June 9, 2009 8:57am by David Farrar

Littlewood on Super

From the post-Budget rhetoric, it appeared the National-led Government’s first Budget had struck at the heart of future retirees’ security. Here is what Phil Goff said:

“And the biggest dishonesty is to talk about a commitment to superannuation because there won’t be any money to pay for it – they’ve taken away the certainty New Zealanders rely on.”

According to Mr Goff, “[T]he net result will be that future entitlements to super are put at risk.”

After a week of headlines, let’s look at Labour’s claim. Was Mr Goff right? No, he wasn’t even a bit right.

Not even a bit right.

Now is the time to be putting money into share markets, he suggested, when markets were at their bottom.

Really? There is in fact no guarantee that markets haven’t further to fall. The super fund will be doing really well if, in the next few years, it recovers the losses it has already suffered. All fund managers are in a similar situation so that is no criticism of the fund’s guardians (they were doing what they were asked to do). But the question is, do we really want to borrow $2 billion a year for the next 10 years and put it all into sharemarkets in uncertain times?

If the US economy has another crash in five years time, and agains billions of dollars gets wiped out of funds, will Goff then insist we borrow even more money to invest into the US economy?

It’s scaremongering to suggest that the incomes of future retirees are put at risk by last week’s decision. Task forces of the 1990s concluded that New Zealand is relatively well placed to afford all the costs of an ageing population, including pensions and health costs.

Taxes will increase because the number of retired people will about double but even then, in 50 years, New Zealand will probably be paying quite a bit less than some countries are paying today for their retired populations.

The talk of a crisis, is just talk.

New Zealand can afford New Zealand Superannuation with or without the New Zealand Superannuation Fund, so we don’t have to change superannuation just on account of the Budget’s decision to suspend payments.

To suggest otherwise is to ignore the major independent reviews of 1992, 1997, 2003 and 2007.

That doesn’t mean we have to preserve New Zealand Superannuation in all its respects for the next 50 years. In fact, the country needs a proper, research-led debate on whether the scheme that was set up, essentially, in 1938 is the one we should still have in 2050.

A research led debate would be nice.

There are still cash deficits to finance, so why not sell the fund’s assets to finance these?

This is a risk issue for the Government’s balance sheet – we know the cost of debt but we don’t know what the super fund’s assets will be worth in one or 10 years’ time. In theory, they should be worth more than the accumulated cost of debt, but that hasn’t worked over the last seven years.

Here Michael and I differ on our views. I agreed the Super Fund could be wound up. Higher economic growth will do more to make future superannuation affodable, than the Super Fund.

But I would split the Super Fund into individual KiwiSaver accounts – so it gives people a boost in their private retirement savings.