OnPoint by Keith Ng

127

The Super Fun(d) Shell Game

Borrow to save? Not saving so we'll have more money? WTF?

National is saying that cutting contributions to the NZ Super Fund is a good thing because it'll save $19.5b in debt over the next 14 years, while Labour says that this is a bad thing because it takes $35b off the value of the NZSF in 22 years.

Naturally, both are true – they're just completely useless pieces of information.

We're comparing between two options: a) Fund NZSF and let debt go up or b) Don't fund NZSF and let debt go down. As Kiwiblog suggests, we need to know the cost of both.

For those of you interested in spreadsheets, it's here. For those of you who are not, here's the skinny:

In 2031, if we contribute to the NZSF at pre-Budget levels, we'd have $124b in the NZSF.

In 2031, if we take a NZSF contribution holiday as prescribed in Budget 2009, we'd have $86.5b in the NZSF, and we'd have $14b less debt (methodology below).

This means that, by suspending NZSF contributions, we'd be $23.5b worse off by 2031.

Kiwiblog and the DomPost were way off because they didn't take into account the fact that NZSF earnings are taxed. The more that goes into the fund, the biggest it gets, the more it earns and the more taxes are returned. This wasn't included in the Treasury backgrounder that Farrar shanghaied because it didn't deal with tax or debt. But the lost tax revenue adds up to a lot: $16b by 2031. That's why it's so much more than the $8b difference that Farrar suggests.

I don't think Bill English wiped $23.5b off the books for shits and giggles. So WTF is going on? The NZSF offsets the impact of debt on the current accounts, so that ain't it. But it doesn't necessarily offset debt for our exposure to the international credit market... which would be something that S&P had on their checklist.

So it was, at the very least, partly done for the benefit of the credit rating agency. But $23.5-friggin'-billion to appease *one* credit rating agency? Surely there must be more to it than that. I don't really know why. My working hypothesis is that a government in the future would have a strong argument for reducing Super eligibility if the Super Fund was dry; the same government, if faced with mounting debt instead, would have to explain why Super should be first against the wall.

So this is National laying the tracks towards a future cut in Super eligibility, albeit doing it spectacularly expensively. I'll try to get some answers from English during the week. Hopefully, a journalist who is paid to do this can beat me to it.

(To journos: Look at this Treasury model. Line 34. This is how much the Crown loses in tax revenue because of the contribution holiday. This line is not counted in the fund balance because it comes *out* of the fund balance. It's about $10b gross, and $16b by 2030/31 if you include interest.)

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That's the public service part. And now, for your amusement and mine, a fisking of Kiwiblog's “Some Super Facts”, with a lot of gratuitous swearing:

1.

Phil Goff’s (and the Dom Post’s) insistence on borrowing to save is bizarre.”

Fucking hell, Farrar, even by your own calculations, investing in the NZSF (that's “borrowing to save”) comes out on top by $8b. On what planet is a choice that results in $8b more considered “bizarre”? Sure, there is an argument on what are appropriate levels of debt exposure, but the onus is most certainly on English to explain why an option that loses the country money is the better one.

(As discussed above, the $8b figure is way too small.)

2.

“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.”

Um, you forgot 11 years. After a 11 years contributions holiday, we'll need to spend the following 11 years on contributions overtime (coined here first!), where we have to put an extra $13b back into the NZSF to partially make up for what we lost during the holiday.

However, you also forgot 11 years of compound interest, so you've actually underestimated the cost of borrowing quite a bit. (Until you count the lost NZSF tax revenue, as discussed above. Then you're back to being wrong the other way.)

3.

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.”

Your analogy is stupid. Would you like to know how stupid your analogy is? I will illustrate it with an analogy of your analogy:

You earn $60,000 a year. Lex Luther aims a $290m death-ray at your $350,000 house. He threatens to destroy your $12,000 house (revalued after Lex Luther aimed a death-ray at it) with you and your family in it unless the government contributes to the NZSF at the Budget 2008 rate. You and your family can't move from the couch, because you're sitting on a dead-man switch which would activate if the total weight (in whole numbers) of the persons on the couch did not equal a prime number. The members of your family weigh 89kg, 72kg, 45kg and 35kg. If the switch was activated, it would send an explosive-laden train with twenty-two orphans who would all grow up to discover the cure for cancer into another explosive-laden train filled with twenty-three property speculators.

Superman was disestablished by the Razor Gang. The average yield for 10-year Government bonds is assumed to be 6%. There is a kitten in your basement. It is very cute.

This demonstrates that the contribution holiday would lead to kitten death.

More seriously though, your analogy is crap because:

a) Your person has a debt that's 330% of his annual income. New Zealand has a debt that is 8.7% of GDP.

b) Your person has an annual deficit that's 16.7% of his income. New Zealand's operating deficit is 3.3% of GDP.

c) A person who invests $2,000 probably pays more fees, proportionally, than an institution that invests, say, $20,000,000,000. Probably.

d) A mortgage for a person earning $60,000 is probably more risky (and therefore more costly) than a loan to the Government of New Zealand. Probably.

e) I'm pretty sure that New Zealand will still be creditworthy in 2019. I think that would be the case – and I don't say this lightly – even if we had Gerry fucking Brownlee as the Minister of Finance for the next ten years.

f) Unlike governments, households... oh fuck it, it's just a really crap analogy, okay?

4.

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... $19.5b plus interest is a huge amount of debt to be racking up, but $37.5b in the Super Fund is practically insignificant, because you've expressed it as a percentage of total Super spending per year?

*That's* your magic trick?

(Methodology: Debt is assumed to incur 6% interest per annum. 100% of reduction in NZSF contribution is assumed to go towards debt repayment (i.e. Reduces debt). 100% of reduction of tax revenue from the NZSF (as a consequence of a lower NZSF balance) is expected to be funded out of debt (i.e. Increases debt).)

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