Labour’s Superannuation Fund to become a major investor in New Zealand
Tuesday, February 8th 2000, 12:00AM
|
Labour's superannuation policy |
|
|
|
|
|
|
|
|
|
|
|
|
Key Points
New Zealand's ageing population will increase the cost of the Government-provided pension from 5 per cent of GDP now to 10 per cent of GDP in 2050. Labour's policy is to build an investment fund so its returns can eventually pay 40 per cent of pension costs (with the rest met from taxation).
Labour proposes that 8 per cent of existing income tax (around $2 billion) will go annually into a commercially managed New Zealand Superannuation Fund. Since the Government will still pay for pensions while the fund is growing, the Government's contribution to the fund will effectively have to come from a fiscal surplus. Labour may find it hard to run the required surpluses.
• The fund will become a very large investor. While it will invest across all asset classes, some of the money is likely to go into the NZ sharemarket. This will not necessarily be "new" money - it may displace existing household savings. The fund will tend to increase liquidity in the NZ market.
• It is likely the political debate on superannuation will now shift to how the fund is managed. The main issue is likely to be whether individual accounts should exist within the fund.
Ageing population means superannuation policy needs to change
When it comes to superannuation, politicians agree on only one thing - something needs to be done before the rapid ageing in NZ's population makes the current regime untenable. Unfortunately, political parties cannot agree on what to do. The last attempt to make progress was Winston Peters' compulsory superannuation scheme - decisively beaten in a referendum. Now it is the new Labour Government's turn.
Labour policy will set up a commercially managed superannuation fund
$2b annual inflows to fund
Labour has suggested the NZ Superannuation Tax will be 8 per cent of existing income tax. On current projections the annual contribution to the Superannuation Fund would be $1.9b.
Contributions funded from fiscal surplus
The $5b cost of pensions would still have to be paid as the fund is being built up. Therefore, contributions into the fund effectively have to come from a fiscal surplus. On current forecasts, the Government would run a $2.3b surplus in 2001/02 (although this includes National's $400m promised tax cut, now abandoned). Since Labour wants to increase spending over the next few years, the surplus may not be large enough to allow for a full first-year payment.
The fund could be very big (by NZ standards)
How big will the fund eventually become? This depends on how much income it will need, and what return it can expect.
Superannuation payments are currently around $5b (5 per cent of GDP). NZ's population will age rapidly in about a decade. On existing policy (which is to have the pension rise with the average wage), payments will rise to 10 per cent of GDP by 2050. Labour wants the fund to pay 40 per cent of the pension from its return on investment. This means the Fund will eventually need to generate net income equivalent to 4 per cent of GDP.
In addition, the fund will need to retain enough earnings to allow for rising pension payments due to inflation, rising average real wages, and population growth. This means the Fund size will need to grow at around the rate of nominal GDP (say 4.5 per cent per annum).
As a thought experiment, say we wanted a fund today large enough to provide a sustainable annual return of 4 per cent of GDP. Assume it could achieve a 5 per cent margin over GDP growth (i.e. a 9.5 per cent return in a 2 per cent inflation world). The fund would then need to be $80b (GDP is presently $100b). If the rate of return were 3 per cent above GDP growth (i.e. a 7.5 per cent nominal return), the fund would need to be $130b. Clearly, the fund will eventually need to be very large.
Some of the money will come to NZ sharemarket
The fund is likely to invest across all asset classes. (Will the fund invest in NZ Government Stock? - the concept of the NZ Government putting money into a Government- owned fund, and then that fund buying New
NZ Government debt seems somewhat circular!) However, some of the money is likely to go into the NZ sharemarket. The fund could become the largest domestic investor in a market dominated by foreign investors. It may significantly increase liquidity in the NZ sharemarket.
Not all this money will be "new"
Money invested by the fund in the NZ sharemarket is not necessarily "new". As the Government runs fiscal surpluses it may just displace household savings. However, given NZ's low savings rate, overall savings are likely to increase.
Fund likely to be politically durable
Will National reverse Labour's scheme if they win a future election?
Probably not. National tends not to change things where possible. Indeed, the policy debate is likely to shift from what to do about superannuation, to how best to run the scheme. Debate may centre on whether individual accounts within the fund would be better. A consensus between the main political parties may develop on superannuation (in the same way we have seen one on monetary policy, fiscal policy and international openness.
| « Editorial: Tell me more, tell me more | AMP & Good Returns launch superannuation website » |
Special Offers
Commenting is closed
|
|
Printable version |
|
Email to a friend |
