1. New Zealand Superannuation
New Zealand Superannuation (NZS) is a universal taxable pension,
funded largely on a 'pay-as-you-go' (PAYG) basis from general
taxation. The net married couple's rate is set in section 16 of the
New Zealand Superannuation and Retirement Income Act 2001 (the NZS Act)
to be between 65-72.5% of net average 'ordinary time'
earnings. Following a 'side agreement' between the Labour and
New Zealand First parties in 2005, the floor for after-tax NZS was
raised to 66% of the after-tax average wage.
Rates of NZS vary depending on whether the person is married,
single or living alone. From 1 April 2009, NZS at the married rate is
$14,229 p.a. before tax each or $28,458 in total for the couple. NZS is
taxed on an individual basis and is paid without regard for other income
2. New Zealand Superannuation Fund
Section 37 of the NZS Act established the New Zealand
Superannuation Fund (NZSF). It is the 'property of the Crown'
(section 40) and section 43 sets out the basis on which the Crown must
contribute each year. In summary, the formula requires the annual
payment to be the net total of all current pension payments (section 45)
plus an amount that is derived from a rolling 40 year calculation,
intended to partially smooth the amounts that future governments will
need to meet the expected cost of NZS.
The effect of this calculation is that the NZSF has in the years to
2009 received more than the net cost of current pensions. The excess has
been invested by the Guardians of New Zealand Superannuation (the
Guardians) a Crown Entity, established under section 48 of the NZS Act.
This paper discusses the issues connected with the partial
pre-funding of NZS, or indeed any long-term government expenditure, in
the context of the government's overall budget and risk management.
It concludes that pure PAYG funding is more appropriate.
3. Fallacy of composition?
New Zealand has an ageing population. By traditional measures, the
number of "retired' New Zealanders will increase over the next
50 years while those 'working' grow at a slower rate. This is
expected to lead to an approximate doubling of the 'retired
dependency' ratio (the number of 'retired' who are
'supported' by each "working' person (1)). As with
many other developed countries, the net cost of NZS will about double
from its current 4.3% of GDP to about 8% by 2050 (The New Zealand
When the NZSF was established, the government described the change
to the financing of NZS as a 'smoothed pay as you go' way of
providing for NZS rather than the pure PAYG system that has been used to
support the elderly for more than 100 years (see for example Cullen,
2000a). At establishment, the NZSF was expected to build and to reach,
at its peak, 50% of GDP (about $89 billion in 2009 dollars). After the
2009 Budget (see below), the projected peak will now be 23% of GDP in
2056 (about $41 billion in 2009 dollars) when today's 18 year olds
reach the present state pension age of 65 (The New Zealand Treasury,
The 'smoothed PAYG' model sees the government saving for
the future retirement needs of its citizens in much the same way as
households do for themselves. The question is whether this decision
might be based on a fallacy of composition. It may be a good idea for a
household to save specifically for its retirement income needs but it
may not be a good idea to force all households to do that (the
'paradox of thrift'); nor even for the government to do that
on behalf of all New Zealand households.
4. The 2009 Budget announcements
As part of the government's response to the 2008 economic
downturn, the 2009 Budget announced that contributions to the NZSF would
be suspended for about ten years:
For the reasons described below, the past presence of Budget
surpluses was an illusory justification for starting the NZSF; the
expected return of Budget surpluses will therefore be no ground for
resuming contributions in 2020.
5. The NZSF's impact on the government's balance sheet:
the 'hurdle rate'
If the government eventually resumes contributions to the NZSF from
2020, it will effectively be making an investment decision with each
contribution. However, even maintaining the existing assets, as now,
requires the government to make that same investment decision: whether
to hold financial assets or repay debt.
Figure 1 summarises the government's overall financial
position at 30 June 2009.
When the accounts for 'New Zealand Limited' are
consolidated for accounting purposes (as in Figure 1), the NZSF provides
nearly $14 billion on the assets side of the balance sheet. However,
whether the presence of the NZSF can be justified depends on looking at
the government's overall financial position in a 'total
[FIGURE 1 OMITTED]
By maintaining the NZSF's assets as financial investments (and
even resuming contributions in 2020 as is intended), the government must
assume that the return on the NZSF will exceed the cost of new
borrowings it will be making in other parts of its financial activities.
The interest payable on that debt is the 'hurdle rate' in this
The NZSF usually has a statement in its annual reports about its
investment return objective over the long term. Here, for example, is
the 2009 version:
Phrased in these terms, the 'reference point' (the T-Bill
rate) is characterised as one of the two separate return targets. That
is the minimum the Guardians aim for; however, the 'internal
expectation' is to exceed that by 'at least 2.5%' a year.
Describing the T-Bill rate in that way considerably understates its
significance to the government. Re-characterising it as a 'hurdle
rate' is a more accurate depiction. In a 'total accounting
context', it is a target the NZSF must achieve. For the reasons
explained below, to the extent the Guardians miss the hurdle rate in any
year, the government is losing money overall. Further, the 2.5% a year
that the Guardians 'aspire to' is probably an inadequate
margin to compensate taxpayers for the investment risks undertaken by
the NZSF. It should be more than an aspirational target. It should be a
prerequisite to justify the portfolio's existence in the
government's overall balance sheet.
The T-Bill rate over the long-term should be the cheapest money the
government expects to borrow. It is equivalent to a short-term cash
rate. Of greater significance to taxpayers in the context of the NZSF
should be the cost of long-term borrowings by the government. In New
Zealand, the longest-term government securities are 10 year bonds and
the cost of those was 6.35% per annum at 1 July 2009. In order for the
government to justify the existence of the NZSF as part of its overall
activities in the 2009/10 financial year, the NZSF's Guardians must
achieve at least that hurdle rate of 6.35% in that year before the
government as a whole is better off financially. (3) As the
government's cost of debt changes, so too does the hurdle rate.
There is a case to suggest that the 'hurdle rate' should
be after-tax; at present 4.45% a year for a 30% taxpayer. Although the
government pays interest of 6.35%, it collects tax from the lender so
the net cost is after-tax. There seem to be three difficulties with
this. First, if the lender is overseas, the government collects only 15%
in Non-resident Withholding Tax, leaving a net cost of 5.40%. Secondly,
if the lender is a charity, the government would collect no tax. Lastly,
for a domestic lender, if the government hadn't borrowed the money,
the lender would have invested it elsewhere and still paid tax. So the
government would receive the tax regardless. Using gross interest as the
hurdle rate seems a better assumption.
