway, Brunei, Saudi Arabia, Alaska, Alberta, Kuwait, Iran etc), or created from Foreign Exchange sterilisation (Singapore, China, Taiwan, South Korea, etc). Our situation is actually unusual in global terms which is why when it was set up under Cullen great care was taken re the mechanism to delay contributions in times of budget deficit. The current debate reminds me of other garbage in garbage out public sector finance debates in the past like the extinction of government debt markets in (variously) NZ, Aus, USA, Canada, Germany etc. Look at it now.

    The right debate to have here is not about contributions in times of budget deficit – even Cullen would likely delay them in the current environment. The right debate is about the best shape of revenue collection and expenditure, but that is a little difficult when the only parties on the record with detailed budget numbers are National (obviously), Act (ignore them – worthy objectives but socially too painful to implement) and the Greens (again noble intentions but unrealistic to 85% of NZ’ers).

  15. OhPlease 15

    This raises the question of why English did not raise taxes to pay into the Cullen Fund ?

    In my opinion the Cullen Fund was always political rather than economic.It was designed to make it politically harder for echo boomers to renege on baby boomers’ entitlements. For this reason continuing to pay in to it gives retirees the ability to say “my taxes pad for the super- and I am therefore entitled to it”.

    The analogy that is being used to equate borrowing by Government to a household to investing in shares is completely spurious.

    Unlike firms, households etc, revenue for Governments is not capped. It is completely in their hands whether they raise tax rates or raise borrowing. A Budget is about choices over tax, borrowing and spending. Our tax rates are not that high. Although the burden is disproportionately on some high income tax payers, the reason is not that we have high EMTRs but that we have a unequal underlying income distribution. Given that life expectancy increases with wealth, taxing to pay for Cullen Fund is almost a user-pays charge – the richer who pay now will have a longer retirement.

    The question is not whether we should borrow to pay for the fund, but why we don’t raise taxes to pay for the fund. Since most of the tax burden falls on those who will retire in the next 20 years, seems a very reasonable thing to do.

    • aj 15.1

      last para above: exactly.

      • RedLogix 15.1.1

        Although the burden is disproportionately on some high income tax payers, the reason is not that we have high EMTRs but that we have a unequal underlying income distribution.

        Some very good observations in this comment. Welcome to The Standard; looking forward seeing more from you.

        Actually this whole thread has been good reading.

    • Zaphod Beeblebrox 15.2

      The question is why is it that we don’t have enough money to give everybody a dignified retirement?
      It can’t be that we overpay our doctors and teachers- they leave to go O/S for more pay.
      It can’t be that our schools and hospitals are over resourced, our hospitals struggle and our school donations are increasing.
      It can’t be that we are over governed and have too many public servants. We only have 2 tiers or government and our ratio of public servants to population is lower than OZ.
      The only explanation could be that we don’t raise enough tax- we don’t have a CGT and we don’t have stamp duty for property transactions, even without these taxes we wouldn’t need much of an increase of marginal rates to properly fund retirement.

  16. tsmithfield 16

    Pascal:

    “Oh yeah. fascinating. Why twenty, rather than twenty five, or twenty plus a pony?
    The return for the risk is priced at what it is, that’s the way it works.”

    You obviously don’t understand the concept of risk and return. The return determines how quickly you can get your original capital amount back out again. The quicker this happens, the lower your risk. You probably also want to consider the NPV v NFV of money, as you will want to get the inflation adjusted amount back. In the case of borrowed money, you also will want to get the interest paid on the principal invested back as well to completely cover your risk.

    To keep things simple, lets just consider recovering the original principal. At 20% the capital will be returned in 5 years. At 6% it will be returned in nearly 17 years. When adjustments are made for inflation and recovering interest paid, at 6% return it could take 25-30 years to get the original sum back.

    The recent recession has been described in a once in 60 year event by some commentators. So, by accepting 25-30 years to get your money back you are accepting a reasonably high degree of risk that there could be another once in 60 year event in that time frame that wipes out your investment. Especially considering the tenuous situation with oil etc over the coming period.

