Reforming NZS – a pertinent private member’s bill

Our Members of Parliament have, at present, 72 proposed members’ bills lodged with the Clerk, each hoping that his or her own bill will be drawn in the periodic ballot that is held to determine which will get the opportunity to be debated and voted on in the House.

There was a ballot the other day.  Four bills were drawn (the list is at the previous link).  On a quick glance, three of them look quite sensible, but here I wanted to highlight just one of them.

It is the New Zealand Superannuation and Retirement Income (Pro Rata Entitlement) Amendment Bill, in the name of New Zealand First MP, Denis O’Rourke. Unusually for a member’s bill, it is designed to (and would appear to) save the taxpayer considerable amounts of money.

The policy statement at the start of Mr O’Rourke’s draft bill sets out the gist of the proposal.

This Bill proposes a pro rata entitlement (PRE) to New Zealand superannuation (NZS) based on residence and presence in New Zealand between the ages of 20 and 65 years; a period of 45 years, or 540 months.

The Bill confronts the demographic realities of an increasingly ageing and mobile New Zealand population and its impact on NZS. These global trends require fair policies for the New Zealand taxpayer, the migrant, and the expatriate Kiwi who return to New Zealand to retire.

Within the OECD, NZS is unusually generous in terms of residency requirements. For example, a migrant who lives in New Zealand for 10 years may make little or no contribution to the New Zealand economy, yet is entitled to full NZS. Under the PRE system, this migrant is entitled to 120/540 of NZS, but retains any overseas government pension which is currently deducted from his or her NZS under the direct deduction policy (DDP).

Another example is an expatriate Kiwi who has worked overseas for 30 years, contributing to another economy, and has most likely earned an overseas pension. On returning to New Zealand to re-tire, he or she is also entitled currently to full NZS. Under PRE, with 15 years’ New Zealand residency, this returning Kiwi is entitled to 180/540 of NZS, but will also retain his or her overseas pension, which is currently deducted. Within the age period between 20 and 65 years, the Bill disregards up to 2 months’ overseas travel per calendar year. The Bill also exempts an aggregate period of 5 years’ absence for those whose rite of passage may cover their overseas experience, education and training (often bringing back exceptional skills), and, of course, the well-earned extended world cruise.

I touched on this issue in a post a couple of months ago.  It is a particularly serious issue because time spent living in Australia counts towards the residential eligibility requirement for NZS.  That just seems like skewing the playing field against the New Zealand taxpayer, in favour of those who have spent large chunks of their working lives in Australia.

One could, no doubt, debate details of O’Rourke’s proposal. But, in a sense, that is what should happen.  Whatever their reservations, I hope MPs will vote this bill through a first reading and allow it to examined by a Select Committee, inviting public submissions and perspectives from experts from MSD.  Perhaps there is a better way to deal with the issue, and I wonder if O’Rourke hasn’t gone a little too far (in requiring 40 years residence after age 20 to collect full NZS) to be sustainable.  But this looks like a constructive response to a feature of our system that otherwise looks likely to be increasingly expensive.  Not being at all a fan of the SuperGold card, there is much more money at stake on this issue, than on the card.

Here is what I had to say on the issue in early May:

New Zealand has a high rate of inward migration.  The target level of non-citizen immigration is around 1 per cent of the population per annum.  Many of those people come to New Zealand young and will spending most of their working lives contributing to New Zealand and its tax system.    But to collect a full rate of NZS you need only have lived in New Zealand for 10 years (at least 5 after the age of 50), so many people will be able to collect a full New Zealand pension having been in New Zealand for not much more than a quarter of a working life.  New Zealand does enforce quite strict offset rules on those who have accumulated foreign pension entitlements, but many migrants now come from countries with little or no public provision of pensions.  Surely it would make more sense to introduce a graduated scale –  perhaps paying half the full NZS after 10 years residence, and a full rate only after someone has lived here for 30 years?