Table 1 shows a year-by-year comparison for the last six years. In
each year, the hurdle rate is the yield on ten-year bonds at the start
of the financial year--1 July in each case. It is appropriate to fix the
rate in this way for the 12 months following after that as the
government should effectively be making its decisions in this regard on
an annual, in advance, basis.
The average rate of return earned by the NZSF over 2004-2009 was
3.91% p.a. (allowing for the initial short year).
Looking at just the NZSF's return is, however, only part of
the story. Over the nearly six years, 2004-2009, the average hurdle rate
was 6.18%. Figure 2 illustrates the impact of the hurdle rate by showing
the 'net' return to the government in each year, after
deducting the hurdle rate. In a 'total accounting context',
this 'net' return is the only one that matters.
However, even Table 1 and Figure 2 together do not show the full
Table 2 shows an approximate calculation of the accumulated
notional deficit in the government's overall balance sheet that the
NZSF has produced in relation to the hurdle rate from October 2003 to 30
[FIGURE 2 OMITTED]
In other words, holding all else constant, if the government had
not established the NZSF but rather had reduced debt (that would
otherwise have cost it the hurdle rate of interest over each of the six
years measured), the overall balance sheet for the government would have
been better off by about $2.6 billion at 30 June 2009. (5) The
investment recovery to 30 November 2009 has reduced that deficit by
about half as the NZSF increased to $15.61 billion (New Zealand
Superannuation Fund, 2009b). However, the accumulated difference in
Table 2 as of 30 November 2009 will still be a deficit of about $1.4
To retrieve this position financially, the NZSF will need to exceed
the hurdle rate over the coming years by an accumulated $2.6 billion
($1.4 billion from 30 November) but that will only restore the
government to its starting position in 2003. In other words, having
restored the $2.6 billion ($1.4 billion), it would be as though the
government had done nothing in 2001 about partially pre-funding NZS but
had instead reduced debt by the net amounts paid to the NZSF.
The key issue, however, is whether over the period to 30 June 2009,
the government would have had the fiscal discipline to apply the net
NZSF contributions to debt reduction. That is a political, not a
financial issue: see Section 7.1l below.
6. Borrowing to invest
By maintaining the NZSF, the government is effectively in the
business of portfolio investing, arguably not a natural function of a
government. There seem to be three problems with this. First, the scale
of the government's portfolio investment activities does not add
natural value. A small investor can achieve equivalent economies of
scale by investing in a large pool. Next, Table 1 shows that the
government has actually been worse off over the last six years to 30
June 2009 by an average of 2.27% a year (6.18% less 3.91%).
Thirdly, the 'total accounting context', illustrated by
Figure 1, shows that the government is effectively borrowing to invest.
(7) Leverage magnifies both positive and negative returns on
In this respect, the government is much like households. Borrowing
to buy shares is inherently risky because the borrowing increases the
volatility of the investment's returns. For the government in a
'total accounting context', a 'negative' result is a
return that is less than the hurdle rate; a 'positive' result
is one that exceeds the hurdle rate. The net return over the hurdle rate
should be the only one that matters. On average, the NZSF has failed to
achieve that minimum target over the last six years. It is correct that
this is too short a period for such a comparison to be made. Looking
back further, however, is still not comforting.
New Zealand's recent history suggests that, if the NZSF had
existed since the early 1990s, it would have also failed the basic test
by missing the hurdle rate. From a 2009 perspective, this analysis
cannot extend beyond 1992 because, although interest rates have been
relatively 'free' since 1985, inflation was not brought under
control until the early 1990s.
Using 1991/92 as a starting point, the hurdle rate to 2009 has
averaged 6.98% p.a. Had all the assets been invested in unhedged
overseas shares over the same period, the average return would have been
4.91% p.a. To show the 18 year cumulative effect of that difference,
using 1991/92 as the base (1991/92 = 100), an index based on the hurdle
rate would have accumulated to 337.00 by 30 June 2009. An unhedged
overseas share portfolio would have accumulated to 237.10 (hedged,
That average annual return margin over the 18 years of a negative
2.07% a year, the difference between 6.98% and 4.91%, is not very
different to the gap over the last six years since the NZSF started (a
negative 2.27% a year). That said, looking back is probably unhelpful.
The recent past has seen an unprecedented three periods of significant
falls in international share prices.
However, looking forward does not help either. The Reserve Bank of
New Zealand expects long term nominal cash rates of about 6% p.a. (9)
Using the NZSF's own aspirational target (T-Bill + 2.5%), adding
2.5% to the cash rate gives a total of 8.5% p.a. Overseas shares might
be expected to earn a long-term return of about 9% p.a. with a
volatility of 18% a year. (10) Expecting a return of at least 8.5% a
year from a portfolio that returns between -27% to +45% in any year
(with two-thirds of those returns expected to be in the range -9% to
+27%) seems inherently risky.
According to the NZSF's current Strategic Asset allocation
(Hayward, Dyer, & Frogley, 2007), 17% of the portfolio is to be
invested in fixed interest securities of all kinds. Borrowing to buy
bonds is probably even riskier than borrowing to buy shares because of
the small or even non-existent margin between the cost of borrowing (in
other parts of the government's balance sheet) and the expected
return to the NZSF. At 30 June 2009, the NZSF actually held 18.5% of its
portfolio in fixed interest securities, 93% of that in overseas holdings
(Guardians of New Zealand Superannuation, 2009b). Given that 18.5% of
the portfolio will probably fail to earn more than the hurdle rate, it
means that the remaining 81.5% has to earn 3.1% a year more than the
T-Bill rate to achieve what the NZSF describes as its aspirational
target but what this paper suggests is a prerequisite in a 'total
Borrowing to invest is not necessarily inappropriate. Borrowing
helps households and businesses pay over time for 'lumpy'
investments. A household takes on a mortgage to pay for the home and
then repays that over a long period while living in the home. A business
might need to take on debt to expand or buy new equipment if it cannot
pay for those directly from cash but can from future profits. Even
governments might need to do this to pay for expensive motorway networks
or other infrastructure. In this case, borrowing to invest has the added
advantage of sharing the costs between generations of users of that
An investor who borrows to buy portfolio investments (shares, bonds
etc) is engaging in speculation--again, not necessarily inappropriate.
The borrower takes on the risk that the returns from those investments
will be at least as great as the cost of the debt used to acquire them.