    So, I stand by what I stated. 6% return is pathetic and unacceptable for this type of investment.

    Pascal:

    “Do you think the Labour party is of a socialist bent? They created this fund, so your accusation looks pretty stupid already.”

    Given my analysis above, then, yes. I think it was a stupid investment decision.

    • Zaphod Beeblebrox 16.1

      TS- I agree about the risk, but doesn’t risk even out over an extended period?
      Surely an objective of the government should be to encourage more saving, less spending. We could use this saving to reduce the current account deficit and free up capital for investment in productive enterprises in NZ.
      Reducing taxation and at the same time reducing our savings for retirement would have to be antithetical to this.

    • Pascal's bookie 16.2

      The return determines how quickly you can get your original capital amount back out again. The quicker this happens, the lower your risk.

      I’ll happily admit to not being anything like an expert on this sort of stuff, but it was my impression that higher returns were related higher risk, which seems to be the opposite of what you are saying. I had thought that to get a 20% return, you had to be prepared to run a higher risk of also losing capital if the investment went bad for whatever reason. Certainly if one could guarantee a 20 % return, then one could obviously get a much quicker 100% return from the capital invested. If you are saying that this sort of investment should be put into riskier high returning options because given the time frame a few bad years won’t matter, as they can be made up in the good years, then I understand, but you don’t seem to be saying that. Where am I going wrong?

      Given my analysis above, then, yes. I think it was a stupid investment decision.

      That wasn’t the question. Funnily enough, in your other comments about what we should be doing with the fund you take a far more ‘socialist’ line, with the govt. effectively hoovering up parts of the economy.

      With regard to investing overseas is there not some merit in the idea that the returns garnered have the benefit of not being extracted from our domestic economy but someone elses?

  17. tsmithfield 17

    Zaphod “We could use this saving to reduce the current account deficit and free up capital for investment in productive enterprises in NZ.”

    Yes, I think this is a much better strategy than the risky Cullen fund.

    We could invest the money in SOEs that could provide infrastructure services and charge market rates for these that are passed on to the consumer. Thus, consumers pay no more than they would have otherwise paid and the country builds up very safe, profit producing enterprises.

    For instance, we could have an SOE that provides sewage services for the country. Scales of economy, planning etc should allow them to provide services at a cheaper rate than councils individually. The SOE could charge the councils who would pass the cost on through rates, at hopefully a cheaper rate than consumers pay now.

    • Zaphod Beeblebrox 17.1

      No problem with infrastructure, but what about stuff like helping farmers and tourism. For instance, we could increase food production massively by lending for farmers to help them build dams (kiwis seem to think we don’t need them for some reason) thereby reducing losses during droughts.
      Read about the Chinese being keen for healthy, safe food products- the Aussies are pouring massive amounts of money into food research. How about a food institute for researching new products, we could not only export the products but the patents as well.

  18. tsmithfield 18

    Zaphod “but what about stuff like helping farmers and tourism. For instance, we could increase food production massively by lending for farmers to help them build dams (kiwis seem to think we don’t need them for some reason) thereby reducing losses during droughts.”

    Would have no problems with this either so long as “risk and return” principles are followed. I would prefer to see the funds invested in our own country where we have much more control than in the overseas environment where we have little control.

  19. gomango 19

    OhPlease – thats exactly the point I was trying to make. The argument isnt about whether we should contribute to the cullen fund in times of budget deficit. The answer to that in rational economic terms is no and always will be on a risk adjusted, cost of equity basis. The structure of the fund is designed so that in times of budget deficit contributions are withheld. That is not a political , left versus right argument.

    The question to debate is as you point out is what is the right mix between governement revenue and expenditure. We cant have it all ways. We can’t have stimulus a la the US and UK (which is incredibly inefficient and gone straight to the people lamented on this website – bank and business owners with political clout. What homeowner is getting direct assistance via a large check from the US Treasury?), we cant also have large tax cuts, we can’t also have 8% growth in public sector spending, we can’t also have massive infrastructure all at the same time. Something has to give – the two easiest things are Cullen fund contributions following the formula set by D Cullen, then tax cuts, then unconstrained public sector spending growth etc.