I had always assumed that New Zealanders who had emigrated to Australia in their hundreds of thousands over the last 40 years or so would be unlikely to come back to New Zealand when they were old, because they would have to live here for five years after age 50 before being eligible for NZS.    I wasn’t the only one to assume that – I was corrected recently by a public servant doing some work in the area who had just discovered that residence in Australia (and several other countries with whom New Zealand has social security agreements) counts as residency in New Zealand for NZS purposes.  It looks as though people can leave New Zealand at 20, spend an working life in Australia, accumulate significant private assets under the Australian compulsory private superannuation scheme (enough that they would not be eligible for the Australian age pension), and having cashed in those assets could return to New Zealand at 65, claiming a full rate of NZS never having worked, or paid tax, in New Zealand at all.  Indeed, one might even be able to go on living in Australia.  Perhaps I have misunderstood the rules, but this structure strikes me as pretty scandalous.  What New Zealand public policy interest is served by such a generous universal approach to people who have not lived here for a very long time?

Personally, I’m happy that we should treat quite generously people who have spent most of their life in New Zealand and have reached an age that can genuinely be considered “elderly”, but I don’t feel the same sense of generosity towards those who have migrated here quite late in life, or to New Zealanders who have spent most of their working lives (and taxpaying years) abroad.

I subsequently had it confirmed that I had interpreted the rules correctly, and it was also pointed out to me that the Productivity Commission had highlighted this feature in its report, with the Australian Productivity Commission, on trans-Tasman issues.

China: the composition of the RB TWI really doesn’t matter for monetary policy

The BNZ’s Raiko Shareef has a research note out looking at the impact of including the Chinese yuan in the Reserve Bank’s trade-weighted index measure of the exchange rate. He argues that the inclusion of the CNY will increase the sensitivity of New Zealand’s monetary policy to developments in China.

I think he is incorrect about that. China has, of course, become a much more important share of the world economy in the last couple of decades. It has also become a much more important trading partner for New Zealand. Both of those developments, but particularly the former, mean that economic developments in China, including changes in the value of China’s currency, have more important implications for New Zealand, and other countries, than they would have done earlier. The Reserve Bank recognised the importance of the rise of China in setting monetary policy, and assessing developments in the exchange rate. But the Bank was quite slow to include the CNY in the official TWI measure. There was a variety of reasons for that, some more persuasive than others. But as far back as 2007 the Bank started publishing supplementary indices that included the CNY. If the Reserve Bank had used the old TWI in some mechanical way, then perhaps it would have been misled, and perhaps there would have been policy implications from the change in weighting schemes, But not even in the brief bad old days of the Monetary Conditions Index was the TWI used mechanically for more than a few weeks at a time. Every forecast round, the Bank comes back and goes through all the data, not just a reduced-form equation feeding off a particular TWI.

In the new TWI, the CNY has the second largest weight (20 per cent), just behind that on the Australian dollar.(22 per cent). But for the time being, that is likely to be high tide mark for the weight on China’s currency. Here is what has happened to goods trade – imports from China have kept on rising, but export values have plummeted (mostly on the fall in dairy prices).

A bigger question is one about what the appropriate weight on the CNY (and other currencies) is. I’ve argued that the CNY is important to New Zealand not because in a particular year we happen to sell lots of milk powder there, rather than in some other market, but because China is a large chunk of the world economy.  If we had no direct trade with China, it would still matter quite a bit.  In that sense, I reckon the new TWI understates the economic importance of the USD and the EUR, and overstates the importance of the AUD. We trade a lot with Australia, but Australia has very little impact on the overall external trading conditions our tradables sector producers face.

There are no easy answers to these issues. In a sense, that was why the Bank settled last year on a simple trade-weighted index. It wasn’t necessarily “right”, it wasn’t what everyone else did, but it was easy to compile and easy for outside users to comprehend. And without spending a huge amount of resources, on what was (probably appropriately) not a strategic priority, it wasn’t clear that any more sophisticated index would provide a better steer on the overall competitiveness of the New Zealand economy.

An issue of the Bulletin, written by Daan Steenkamp, covered some of this ground last December.