Borrowing to invest magnifies positive yields and also the losses. It
turns a good return into an excellent result; and a bad return into a
potential disaster. While a private investor may be willing to speculate
in this way, it seems questionable for a government to do that with
In a 'total accounting context', it is clear that amounts
added by way of contributions to the NZSF are, as illustrated in Figure
1, effectively (if not actually) borrowed money. (11)
The same applies to assets already held in the NZSF even if the
current 'contributions holiday' continues--new borrowing by
the government in the presence of the assets held by the NZSF is
effectively the same as borrowing to invest. That is because the
government has a choice with respect to all new borrowings: it can
borrow, say, $1 million and maintain that amount of invested assets in
the NZSF or it can sell $1 million of those investments and not borrow.
The suggested 'total accounting context' makes clear that a
decision to borrow in the presence of the NZSF's current assets is
also a 'borrow to invest' decision.
In a 'total accounting context', the NZSF's
portfolio is effectively 100% leveraged.
7. The economics of an ageing population
The NZSF 'sets aside' financial assets to help meet the
pension outgoings of tomorrow's retirees. Sections 7.1 to 7.11
analyse the implications of doing this.
7.1. Economic strength matters
The material living standards of people in retirement are largely
determined by their ability to consume goods and services. Retirees
cannot directly consume the money represented by public or private
savings. Those savings must be used to buy goods and services that are
produced by New Zealand's future working-age population or by
workers of other countries (imports). The British economist, Nicholas
Barr, expressed this point memorably:
With respect to the growing future number of pensioners, it is New
Zealand's future capacity to create wealth that matters. The
ability to produce goods and services and to buy imports is the key to
the living standards of present and future retirees (and everyone else).
Savings by the government or by individuals will not help by themselves.
What matters is how those savings are applied (investment and then
growth). It is not apparent how the presence of the NZSF will help
increase the capacity of tomorrow's New Zealand workers to produce
more for tomorrow's retirees to consume.
7.2. How do we support the growing elderly population?
An increasing elderly population can only continue to be supported
at current real income levels by, broadly, either increasing output
today and tomorrow, restricting consumption today and tomorrow, or by
improving the productivity of the relatively smaller workforce we expect
to have. In a retirement income context, this means, specifically:
7.2.1. raising future output by increasing the working-age
population relative to the dependent population of all ages: the young,
the infirm and the old, but particularly the last group because it will
become relatively much larger. Changing the working population can be
done in a number of ways such as:
* bringing new workers into New Zealand through immigration; (13)
* increasing the effective retirement age by having an income test
or by allowing a more flexible state pension age (with an actuarial
increase to 'reward' a later starting age). This might have
the effect of extending retirement ages on a voluntary basis but may
also reduce them as people leave the workforce to take up NZS; (14)
* increasing the state pension age (currently age 65) so that the
age from which the future old start receiving NZS is deferred;
* increasing the labour force participation rate by persuading more
people to work, including by raising the state pension age.
7.2.2. restricting current consumption and investing overseas with
a view to paying for retirees' future imports. At 30 June 2009,
76.2% of the NZSF is in fact invested overseas (Guardians of New Zealand
Superannuation, 2009a). On this ground alone (leaving aside the
'borrowing to invest' issue), there is a case to make that
7.2.3. constraining the consumption of the working-age population
in future, for example through higher taxes on wages, to make
proportionately more goods and services available to retirees. A
compulsory, private savings scheme that reduces current consumption, as
long as it has no impact on other savings, can have this effect.
7.2.4. improving productivity through investment in education and
training. In the debate about the introduction of the NZSF, the last
government argued that as productivity rises so do wages (and,
therefore, NZS because of its link to wages). On that view, increasing
the size of the cake does not help to make NZS more affordable (see, for
example, Cullen, 2000b). There are two possible answers to this. First,
increases in the productivity of capital employed and also innovations
can raise total factor productivity and let GDP increase without
increasing wages and, therefore, NZS (see below). (15) Secondly, the
link between real wages and NZS could change as relative incomes
7.2.5. increasing the capital stock and its quality to compensate
for the potential labour shortage. That can make a relatively smaller
workforce more productive. In addition, robots have the advantage of not
In order for the government to support the presence of the NZSF as
a way of helping to address the problem of the sustainability of NZS
with an ageing population, it would have to show how the NZSF will
increase output, raise productivity or might possibly constrain the
consumption of future workers, as the retired population increases. Of
the above list, the only possible contribution the NZSF might make is to
constrain current, in favour of future consumption: paragraph 7.2.2
above. The NZSF could also, by smoothing tax receipts, reduce the impact
of the deadweight costs associated with higher expected taxes: see
paragraph 7.6.6 below.
7.3. Where does the money come from?
The NZSF is used as an accounting device to pass through all the
money that is paid to existing and future superannuitants. Total
payments by the government to the NZSF for the year ended 30 June 2009
were $9.99 billion but, of that, $7.74 billion was immediately paid out
to superannuitants, leaving $2.24 billion for investment purposes
(Guardians of New Zealand Superannuation, 2009b, 63). Therefore, what is
not needed to pay for pensions today is left behind to build up into a
The transfer to the NZSF a dollar of tax revenue to pay a dollar of
NZS to an existing superannuitant is accounting 'housework'.
It is like putting a dollar of wages directly into the housekeeping jar
instead of the tin for general spending.
The partial pre-funding of NZS has been necessarily matched in past
years by an equal reduction in money available to fund other activities.
For instance, general government debt may have increased; health capital
spending may have reduced or there may have been less available for
education. Again there was no change of substance but, for the reasons
described in Section 7.11, limiting cash resources to fund other
activities or to reduce taxes, may in fact have been the main
(political) reason for the NZSF's establishment.
The recent arrival of potentially long-term fiscal deficits has
changed the past justification for the NZSF's existence. They have
brought into focus more sharply the substance of what was previously
happening: the government's borrowing to invest. However, that
difficulty existed even without the deficits. Had the true nature of the
NZSF's arrangements been properly debated at the outset in a
'total accounting context', the risks of borrowing to invest
that Section 5 has quantified might have been more clearly understood.
7.4. Current workers pay twice
A change from the previous pure PAYG approach to a partially
pre-funded basis requires workers during the transition to pay twice.
Those workers must meet, through their taxes, the costs of NZS for
current retirees as at present. In addition, they must pay the capital
contributions to the NZSF that, together with related investment income,
will provide partly for their own NZS when they retire. It is not
possible to change to a partly pre-funded NZS without increasing taxes
and/or reducing spending on NZS or other goods and services or transfers
like education, health and welfare.
If capital contributions resume from 2020 as the government
intends, it will be effectively asking today's workers to pay twice
(at least partially) for NZS.
