Time to wind-up the NZ Superannuation Fund

In their print edition last Friday, NBR ran a piece from me suggesting that it was now time to wind-up the New Zealand Superannuation Fund.  For those with NBR subscriptions, it is now available on line.

I didn’t assign my copyright to NBR or anything of the sort, but I won’t reproduce the full column here.  It was, largely, a much shorter version of a post I did here a couple of weeks ago (and in the process of generating it, I proved to myself again that one reason I write long posts is that short posts take much longer).  But this was the final paragraph.

There is a political debate to be had about both NZSF and about the future parameters of New Zealand Superannuation.  But the two simply aren’t very logically connected.   What NZS policy we run in future depends on all manner of things, including the overall state of the government’s finances.  But the performance of one part of the balance sheet simply isn’t a key consideration.    If it makes sense for governments to run speculative investment management operations, it does so whether or not life expectancies are increasing.   But short of Norwegian quantities of oil and gas being discovered here –  which give the government cash that simply has to be invested –  it is just isn’t a business the government should be in.  Fortunately, the Fund hasn’t done badly over its life to date, but let’s bank the gains, and wind-back the considerable future risks by closing the Fund and using the proceeds to repay government debt.   

In both my recent posts on NZSF (here and here) , I’ve tried to emphasise that those who run it probably haven’t done a bad job in the time they’ve been managing our money.  (Here I should note that the NZSF have pointed out, via a response to someone else’s OIA, that in my first post I made a mistake in annualising the rates of return on the New Zealand stock exchange, a number I had mentioned in passing in that post.  NZSF and I agree –  on this if little else –  that the New Zealand stock returns are not a particularly meaningful benchmark for these purposes.)

NZSF has been charged by Parliament with running a high risk fund, they’ve done that, and over a period in which global asset markets have done rather well, they’ve made quite a bit of money for the taxpayer.  But if the relevant benchmark isn’t the NZSE50, neither it is (as NZSF and its chief executive keep claiming) the Reference Portfolio that the Fund Board themselves construct and adopt.  The latter has some uses inside the organisation, but it is largely irrelevant for taxpayers and citizens trying to decide whether NZSF has (a) done a good job, and (b) should exist at all.

In their own official documents, the relevant performance benchmark is

It is our expectation, given our long-term mandate and risk appetite, that we will return at least the Treasury Bill return + 2.7% p.a. over any 20-year moving average period.

That expectation is hardly ever mentioned when, for example, the chief executive takes to the media.  It didn’t appear in the OIA response I linked to earlier either.

As it happens, the returns to date have been (quite a bit) better than that benchmark –  which is why I’m quite open about the fact that NZSF has probably done a reasonable job, perhaps as good as most other managers with their opportunities might have done.   But after only 13 years, their own official documents tell us that we can’t yet know how much of those returns is down to luck, and how much down to skill.   As they note, when you take as much risk as they do –  really big year to year fluctuations –  it takes a long time to tell.   When global markets are rising strongly it isn’t hard to make money.

Over the life of the Fund, their total returns have averaged around 10 per cent per annum.  As I’ve noted previously, over most of that period the Treasury required government agencies looking at investment projects to use a discount rate of 8 per cent real (or around 10 per cent in nominal returns).  Of course, what discount rate one should use depends on how risky the proposed project is, and what it does to the risk profile of the whole of the owner’s business.  A “high octane” (Orr’s words) investment management subsidiary is risky –  it might not be Wellington aiport runway extension risky or INCIS risky, but it will be riskier than, say, a new school in a growing city.   And these sorts of investment management returns tend to add to, rather than reduce, the variance of the Crown’s overall financial position –  in particular, the biggest losses tend to become starkly apparent in periods when there is the greatest pressure on other government finances (ie in severe global economic and financial downturns).  A 10 per cent (pre-tax) return over the period from 2003 to now –  even though it is better than they expected –  just isn’t that impressive.  And NZSF tell us that even they believe those sorts of returns can’t be expected to be replicated in future –  they tell us we should expect 2.7 per cent above the Treasury bill rate.  Who knows what a “neutral” New Zealand Treasury bill rate is, but even if it is getting up to around 4 per cent, that suggests expected future pre-tax returns of less than 7 per cent.   And there is no reason to think that the variances, or covariances, of the portfolio will be less in future than they have been.    (In recognition of the lower interest rate environment, Treasury now encourages government agencies to use a real pre-tax discount of 6 per cent –  or 8 per cent in nominal terms.)

I could add into the mix the point that few private companies will be using hurdle rates of return of less than 10 per cent in deciding on investment projects, or the acquisition of a subsidiary.  And that is what NZSF is –  a fairly aggressive investment management subsidiary of the New Zealand government (with deteriorating governance/transparency –  eg when a large chunk of a government-owned local retail bank is in the portfolio).