As already discussed, the new TWI has appreciated much less than the old TWI over the past decade or so. It is natural to ask whether the difference has, or should, affect how the Reserve Bank interprets or assesses the exchange rate. For example, are recent judgements about the ‘unsustainability’ of the exchange rate around recent levels affected? The exchange rate, however measured, is never considered in isolation from everything else that is going on in the economy. The Reserve Bank has, for example, recognised the rising importance of Asia in New Zealand’s trade and has taken that into account in its analysis and forecasting over the past decade or more. Exporters and importers deal with individual bilateral exchange rates, not summary indices. And New Zealand’s longstanding economic imbalances have built up with the actual bilateral exchange rates that firms and households have faced over time. How those individual bilateral exchange rates are weighted into a summary index therefore does not materially alter the Reserve Bank’s assessments around competitiveness and sustainability. Applying the macro-balance model (Steenkamp and Graham 2012) or the indicator model of the exchange rate (McDonald 2012) to the new TWI there are inevitably some changes, but the conclusions of those models, about how much of the exchange rate fluctuations are warranted or explainable over the past decade or so, are not materially altered.

There is no single ideal measure of an effective exchange rate index. Different TWI measures are useful for different purposes. In trying to understand changes in competitiveness it is likely to be prudent to keep an eye on them all. Developments in specific bilateral exchange rates will also have different relationships with economic variables and will be useful for different types of analysis. The focus of the Reserve Bank’s approach is on assessing the impact of the exchange rate on the competitiveness of New Zealand’s international trade, and the implications for future inflation pressures. Developing a full indicator of competitiveness, that reflected the specific nature of New Zealand’s international trade, and in particular the importance of commodity markets would require a very substantial research programme. It is difficult to be confident that the results would offer a materially better summary exchange rate measure than the simpler approaches the Reserve Bank has customarily adopted.

Of course, if China continues to grow in significance in the world economy, and if its currency becomes more convertible and is floated, it will become increasingly important to New Zealand. At the moment, the risks around China look somewhat the other way round – the influence of China may be more about the nasty aftermath of one of the biggest, least-disciplined credit booms in history. Growth looks to have fallen away much more than many (including the Reserve Bank) seem to have yet recognised.  But whatever the correct China story, the influence on New Zealand has little or nothing to do with how the Reserve Bank’s trade-weighted index is constructed.

The Governor states his medium-term plans

The Reserve Bank published its annual Statement of Intent on Friday.  I hesitated to write about the document, because to write about it I have to read it.   I always avoided doing so when I worked at the Bank.

The requirement to publish an SOI was added to the Act about 10 years ago.  And dry as they typically are, the SOIs were presumably intended by Parliament to help us understand what the Governor plans that the Bank will be doing over the next few years, and to help us –  and the Board and Parliament – hold the Governor to account.    It should give us a sense of where he sees the bigger looming issues.

Here is what the Act says:

162A Obligation to provide statement of intent

162B Content of statement of intent

162C Process for providing statement of intent to Minister

There is a reasonable amount of material in the document, and tempting as it is to comment on “the Bank’s aspirational goal of being the Best Small Central Bank” (the first time I’ve noticed this in a public document) I’ll save that for another day.  Instead, I want to look at what the Governor does, and apparently does not, see as the priorities for the Bank in the next few years,  in the three broad areas of the Bank’s main statutory responsibilities:

  • Currency
  • Monetary policy
  • Banking supervision


Two of the Bank’s 10 strategic priorities relate to physical currency

  1. Delivering New Zealand’s new banknotes

The release of Series 7 banknotes (Brighter Money) is scheduled for

the end of 2015 and in 2016. A successful release will require continued

extensive interaction with the Canadian Banknote Company, and

increased engagement with the public, the financial services industry,

and other key stakeholders.

  1. Developing a plan for future custody and

distribution arrangements for currency

The Bank will review its currency operating model and supporting

infrastructure to ensure that the currency needs of New Zealanders will

be met in the future. The review will assess the current operating model,

and identify options for the custody and distribution of currency. The

Bank will consult and collaborate with key stakeholders during 2015-

16 to ensure that the review’s recommendations are understood and


Those look fine as far as they go, even if the first now seems more operational than strategic.  But neither in this list, nor in the “functional initiatives” section, is there any sense of the significance of the zero lower bound, and the role that central bank physical currency monopolies play in exacerbating periods of economic weakness when policy interest rates get to (just below) zero.  New Zealand has been fortunate not yet to have the zero lower bound (ZLB) issue, but with a policy rate at 3.25 per cent and which is widely expected to fall quite a bit further it is not that far away.  We went into the last downturn with policy rates of 8.25 per cent.