7.5. Long-term costs probably higher
The cost of any superannuation scheme (public or private;
pre-funded or PAYG; defined benefit or defined contribution; lump sum or
pension) is the benefits that the scheme pays (plus administration
costs). In that regard, it does not matter how the scheme is paid for:
whether from current taxes, contributions paid in earlier years or from
investment income. Investment risks aside, what matters is the type of
structure that is the cheapest to administer. NZS, in the presence of
the NZSF, will probably be more expensive than in its absence.
7.6. Partial pre-funding or PAYG?
When the NZSF was established, the economic substance of the
'smoothed, PAYG' method of paying for the future costs of NZS
received little public examination. In fact, adding a pre-funded
component to the process raises a number of issues:
7.6.1. No reduction in cost
The establishment of a partly pre-funded scheme does not reduce the
cost of NZS, other things being equal. A transfer to the NZSF of a
dollar today that increases in value with net investment income of, say,
5% a year (before adjusting for inflation) to $7 in 40 years' time
is exactly equivalent to a PAYG payment of $7 (plus an adjustment for
inflation) in 40 years' time. In the latter case the taxpayer can
invest a dollar today and earn the same investment income as the NZSF to
pay his or her tax bill in 40 years' time.
Similarly, the transfer of a dollar of personal income tax to the
NZSF, which increases to $7 in 40 years' time is matched by a
dollar plus related forgone earnings elsewhere in the government sector
which, other things being equal, can be expected to have an opportunity
cost of $7 in 40 years' time.
Contrary to the then government's claim, adding the NZSF to
the mix provides no additional security about where the money for NZS
will come from. It will effectively continue to come from tax revenue.
There is no separate source of funding for NZS. The best that can be
argued in support of partial pre-funding is that it affects the timing
of tax receipts by increasing today's tax in favour of a possible
(not promised) reduction in tomorrow's tax.
7.6.2. The strength of the economy matters
There seem to be no grounds for partly pre-funding NZS over similar
noncontributory public programmes, such as the invalid's benefit or
health-spending, that are presently funded on a PAYG basis. The future
funding of these schemes primarily depends on the prosperity of the
economy and the government's power to tax. (16) Private
superannuation schemes are not analogous as they are unable to tax
residents. This is the main reason they seek to provide security for
contributors by fully pre-funding their schemes. Governments face no
such problem because of their ability to tax and the fact that they do
not go out of business.
As Nicholas Barr explains it:
7.6.3. Re-arranging claims on the economy
It is a good idea for individuals or employers to put aside money
for future superannuation payments. However, it does not follow that
what is right for an individual is necessarily right for the country.
Building up the NZSF will re-arrange claims on today's economy
between earners and non-earners and also, through overseas investment,
as between New Zealand and other countries. However, that does not
necessarily increase the security of the claims by both tomorrow's
earners and non-earners. Only a stronger economy can do that.
There is an even more significant political issue in this
connection. The NZSF is founded on the principle that, when a future
government looks at the amount to be spent on NZS, it will have regard
for only the net amount, after allowing for the receipts from the NZSF.
This seems unrealistic politically. The government is more likely to
make compensating adjustments in other parts of its spending to allow
for the NZSF's contributions. In other words, the existence of the
NZSF and the expected future draw-downs can give no assurance that total
spending is likely to be less in the presence of those draw-downs. The
contrary view seems just as likely: that total government spending would
be higher in the presence of the NZSF draw-downs than in their absence
(with a pure PAYG pension).
In fact, NZS is (and should continue to be) part of an annual
balancing by governments of spending priorities against income. In any
year, the annual amount of NZS is effectively the total amount the
government decides to spend on NZS divided by the number of people then
eligible to receive it. The presence (or absence) of the NZSF does not
affect that fundamental process. It may affect the pocket from which
amounts come but is unlikely to affect the process itself.
In that way, the NZSF might obscure a political 'safety
valve'. Given that the country's capacity to meet the economic
obligations to superannuitants (both public and private) depends on the
strength of the contemporary economy, the NZSF will partly disguise one
of the safety valves that will be required to regulate the relative
equities of competing claims on that economy. The annual budget process
is the most practical example of the way in which those relative
equities are resolved year by year. The NZSF creates a partial barrier
for that ongoing, self-balancing process.
7.6.4. Increases superannuation costs
The presence of the NZSF may mean that NZS costs more than the past
pure PAYG arrangements. First, there are the risks of investment losses,
both direct and indirect, that, as at 30 June 2009, effectively amount
to about $2.6 billion (see Section 5 above). Then there are the
potential losses that the New Zealand government might suffer if the
NZSF fails in the future to achieve returns at least equal to the hurdle
rate. Finally, there are the administration costs of running the NZSF.
According to the NZSF, these amounted to $96.8 million for the 2008/09
year (Guardians of New Zealand Superannuation, 2009b, 74) or 0.69% of
average assets for the 2008/09 year.
7.6.5. Deadweight costs of higher tax
If, as suggested in paragraph 7.6.4, NZS costs more over the long
term than the pure PAYG alternative, taxes must also be higher unless
other spending is constrained. Higher taxes involve indirect costs, such
as the dead-weight costs on the economy. Collecting taxes is not
costless. Not only are there the direct administrative costs but there
are more subtle, but real, costs to the economy as people change their
behaviour as a result of the structure of taxation. These are the
'deadweight costs' or sometimes known as the 'social
costs' of the tax system's design. (17)
Estimating this cost is not a precise matter. An attempt for New
Zealand was made in 1994 (see Diewert & Lawrence, 1996, 2001). The
authors found that the excess burden arising from labour taxation
(primarily taxation on the income of wage earners and the self-employed)
had gone up from 5 cents to 18 cents for each additional dollar of
revenue raised between 1972 and 1992. The marginal excess burden of
consumption taxation (mainly GST) increased from about 5 cents to 14
With respect specifically to the additional tax needed to pay for
any NZSF-derived direct and indirect losses, the deadweight cost depends
on the way the tax was raised, but, from the above analysis, something
more than 14 cents in every dollar raised seems possible. Looking at the
economy as a whole, any difference between the hurdle rate and the
return actually achieved (that was an accumulated deficit of $2.6
billion at 30 June 2009) must eventually be recovered through higher
taxes (other things being held equal). This is a hidden additional cost
when the NZSF does not beat the hurdle rate. That it is hidden makes it
no less real: as of 30 June 2009, that implicit addition to the
effective, direct losses was at least $360 million.