    The US and UK stimulus packages will be seen with history to be follies – necessary to maintain a functioning bank system but otherwise incredibly wasteful and inefficiently applied.

    And while not dismissing the potential pain of many over the next 18 months in NZ, no projections I have seen for unemployment reach the terrible times we experienced in the late 80’s early 90’s where too rapid adjustments were accompanied by a far less sympathetic social welfare approach than we have now. I’d rather be unemployed now than in 1991 (which is lucky because I am! though I will never draw a benefit, and hence won’t show up in the stats).

    Until there is a bi-partisan approach in NZ to three big issues – superannuation entitlements, compulsory savings and taxation of savings (including capital gains on property investment) we will always lurch from one policy to another, and as a result always – no matter who is in power – need to fund superannuation out of general, current tax revenue.

    Think how we’d look if the cullen fund broken up to individual accounts for everyone in NZ, contributions became compulsory and tax free for individuals, the govt mandated a minimum retirement income which is set off against each persons individual retirement account and topped up if necessary out of general revenue. Leave the cullen fund as the default provider of investment services. When surpluses return the govt can do what Singapore does – every now and then declare a dividend which is given to the individual account holder for their pension fund. And on retirement age individuals can do whatever they like with their money but how about these for options individuals:

    1 disappear into the sunset with their money and receive nothing in superannuation from the govt, unless the individual chooses to buy an annuity from the govt
    2 buy an annuity from the govt with their capital – if this is grater than the super entitlement , well and good. The govt has no additional obligation to you.
    3 buy an annuity from the govt – if this is less than the super entitlement then the govt agrees to top it up to the minimum for life.

    If you have more money than required, then happy days – you don’t need the government anymore in your retirement. If not the govt guarantees minimum super as it does now.

    Set the annuity levels based on 10 year govt bond rates plus say 1% and everyone is happy. Start the retirement end of the scheme in say 25 years to allow people time to adjust and we’d be in a much better place as a country.

    Pretty simple stuff – not much different to what happens now but formalising the situation, encouraging us to save, not taxing at all retirement savings and giving individuals an ownership incentive to look after themselves would be a big step forward.

    • Pascal's bookie 19.1

      We can’t have stimulus a la the US and UK (which is incredibly inefficient and gone straight to the people lamented on this website – bank and business owners with political clout. What homeowner is getting direct assistance via a large check from the US Treasury?)…

      …The US and UK stimulus packages will be seen with history to be follies – necessary to maintain a functioning bank system but otherwise incredibly wasteful and inefficiently applied.

      The bank bailouts are separate from the stimulus packages aren’t they? I mean , they weren’t ‘sold’ as being stimulus, and that’s not what they intended to. It seems silly to judge them, or the idea of stimulus, based on what stimulatory effects and costs the bailouts have.

    • SPC 19.2

      “The argument isnt about whether we should contribute to the cullen fund in times of budget deficit. The answer to that in rational economic terms is no and always will be on a risk adjusted, cost of equity basis.’

      Then why did the Minister of Finance write otherwise in February of this year?

      “Something has to give – the two easiest things are Cullen fund contributions following the formula set by D Cullen, then tax cuts, then unconstrained public sector spending growth etc.”

      The forumla specified by Cullen was not to be pre-determined for a 10 year period. What the government did was determine it had other priorities on which it use any possible surplus in the meantime. My guess is that this National government intends to offer a tax reform programme involving a top rate of tax at 30% during the 10 year period.

      In 1990 they cut benefits because of a deficit and then back in surplus they gave it to middle class tax payers in a tax cut. This government intends to end savings while in deficit and then when back in surplus (or before) hand out a tax cut. Same old routine.