Issues around the central bank physical currency monopoly, and whether (for example) retail electronic outside money might help alleviate the ZLB problems cannot be dealt with or resolved overnight.  But that is why it is so disappointing that nowhere in this medium-term document is there any sense that the Bank is taking the issue, and associated risks, seriously.  It looks as though they will be quite content to just run the risk that one day we get to an OCR of zero, unbothered that nothing was done to get ready for (and mitigate the risk of) that day. For countries that got to zero in 2008/09 it was a pardonable surprise perhaps, but the rest of the advanced world has now put us on notice.  This was a chance to be pro-active, and mitigate future risks, but the Governor does not seem interested in even commissioning work to look in more depth at the issues and options.   There aren’t straightforward “right or wrong” solutions, but the issues and options need serious analytical work now.

Monetary policy 

Not one of the Reserve Bank’s strategic priorities for the next few years relates to monetary policy, which remains (by statute) the Bank’s primary function.  This is so despite:

  • several years in which inflation has consistently undershot the targets agreed between Ministers of Finance and successive Governors
  • the salience of the zero lower bound issues to the ability of monetary policy to adequately deal with possible future serious shocks.  In view of the Governor’s worries about the potential threats to financial stability, it is all the more surprising that nothing major appears to be on the work programme to deal with these issues.
  • A new Policy Targets Agreement is due in just over two years (so inside the period covered by this SOI.

I have some sympathy with the argument that normal year-to-year issues in monetary policy don’t easily fit a “strategic priorities” framework, so perhaps the persistent forecast errors (and associated monetary policy mistakes) might not be expected to appear, even though they are now quite persistent, and have come at quite some cost to the unemployed.

But the ZLB issues certainly aren’t just routine issues.  They have represented a major constraint on the ability of central banks in other countries to do the sort of macroeconomic stabilisation expected of them.  Should we be doing something about removing the technical ZLB constraint?  If not, should we thinking harder about raising the inflation target midpoint?  What are the costs and benefits of the various options, and what might the implications be for other areas of policy (eg the tax system).

But the “functional initiatives” list offers nothing either. Here is what it says:

The Bank’s Economics Department has four key work streams for 2015.

  1. Macroprudential and monetary policy interface: undertake analysis and develop frameworks to better understand the interaction between macroprudential and monetary policy.
  1. Support the formulation of monetary policy: understand how events such as a construction and housing boom, fiscal consolidation, and international developments will shape the next business cycle.
  1. Monetary policy research: undertake analysis to improve the Bank’s understanding of the New Zealand economy and key monetary policy issues.
  1. Exchange rate analysis: reviewing the Bank’s frameworks for assessing the long-term sustainable level of the exchange rate and analysis of the cyclical impact of the exchange rate on New Zealand economic activity and inflation.

Nothing particularly objectionable there, perhaps, but nothing that seriously engages with the sorts of issues I listed above either.

Banking supervision

The Bank has three strategic priorities related to banking supervision:


  1. Exploring macro-prudential policy options to manage the financial stability implications of housing cycles

The Bank will explore macro-prudential policy options for managing the financial stability implications of housing market cycles. It will continue to investigate the interactions between monetary policy, prudential policy and the objectives of price and financial stability. The Macro-Financial department will lead work through the Macro-Financial Committee and

Governing Committee, with support from the Economics and Prudential Supervision departments.


  1. Updating the prudential policy and supervision frameworks.

The Bank will implement changes arising from the regulatory stocktake and will review other key policy settings. These will include outsourcing requirements on banks, and capital and liquidity settings in light of the revised Basel standards.


  1. Developing a comprehensive stress-testing framework for the New Zealand banking system

The Macro-Financial and Prudential Supervision departments are developing a comprehensive stress-testing framework to gauge the resilience of the banking system to adverse shocks. The Reserve Bank will work with the banks to identify and implement improvements to the banks’ technical stress-testing frameworks and processes. In addition,

the Bank will ensure that stress tests become a centerpiece of banks’ internal risk management, and are regularly scrutinised by senior management and boards.