Even setting aside the overall accumulated losses the NZSF has
incurred to date for the government in relation to the hurdle rate, it
seems difficult to see how the NZSF will save money over the pure PAYG
arrangement that applied until 2001. It also seems difficult to
understand why the NZSF is more 'secure' than the capacity of
future governments to tax; or how rearranging economic claims in
today's economy will better prepare future New Zealanders for the
impact of a growing aged population. These are all issues that
governments must resolve politically.
7.7. Where is the money invested?
The extra amount of tax required each year to achieve the NZS
Act's 'smoothed, pay as you go' objective averaged $2.1
billion a year in the three years leading up to the 2009 Budget. The
current government's suspension of contributions for up to ten
years until 2020 will increase the expected annual contributions, in
today's money once they resume, to $2.7 billion (The New Zealand
For a number of reasons, nearly all of that money must be invested
overseas. The New Zealand market cannot absorb much but, even if it
could, there are two main reasons for investing outside New Zealand.
7.7.1. The New Zealand markets
New Zealand does not have sufficient local diversification or
depth. There is not the range of companies and industries in sufficient
quantities that such a large pool of assets will require for a
diversified portfolio. The NZSF could, arguably, be part of the solution
here but that raises the question of whether it is appropriate for a
government agency to undertake that role given the other risks
associated with the government's balance sheet.
7.7.2. Economic 'insurance'
Aside from the modest intergenerational cash flow smoothing of the
'smoothed pay as you go' system required by the NZS Act, the
NZSF could also help to partially insulate the New Zealand economy from
internal shocks. On that basis, it will act like an insurance fund but
only to the extent the money is invested in other economies. The NZSF
would then be diversified away from the economy that could most directly
affect the affordability of NZS (New Zealand's).
If the local economy performs better than others, future retirees
can look to the New Zealand economy itself for their retirement income
security. By contrast, a relative under-performance by New Zealand would
see the NZSF act as a form of risk-sharing. In the first case of
relative over-performance locally, the cost of that insurance will be
the likely relatively poor performance of the NZSF. However, it is
probably inappropriate for a government to intermediate that form of
risk-sharing. The better alternative would probably be for
individuals/businesses to undertake that.
With that background, it seems difficult to explain why the
NZSF's investments are currently almost wholly hedged back to the
New Zealand dollar in respect of its equity investments:
At the end of August 2009, the foreign currency exposure resulting
from the allocation to international equities was approximately 81.5%
hedged back to NZD. (New Zealand Superannuation Fund, 2009a, 4)
One explanation might be that this exposure is a currency play
because the Guardians expect the New Zealand dollar to rise against
other currencies. The alternative, more likely explanation is that the
Guardians do not want to run the short-run political risk of exposing
the NZSF to sudden swings in capital values based solely on the
relationship between the currencies of the countries the NZSF invests in
and the New Zealand dollar. (18) This sees the Guardians' taking an
unnecessarily short-term perspective to what should be a long-term
issue, given the nature of the liabilities the NZSF is intended to
pre-fund. Any suggestion that NZS is a New Zealand dollar-denominated
liability is misplaced. NZS is effectively a New Zealand
economy-denominated liability. As has already been explained, the
ultimate security of future payments of NZS depends on the strength of
Investing such a large amount overseas raises two further issues.
7.7.3. Exchange rate impact
First, there is the immediate impact on New Zealand's exchange
rate as the investment money flows overseas. Then, the impact will be
reversed as that money comes back into New Zealand to help finance the
consumption of tomorrow's retirees.
7.7.4. Timing of draw down
The citizens of all other developed countries face similar but, in
most cases, more serious ageing issues than New Zealand. Just as New
Zealand will want to be drawing down on the NZSF to meet payments to
superannuitants, other baby boomers around the world will already have
started their draw-downs.
Some suggest that such a coordinated withdrawal of money from
markets to pay for retirement consumption will have a significant,
negative impact on global asset values. (19) Shifting the investment
response to the ageing issue from individuals to the government, as the
NZSF implies, does not change that risk but could magnify it.
Individuals are more likely to respond rationally with their own money
to this issue than are governments that make decisions about
taxpayers' money and that aren't directly accountable for the
The final investment issue extends the 'debt versus
investment" argument, already described in Section 6 in a
'total accounting context'. For individuals, paying off debt
before investing for retirement income is a sensible strategy. The most
important reason for that is tax: it is very difficult for future,
after-tax investment returns to exceed the interest rates charged on
personal debt, the cost of which is normally not deductible. Reducing
debt is effectively an investment with a guaranteed return equal to the
interest rate avoided. However, reducing risk is also important. Given
the volatility of interest rates, paying off debt also reduces a
family's exposure to risk.
Similar arguments apply to the NZSF when examining the
government's balance sheet in a 'total accounting
context'. Investment logic says that returns from investing in
shares should be higher over the long term than the cost of debt.
However, they might not be, as has been demonstrated by the last six
years; and they were not higher for a New Zealand investor, even over
the last 18 years as Sections 5 and 6 have shown. The risk that
after-tax returns might be less than the cost of debt should favour the
repayment of debt by the government over portfolio investment through
the NZSF. This argument should also preclude the inclusion of any
government debt (bills or bonds) in the NZSF's portfolio.
Maintaining debt in the government's balance sheet while investing
in other governments' debt (or especially New Zealand government
debt) through the NZSF makes little investment sense. (20)
At 30 June 2009, the NZSF's $13.7 billion is equivalent to
11.6% of the government's overall liabilities in a 'total
accounting context' (see Figure 1). If the logic of investing in
the presence of debt prevailed then there would be a theoretical case to
double the amount of effective debt to, say, $27.4 billion and invest it
all through the NZSF. If that doesn't sound sensible then neither
is the concept of building, or even maintaining the NZSF in the presence
To summarise the investment perspective, the unintended
consequences of the NZSF may be that:
(a) the NZSF increases New Zealand's exposure to risk in the
short run (exchange rate; interest rates versus portfolio returns) and
also in the long-term as New Zealand reaches its peak retirement income
demand period later and less severely than most other developed
(b) the NZSF's indirect investments in other countries'
businesses are more likely to produce lower returns for New Zealand than
would be produced for the country if New Zealanders made their own
decisions with their own money.
7.8. The investment process
The NZSF is managed independently of the government on an
arms-length, 'commercial' basis. All the risk, however,
remains with the government in the first instance (and ultimately with
taxpayers) because the level of NZS payments will continue to be
determined by the government. As the history of the last 30 years has
shown, that is a political issue. The cost of those future payments of
NZS will not be directly related to the level that would be actuarially
prudent given the levels of the NZSF and income tax. There can therefore
be no suggestion that the government can reduce the future risk posed by
its current promise to pay NZS to present and future retirees.
