Some Super Facts

The Dominion Post appears to have a front page jihad against the Government. On Friday their front page boomed that it was the slash and burn budget, with holocaust fire type illustrations on their billboards.

Yes the budget that (despite the global recession) protected every existing social entitlement, boosted health, education and justice spending, and cancelled future tax cuts was headlined “slash and burn” as if it was the 1991 Mother of all Budgets. It has been years since I saw such a misleading front page. There are many criticisms you can make of the budget – but calling it slash and burn is not one of them. Disgraceful.

Then on Saturday the Dominion Post cries out “Who will pay for our super?“, saying there will be a $37 billion gap in the Super Fund in 2030, making future superannuation unaffordable.

This is economic illiteracy on two fronts, and I will detail both. The first is ignoring that borrowing to contribute to the Super Fund will equally make future superannuation unaffordable, and the second is what proportion of future superannuation is funded by the 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.

But let us look at what the cost of those contributions would have been. 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 – less than 1/4 of the $37 billion cited by the Dom Post.

An extra $29 billion of debt (costing $2 billion a year more in interest) makes future super almost as difficult to pay for, as having $37 billion less in the Super Fund.

And if we get a credit downgrade, leading to higher interest rates, you could end up with debt rising by far more than the shortfall in the Super Fund. Likewise of the Super Fund does not meet targets, you can end up with less money.

What the Dom Post failed to explain, is that what threatens future superannuation is not how much you invest in the Super Fund, but the level of economic growth New Zealand has. The $50 billion wiped off the economy is what has created the problem. You can not grow money – you need to earn it. The solution to future superannuation is increased economic growth – something worth remembering.

Treasury have done a useful report on the impact of the suspension of contributions. Now this only looks at the Fund, not at the overall crown accounts with the impact of an increase in gross debt. But even putting aside the debt issue, the viability of future superannuation is not greatly changed:

In 2050, without a contribution holiday, the withdrawal from the Fund would have paid for 24% of the increase in net NZS expenditure (to GDP) compared to 2009 (or 11% of nominal net NZS expenditure in that year).

This means that in 2050, the Fund would pay for 11% of superannuation, and current taxpayers pay for 89%.

In 2050, with an eleven‐year contribution holiday, the withdrawal from the Fund would pay for 18% of the increase in net NZS expenditure (to GDP) compared to 2009 (or 8% of nominal net NZS expenditure in that year).

And with the contributions holiday, it means that in 2050 current taxpayers will be paying for 92% of superannuation, as opposed to 89%.

So remember this. Even if you discount the reduction in debt and finance costs by suspending contributions (which you shouldn’t anyway), the long term impact is that future taxpayers have to pay for 92% of superannuation, instead of 89%.

So when the Dominion Post bleats on its front page, who will pay for our superannuation, the answer is future taxpayers – as always.

So again, for those who are really slow:

1. It is the lack of economic growth, not the decision to suspend Super Fund contributions, that most impacts the future affordability of superannuation.
2. The suspension of contributions will merely mean that the percentage of future superannuation not funded by the Fund will increase from 89% to 92%

Phil Goff’s (and the Dom Post’s) insistence on borrowing to save is bizarre. Think of the analogy if you are a household.

You earn $60,000 a year. However your living expenses comes to $70,000 a year. You have a $10,000 a year shortfall. Due to this shortfall you are not making any  repayments on your $200,000 mortgage. In fact you are having to borrow an extra $10,000 a year against your mortgage to cover your living costs. Now your house is worth only $350,000 so you know you can’t keep borrowing for much more than a decade before your credit runs out.

Phil Goff’s brillant policy is that you should borrow an additional $2,000 a year and invest it in overseas sharemarkets. That a household that already is borrowing $10,000 a year, is unable to make repayments on its mortgage, is being charged compounding interest – should borrow an extra $2.000 a year.

And Goff claims this will make your household more secure, as it will provide security for your retirement.

Now you might think – wait – we are going to lose our house if we don’t eventually start earning more than we spend. But Phil is saying no need to worry about that.

Now for those of you who agree with Phil Goff, I have good news for you. You as individuals can follow his advice. The Government has decided not to follow Goff’s advice – but you can.

So here is what you should do if you beleive Phil Goff. Head down to your bank manager. Show them your overdraft, your credit card debts and your mortgage. Explain to the bank manager that yes you are spending $10,000 a year more than you earn. Also explain to him or her that you want to increase spending even more, even though your income is unlikely to improve for some years. But then most of all explain that you want to borrow some more money fro the bank, so you can invest it on the sharemarket.

The manager may be hesitant, but explain that you are sure you will make more money in the long run. And offer to mortgage your house further to pay for the extra borrowing. So long as you offer security the bank will eventually agree.

Then after having extended the mortgage on your house, go off to your investment advisor and tell them to invest it in a fund that mirrors the Super Fund.

Now I don’t want to hear any excuses about why you can’t do this. If you want the Government to do this on your behalf, you should have the courage of your convictions and go do it yourself.