One might question just how “strategic” 5 and 6 are – presumably here the Governor just means “we will put a lot of time into”?  I noticed that the Governor says he will “ensure that stress tests become a centrepiece of banks’ internal risk management”.   But banks might reasonably ask the same of the Reserve Bank.  The Bank is currently trying to further restrict banks’ business operations, even though the latest stress test results suggest there is no threat to the health of individual banks, or to that of the financial system as a whole.

There is also a long list of “Initiatives and strategies” in this area:

Initiatives and strategies

To address these issues, the Bank will:

  • explore additional macro-prudential policy options for managing the financial stability implications of housing market cycles;
  • work with the banks to ensure that stress-testing models and processes are robust and a core centrepiece of the banks’ internal risk management

continue to assess the linkages between monetary and macroprudential policy to ensure that complementary or opposing effects between the two policy areas are properly taken into account;

  • continue to enhance the reporting of financial system stability and efficiency, and policy assessments, contained in the FSR and other reports;
  • publish a stress-testing guide with a view to improving the stresstesting practices of New Zealand banks, and continue to develop a comprehensive stress-testing framework for New Zealand banks, a joint initiative with the Macro-Financial department;
  • complete the regulatory stocktake by consulting on and implementing initial enhancements to improve the efficiency, clarity and targeting of prudential standards for banks and NBDTs, and identifying separate areas for further work;
  • maintain supervisory engagement with executives and directors of regulated banks;
  • complete a review of, and consult on, the outsourcing arrangements that currently apply to ‘large banks’;
  • work closely with banks to ensure timely compliance with new outsourcing requirements;
  • review the Bank’s existing liquidity policy against finalised international liquidity standards;
  • review the Bank’s broad suite of capital requirements;
  • consult on a range of amendments to the statutory management powers in the Reserve Bank of New Zealand Act 1989 to clarify aspects of the legislative framework for the Open Bank Resolution policy;
  • promote legislative changes recommended by the review of the prudential regime for NBDTs that was completed in 2013;
  • finalise policy to strengthen the Bank’s oversight of financial market infrastructures; and
  • implement the business-as-usual supervisory framework for licensed insurers.

Again, what is there is not objectionable, but I think some questions should be asked about what is not there.    For example:

  • There is no sign of any proposed rigorous (let alone independent) ex-post evaluation of the Bank’s LVR regulations, even though they have been a major innovation in New Zealand policy.
  • There is no sign of any particular work on the efficiency of the financial system, even though any (arguable) soundness benefits from measures like the actual and proposed LVR controls come with undoubted efficiency costs.
  • There is no sign of any initiatives to lift either the quantity of quality of the Bank’s research and policy analysis in prudential regulatory and financial stability areas.  For example, there is no sign of any work programme on how to best interpret the lessons of other countries which have, and have not, experienced financial crises in the last decade or so.

More generally, there is no sign of an organisation that recognises the importance of, and wants to foster,  the robust contest of ideas, internally and externally.

In a sense, none of this should be very surprising.  As I have been highlighting, too many of the Reserve Bank’s powers (ie all of them) rest with the Governor alone.  But the draft of this SOI will have been seen by the Minister, and it might be interesting to ask the Bank or the Minister for a copy of any comments the Minister provided. Probably a draft went to the Reserve Bank’s own Board –  but the Board exists to review the Governor’s performance after the event, not to set strategic priorities, approve functional initiatives, or even set Budgets.   The SOI is a reflection of the single decision-maker’s preferences and priorities –  a model which has both strengths, and some significant weaknesses and risks

There is no suggestion of any further work on possible improvements in, or changes to, the statutory governance of the Bank.  I have just lodged an OIA request with the Bank asking for copies of any work done in this area over the last couple of years.  Of course, decisions on governance and statutory changes are a matter ultimately for the Minister and Parliament, but in his early months the Governor did appear to recognise some weaknesses in the current model, prompting him to establish the Governing Committtee (him, and the three deputy/assistant governors), as a forum in which the Governor would make major decisions, to help mitigate some of the internal risks in the current statutory system.

The Reserve Bank’s Statement of Intent stands referred to Parliament.  It might be interesting for the Finance and Expenditure Committee to ask the Governor about the some of the issues raised here.  Other departments have an estimates hearing before their funding is appropriated.  There is nothing similar for the Bank’s five year funding, but the SOI does provide a basis for some scrutiny and challenge.