It is almost inevitable that political pressures will also
influence the NZSF's investment strategy. For example, it seems
that the NZSF will not be permitted by the current government to invest
unlimited amounts overseas (see below). It is also constrained by
government policy to invest in a manner consistent with 'avoiding
prejudice to New Zealand's reputation as a responsible member of
the world community. (21)
The government has, under section 64(1) of the NZS Act, the right
to 'give directions to the Guardians regarding the
Government's expectations as to the Fund's performance,
including the Government's expectations as to risk and
return.' However, any such direction must not be '...
inconsistent with the Guardians' duty to invest the Fund on a
prudent, commercial basis, in accordance with section 58.' This
requires the Guardians to adopt a 'prudent commercial basis'
consistent with 'best practice' and 'maximising return
without undue risk'.
Despite the apparent independence of the Guardians, there is
significant potential for the politicisation of the investment process.
The current government's inexplicable pressure to require the NZSF
to increase its exposure to New Zealand investments is a case in point.
The announcements by the National Party in opposition were less
constrained than those now being made in government. For example, the
National Party suggested the following as part of its 2008 election
policy: National will:
* Amend the New Zealand Superannuation and Retirement Income Act
2001 to allow the Minister of Finance to give a direction to the
Guardians of the Fund in relation to the proportion of the fund which is
to be allocated to New Zealand.
* Set the target of at least 40% of the Super Fund to be invested
in New Zealand.
* Maintain the independence of the Guardians of the Fund in every
The Guardians will continue to invest on a prudent, commercial
basis, by making their own decisions about what asset classes to invest
in, in line with best-practice portfolio management. In particular, the
Guardians will determine the appropriate rate at which to increase their
investment in New Zealand to 40%, taking into account their need to
manage their overall risk profile, the availability of quality
investments, and the impact of increased investment on local markets.
(National Party of New Zealand, 2008)
The 2009 National-led government has drawn back from that
The Guardians will actively consider New Zealand-based investments
as part of their role of managing the Fund prudently and commercially.
(English, 2009, 26)
But all that is required is a change to the NZS Act as National
promised before the 2008 election. Because of almost inevitable
political interference and the politicised nature of the NZSF, the
returns from the NZSF are likely to be lower over the longer term than
the returns from other equivalent, politically unconstrained funds.
7.9. The lessons of history
History seems also to be against the long-term survival of the
NZSF. The 1938 social security 'charge' (1/- in every 1
[pounds sterling], or 5%) was intended to fund the contributory health
and welfare programmes that were charged to the Social Security Fund by
the Social Security Act 1938. A 1958 change credited the successor to
the charge (the Social Security Income Tax of 1/6 in every 1 [pounds
sterling], or 7.5%), to the Consolidated Fund to which social security
and other spending was then debited. The separate tax was eventually
abolished on the recommendation of the Ross Committee because it
reflected 'an artificial splitting of tax receipts' and social
security spending had consistently exceeded the level of the tax (Ross,
The current government has suspended contributions to the NZSF
until 2020. It remains to be seen whether contributions are resumed. The
lessons of the last 30 years suggest that what is perhaps more likely is
for the NZSF to be disbanded.
7.10. The impact on saving decisions
People are more likely to save for retirement if they doubt the
future sustainability of NZS or think it will not be enough to meet
their retirement income needs. The last government suggested that the
NZSF would put an end to that uncertainty.
Relative certainty of outcomes should undoubtedly form a
significant plank of any retirement income system. Given the importance
of NZS to the retirement incomes of today's pensioners (and
probably tomorrow's), its sustainability is of considerable
significance. However, in another example of the law of unintended
consequences that afflicts modern government, the mere existence of the
NZSF and its seemingly substantial appearance might induce New
Zealanders to save less than they would otherwise have done. (22)
The NZSF does not answer the affordability issue, as stated in
Section 7.5 so, the NZSF may lead New Zealanders to save less while at
the same time it fails to address the issues of sustainability that
really matter to NZS.
7.11. Politicising the problem
David Thomson argues (Thomson, 1991) that the history of the
welfare state in the latter half of the 20th century was a direct
response to the needs of the baby boom generation and its parents. From
birth, education, household formation, health care and retirement income
provision for their parents, Thomson suggests that the baby boomers are
the 'selfish generation'.
The NZSF might be seen by future taxpayers as an attempt to lock in
benefits that the country might subsequently discover that it cannot
The growing NZSF is already the largest local pool of investment
capital and will grow, especially if contributions resume, as intended,
in 2020. The NZSF could, in fact, be an impediment to needed change in
NZS itself. It may be that this was what the last government intended.
The NZSF may therefore tend to politicise the issue of a
sustainable NZS. In other words, as the most visible flagship of
Thompson's 'selfish generation', the NZSF may increase
policy uncertainty rather than reduce it.
Another political dimension to the NZSF's establishment is
derived from the almost embarrassing fiscal surpluses the last
government ran for the nine years it held office. It apparently
preferred to lock up surpluses under the government's control
rather than alternatives such as:
* initiating further spending programmes, such as investment in
* reducing debt and then resisting pressures to raise further debt
to fund additional spending; (23)
* reducing taxes and letting taxpayers decide whether they wanted
to save the tax reductions for their retirement.
8. Conclusion--partial pre-funding an ineffective distraction New
Zealand faces an ageing population with fewer workers supporting a
growing retired population. There has been a long period of policy
instability on superannuation issues over the last 35 years: see
Littlewood (2008). The last government intended that the NZS Act and the
NZSF would add stability. Because of the significance of NZS to most New
Zealanders' retirement income security, public policy on this
component of retirement income in New Zealand sends quite powerful
messages to individuals. If New Zealanders are to behave
'sensibly', there must be a settled framework.
Viewed through the microscope of the 'total accounting
context', the NZS Act and the NZSF seem little more than fiscal and
political window-dressing. Their unintended consequences are likely to
be greater instability in public policy at a greater cost than the pure
Before New Zealand can discuss how to meet the future cost of NZS,
it must settle the benefit design for New Zealanders who retire after,
say, 2030. From comments made by the current government, it seems that
the presence of the NZSF and the political backdrop provided by the last
30 years might be impediments to that needed discussion. (24) The Prime
Minister said after the 2009 Budget changes to the NZSF that he would
resign rather than reduce NZS entitlements:
The Government is committed to these settings and I have said many
times that I would rather resign rather than change them. (Key, 2009b)
Before deciding how to pay for NZS, New Zealand should first decide
what it should pay for. New Zealand must choose the 'best'
design for NZS. Only then should cost considerations become significant
to assess the impact of the growth in numbers of pensioners. That may
require aspects of the 'best' design to be modified. No other
process can produce an answer that might be sustainable over
The benefit design is the only thing that will directly affect the
cost of NZS. The NZSF is not relevant in that regard. Regardless of the
way in which NZS is funded, the cost of the scheme will be the benefits
that are paid. If New Zealand is concerned about the future cost of NZS,
it must first discuss the benefit design.