    • SPC 19.3

      “Think how we’d look if the cullen fund broken up to individual accounts for everyone in NZ, contributions became compulsory and tax free for individuals, the govt mandated a minimum retirement income which is set off against each persons individual retirement account and topped up if necessary out of general revenue. Leave the cullen fund as the default provider of investment services. When surpluses return the govt can do what Singapore does – every now and then declare a dividend which is given to the individual account holder for their pension fund. And on retirement age individuals can do whatever they like with their money but how about these for options individuals:

      1 disappear into the sunset with their money and receive nothing in superannuation from the govt, unless the individual chooses to buy an annuity from the govt
      2 buy an annuity from the govt with their capital – if this is grater than the super entitlement , well and good. The govt has no additional obligation to you.
      3 buy an annuity from the govt – if this is less than the super entitlement then the govt agrees to top it up to the minimum for life.

      If you have more money than required, then happy days – you don’t need the government anymore in your retirement. If not the govt guarantees minimum super as it does now.

      Set the annuity levels based on 10 year govt bond rates plus say 1% and everyone is happy. Start the retirement end of the scheme in say 25 years to allow people time to adjust and we’d be in a much better place as a country.

      Pretty simple stuff – not much different to what happens now but formalising the situation, encouraging us to save, not taxing at all retirement savings and giving individuals an ownership incentive to look after themselves would be a big step forward.”

      You and the Kiwiblog host should get a room or form a club.

  20. tsmithfield 20

    Pascal:

    “I had thought that to get a 20% return, you had to be prepared to run a higher risk of also losing capital if the investment went bad for whatever reason.”

    As I understand it, the money invested in the fund is invested as totally unsecured. That is risky in anyones books. 6% is simply not high enough return.

    Pascal

    “Funnily enough, in your other comments about what we should be doing with the fund you take a far more ‘socialist’ line, with the govt. effectively hoovering up parts of the economy.”

    Probably right. However, I don’t see myself as purely capatilist. I take a more pragmatic approach. However, I think any government involvement in the economy needs to be at market rates to avoid distortions in the economy. It would be important to ensure that consumers are not adversely impacted by this sort of move.

    My point is that there is a much more certain business case for investing in our own economy in SOE’s and the like. SOE’s that are providing necessary services have to be very safe, will provide an ongoing return, and provide an asset that could be sold in the future if necessary. Looks a lot better bet than the uncertainties involved in the Cullen fund, and I bet they would provide a much better return than 6%.

  21. SPC 21

    So the risk premium in saving with the NZ Government (bonds) is the highest in the investment world – as gomango claims

    The problem for the Super Fund is of course its ability to take advantage of this is is limited to the level of government debt. Good news, this debt is rising, so why limit investment into the Fund now? Or why not simply demand that the Super Fund lend its $12.5B to the government -then the interest paid would go to the Fund sans tax paid on this income.

    Joking aside, this would imply that we have more reason than other countries with lower bond rates to consider innovative (or just loose monetary policy – free credit to government) forms of finance, as here the comparative inflation cost is lower than the cost of debt. So why our hardline RB policy?

    PS gomango chooses to make his case based on a large fall in stock values – hardly a case for a fair comparison.

  22. SPC 22

    gomango

    “The argument isnt about whether we should contribute to the cullen fund in times of budget deficit. The answer to that in rational economic terms is no and always will be on a risk adjusted, cost of equity basis.”

    Then why did the Minister of Finance write otherwise in February of this year?

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  • New TVNZ chair & directors confirmed
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  • Hutt Road cycle path officially opened
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  • Announcement of new Ambassador to Russia
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  • Kiwis getting higher pay
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  • Significant progress on Regional Comprehensive Economic Partnership (RCEP)
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  • Outstanding public service recognised
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  • NZ-China FTA upgrade negotiations conclude
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  • New Zealand gifts White Horse to Nikko Toshogu Shrine in Japan
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  • High Commissioner to Canada announced
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  • New Zealand and Japan commit to greater cooperation in the Pacific
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