At best, the NZSF will make a relatively minor contribution to a
partial intergenerational smoothing of cash flows. At worst, it could
increase costs (the case to date), constrain growth, increase risk,
reduce private savings and provide a distraction to the real issues that
affect the size and shape of NZS.
The NZSF should therefore be dismantled (carefully) and NZS
returned to the original, pure PAYG model.
The author thanks Michael Chamberlain Greg Dwyer and Susan St. John
for their helpful comments and suggestions on earlier drafts. The views
expressed are the sole responsibility of the author.
Barr, N.A. (1979). Myths my grandpa taught me. Three Banks Review,
124, 27 55.
Barr, N.A. (2000). Reforming pensions. Myths, truths, and policy
choices. Working paper No. 139. Washington: International Monetary Fund.
Becker, G. (1985). Public policies, pressure groups, and dead
weight costs. Journal of Public Economics, 28, 329-487.
Bjorksten, N., & Karagedikli, O. (2003). Neutral real interest
rates revisited. Retrieved January 5, 2010, from
Bohn, H. (2006). Optimal private responses to demographic trends:
Savings, bequests and international mobility. In C. Kent, A. Park, &
D. Rees (Eds.), Demography and financial markets. Sydney: Reserve Bank
Borsch-Supan, A. (2006). Demographic change, saving and asset
prices: Theory and evidence. In C. Kent, A. Park, & D. Rees (Eds.),
Demography and financial markets. Sydney: Reserve Bank of Australia.
Creedy, J. (2003). The excess burden of taxation and why it
(approximately) quadruples when the tax rate doubles (New Zealand
Treasury Working Paper 03/29). Wellington: The New Zealand Treasury.
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arrangements. Retrieved January 5, 2010, from
Cullen, M. (2000b). Questions and answers on the proposed NZ
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Diewert, E., & Lawrence, D. (1996). The deadweight costs of
taxation in New Zealand. Canadian Journal of Economics, 29, S658-S673.
Diewert, E., & Lawrence, D. (2001). The marginal excess burden
of capital taxation hi New Zealand. Wellington: The New Zealand
English, B. (2009). Budget speech. Retrieved January 5, 2010, from
Grimes, A. (2001). Crown financial asset management: Objectives and
practice. Wellington: The New Zealand Treasury.
Guardians of New Zealand Superannuation. (2009a). Annual report
Guardians of New Zealand Superannuation. (2009b). Annual report
2009, Financial statements.
Hayward, T., Dyer, P., & Frogley, R. (2007). Strategic asset
allocation review. Wellington: New Zealand Superannuation Fund.
Key, J. (2009a). Budget 2009 The road to recovery. Retrieved
January 5, 2010, from
Key, J. (2009b). Protecting superannuation in tough economic times.
Retrieved January 5, 2010, from
Littlewood, M. (2008). A condensed history of public and private
provision for retirement income in New Zealand-1975-2008 [Electronic
Version]. Pension briefing, 05, 8. Retrieved January 5, 2010, from
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expenditure: New Zealand 2002-2051.
National Party of New Zealand. (2008). 2008: NZ superannuation
fund. Retrieved January 5, 2010, from
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allocation. Retrieved January 5, 2010, from
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update at (and since) 30 June 2009. Retrieved January 5, 2010, from
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http://www.stats.govt.nz/browse for stats/
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superannuation: Effect on private saving (Report). Wellington.
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Zealand's long-term fiscal statement. Retrieved January 5, 2010,
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of Applied Economic Research, The University of Melbourne.
(1.) The traditional definitions of the working and the retired are
entirely age-based and are therefore unsatisfactory. Many between the
internationally used ages of 16-64 for the 'working"
population do not work, while an increasing number over age 65 do. All
those receiving income pay income tax, even the retired. NZS is
supported by all government revenue, including income and expenditure
taxes from the retired.
(2.) The reduction from 50% of GDP to 23% is caused by the combined
effect of the 10 year contribution suspension and the rolling 40 year
calculation resuming 10 years after the first baby boomers start
(3.) The hurdle rate could also be the cost of interest on the most
expensive debt currently held as that is the debt that the government
should repay first.
(4.) Hurdle rate calculations are by Michael Chamberlain, MCA NZ
(5.) Using the NZSF's aspirational T-Bill + 2.5% as the
'hurdle rate' in Table 2 means the government is even further
behind. The 30 June 2009 shortfall would have been about $3.5 billion.
(6.) The calculation for the 2009/10 year is only approximate as it
is based on the cited news release from the NZSF, rather than the full
(7.) Grimes (2001) suggested (in contemplation of the NZSF's
establishment) that the government can run its various financial
activities as 'individual entities' as long as a recommended
Asset-Liability Management Office (ALMO) 'manage[d] Crown-wide
risk, taking into account the portfolios adopted by individual
entities.' In the presence of the NZSF, it is not apparent how the
recommended ALMO might have counteracted that effect except by borrowing
further amounts. Grimes does conclude that the 'Crown should act as
a risk-averse investor'. An NZSF portfolio in a 'total
accounting context' is effectively 100% leveraged does not seem to
fit a normal investment management understanding of that description.
(8.) Before tax and expenses. Data supplied by MCA NZ Limited,
(9.) The Reserve Bank notes that the 'current model includes
an assumed equilibrium nominal 90-day interest rate at 6%.' This is
based on what the Reserve Bank calls a long-term 'neutral real
return' of 4% p.a. (+/- 0.75%) plus expected inflation. See
Bjorksten and Karagedikli (2003).
(10.) Using the MSCI World Index information supplied by MCA NZ
(11.) The same financial logic also applies to other investments
the government makes, such as in state-owned businesses like New Zealand
Post, KiwiRail etc.
(12.) The analysis in Sections 7.1 and 7.2 draws on Barr (1979).
(13.) However, immigration tends to import other countries'
(14.) There is some evidence of this effect amongst men (but not
women) in Australia: see Warren and Oguzoglu (2007).
(15.) In fact, employees' compensation as a proportion of GDP
has fallen from about 55% in the early 1980s to less than 45% in the
2000s: 44% in 2008 (Statistics New Zealand, 2008).
(16.) The Ministry of Health suggests that healthcare costs will
rise from 6.2% of GDP to 9.2% by 2051 (Ministry of Health, 2004). If a
government were concerned about the future affordability of health care,
why is there no proposal for a similar 'smoothed pay as you
go' approach to rising health costs? There seems to be no economic
distinction between these two demographically influenced programmes.
(17.) See, for example, Becker (1985). The deadweight costs in the
present case do not apply to the higher taxes collected during the
build-up of the NZSF as these should be matched by the assumed lower
taxes when the NZSF is drawn down. Given the expected higher overall
levels of taxation during the draw down, the value of future lower taxes
derived from the NZSF's tax smoothing effect might be higher than
the costs incurred during the build-up. See, for example, Creedy (2003)
where the 'excess burden' of tax is estimated as the
"square of the tax rate'. That 'compensatory' effect
depends on future governments reducing overall tax levels by the full
value of the drawdown from the NZSF--see paragraph 7.6.3. However, that
potential saving comes, currently, at a high cost.
(18.) The NZSF states (New Zealand Superannuation Fund, 2008):
"To reduce the volatility of returns due to exchange rate
fluctuations, the majority of non-New Zealand exposure is hedged back to
New Zealand dollars.'
(19.) See, for example, Borsch-Supan (2006). An alternative view
can be seen at Bohn (2006).
(20.) At 30 June 2009, the NZSF had no investments in New Zealand
government debt (3.9% in 2008) and only 1.3% of its investments in other
local fixed interest investments (Guardians of New Zealand
Superannuation, 2009b, 77).
(21.) The NZS Act, section 58(2)(c).
(22.) As was noted by The Treasury in a report to the government
before the NZSF started (The New Zealand Treasury, 2000b).
(23.) As part of the background papers to the establishment of the
NZSF, the Treasury suggested that '... pre-funding may provide
greater fiscal discipline on government than debt repayment or a general
accumulation of assets, as it ensures some of the future costs of
provision for retirement are taken into account in current fiscal
decisions." (The New Zealand Treasury, 2000a).
(24.) For example, see Key (2009a): 'The Government has
therefore decided to take the sensible step, and hold off making full
contributions to the Super Fund until the Government runs an operating
surplus sufficient to fund those contributions. I cannot stress enough
that this move does not have any detrimental impact on New Zealand
Superannuation entitlements, either in the short-term or in the longer
term. The bottom line for this Government is preserving current
Superannuation entitlements. We will maintain payments at a minimum of
66 per cent of the average wage, and people will continue to be eligible
for Super when they reach the age of 65. Future funding at this level is
locked into the Government's long-term spending path and is
reflected in all of the Budget projections. In fact it is quite correct
to say that, far from putting anything at risk, the combination of
measures we have taken in this Budget actually secures Superannuation
entitlements in the future.'
Michael Littlewood *
Retirement Policy and Research Centre, University of Auckland
Business School, Private Bag 92019, Auckland 1142, New Zealand
* Email: Michael.Littlewood@auckland.ac.nz
When it was set up, the idea of the Super Fund was to invest Budget
surpluses. The Government was then in surplus and expected to
remain so for the foreseeable future. Those Budget surpluses have
Had contributions continued at the previous rate, the Government
would have had to borrow an additional $1.5 billion a year, rising
to over $2 billion a year during the next decade. It makes little
economic sense to burden future generations with debt incurred
financing investments that were intended to reduce their need to
We will resume contributions when the operating balance is
sufficient in terms of cash flow to meet contributions and other
capital spending. On current projections this will be from 2020/21,
and will continue for a decade until withdrawals from the Fund
begin in around 2031. (English, 2009)
Our reference point for [the long-term return] is benchmarking the
Fund performance against the 90-day Treasury bill rate (i.e. a
proxy for the Government's 'risk-free' rate or its opportunity cost
of raising debt). Based on our investment blueprint--our Strategic
Asset allocation (SAA)--our internal expectation is to deliver a
rate of return averaging at least 2.5% per annum above the 90-day
Treasury bill (T-Bill) rate over rolling 20-year periods .... It is
important to note that this outperformance is not our target, which
is to maximise return without undue risk. In fact we aspire to
outperforming the +2.5% whenever we have opportunities to do so.
(Guardians of New Zealand Superannuation, 200%, 8-9)
Pensioners do not eat pound note 'butties' [sandwiches]--they use
the pound notes to purchase consumption, and it is consumption that
matters. (Barr, 1979) (12)
I know that I will need to buy food for the rest of my life; but I
do not accumulate a food fund but intend to pay my grocery bills
out of future earnings. The reason for making a pension
accumulation is a different one namely that I intend to retire,
that is to stop producing goods which I can exchange for other
goods; no such accumulation is needed in a world without
retirement, where people are immortal, or remain healthy and active
in the labour force until their death. Such a world is mythical for
the individual but is exactly the case for a country, which does
not have to take action to anticipate a time when production will
cease. The fact that countries are immortal is central: from an
economic perspective, it makes prefunding unnecessary unless it has
a positive effect on output ... (Barr, 2000)
Table 1. New Zealand Superannuation Fund's returns vs. hurdle
Year ending NZSF's Hurdle
30 June return (2) rate (3)
2004 (1) 7.69% 6.15%
2005 14.13% 6.31%
2006 19.20% 5.72%
2007 14.58% 5.85%
2008 -4.92% 6.71%
2009 -22.14% 6.35%
(1) The Guardians received the first trinche of money in October
2003 so the first period is effectively eight months.
(2) The returns are as reported in the NZSF's annual reports. It
seems they are before tax but after expenses.
(3) The hurdle rate is the yield on 10 year government stock at the
beginning of each year (except for 2004 when it is as of 30 October
Table 2. New Zealand Superannuation Fund's accumulations--actual
returns vs. hurdle rates 2004-2009.
Year ended At NZS Fund's At hurdle Accumulate
'30 June return rate difference
2004 $3,956 m $3,861 m $94 m
2005 $6,555 m $6,067 m $488 m
2006 $9,864 m $8,515 m $1,350 m
2007 $12,992 m $10,507 m $2,485 m
2008 $14,212 m $12,963 m $1,249 m
2009 $13,688 m $16,267 m ($2,579 m)
Sources: The NZSF's actual accumulation is from the NZSF's annual
reports; the accumulations at the hurdle rate (4) assume the Crown's
contributions are received evenly through each year; also that all
amounts shown in the financial statements as 'tax paid' (including
GST) were in fact paid to the New Zealand government evenly through
the year in question.