And so my bottom line is that we should be thankful for the reasonable returns we’ve had from NZSF to now (through some mix of luck and skill), but that since we can’t count on anything like those sorts of returns in future (even NZSF say so), and even the returns to date are really only sufficient to compensate us for the risk run on our behalf, we’d be better off locking in the gains we’ve had, closing down the Fund,  liquidating the assets over a couple of years, and using the proceeds to repay public debt.    Our government does not need to be in this game –  unlike, say, the governments of Norway or Abu Dhabi, with genuine wealth to manage and smooth –  and the returns to doing so don’t look that attractive.   As the Crown is already heavily exposed (both through the tax system and its other extensive asset holdings) to the ups and downs of the domestic economy and global markets, strategies that reduce risk, rather than increase it, seem intuitively more appealing.  The NZSF logic is the opposite of that.

To accompany my NBR piece, they did an NBR Radio interview.  The one question that got me thinking –  and really the reason for this post, which to some extent is traversing old ground –  was along the lines of “wouldn’t winding up the NZSF leave ordinary people worried about whether their NZS pension would be there for them when they got old?”.

That the question slightly rattled me probably just reflected the fact that I’m a macroeconomist not a political scientist.    Perhaps it is also a testimony to Michael Cullen’s political skill in constructing the NZSF, initially to safeguard surpluses from spending ministers as anything else, and linking it to the NZS regime.      But why shouldn’t people worry?

  • NZSF is only a small part of the government’s overall balance sheet,
  • Our government finances are –  thanks to a succession of Labour and National led governments –  among the stronger in the advanced world,
  • Even the staunchest advocates of NZSF never saw it contributing more than a moderate proportion of future NZS costs,
  • We’ve had a universal government pension since around 1940 –  with brief interruptions in the means-testing years of the 1980s and 1990s – and a government old-age pension for those in need since 1898,
  • Our universal old-age pension is high enough to keep most old people out of poverty (even those who earned low enough incomes through their lifetimes that they’d have had little effective capacity to save), but doesn’t (of itself) deliver high incomes to people beyond basic needs (so it isn’t like some state schemes elsewhere in the OECD),
  • And there is nothing about NZS that is unaffordable in the long run, provided that sensible, well-foreshadowed, adjustments in the age of eligibility are made, in line with continuing improvements in life expectancy.  Ideally, we’d have the age at 67 already, and be increasing (by statutory formula) a little each year as the life expectancy rises.   Simply shifting the age to, say, 67 doesn’t resolve the issue, but a suitable resilient formula-based adjustment would.

In modern times, the greatest period of uncertainty –  by far –  about future state pension support was during the years from around 1985 to 1998 when a means-testing regime was instituted and then constantly revisited.  That had to do with some combination of the overall stretched state of the government’s finances, as well as essentially ideological debates about universality vs targeting.

If one believes –  as I, somewhat reluctantly (but for good second-best reasons) do –  in a modest but universal state age pension, the best protections of that over the long-term, and the best way to provide predictability to individuals (avoiding jerky discontinuous policy adjustments) are

(a) sound overall government finances (low debt levels, and tax and spending shares of GDP that don’t push historical or international limits), and

(b) agreed, or at least broadly accepted across the main parties, statutory provisions that lay down well in advance how the age of eligibility will adjust in future as life expectancy increases.

NZSF really isn’t relevant to either.    It is just a high-risk investment management business, and that isn’t a natural business of government.

And veering slightly further off topic, I’m still puzzled by that Labour-Green commitment I discussed yesterday to keep core Crown spending to around 30 per cent of GDP while doing nothing to alter NZS parameters.  This was the chart from the Treasury’s long-term fiscal statement released late last year.

ltfsThey would be okay for the next few years, but once you get even 10 years out from here, there would need to be a lot of other expenditure cut to keep spending to around 30 per cent of GDP, even if (a) the two parties resume NZSF contributions soon, and (b) investment returns proved to be pretty good.   I’m genuinely puzzled how they propose to square that circle.

Defenders of the NZSF

After the flurry of coverage a couple of weeks ago over the remuneration of Adrian Orr, chief executive of the New Zealand Superannuation Fund, debate seems to have turned towards the more substantive issues around the role of the Fund.   The chief executive has been out, in his usual feisty and rather opportunistic style, defending the Fund, advocating for it to be given more money to invest and so on.   One could reasonably question whether the latter in particular is the role of a public servant.  His job, surely, is to invest the money the government has chosen, under the terms of the legislation, to place with NZSF.    Wisely, in my view, no more money has been placed with Fund since 2009 (although even then I thought it was shame the government didn’t simply wind up the Fund).  But this is now an election campaign issue, with the Labour Party vocally calling for an immediate restart of contributions.   That is perhaps understandable from a party which now, once again, favours keeping the NZS age at 65 indefinitely –  which was pretty much their position back when the Fund was first set up.   But it is a debate senior public servants shouldn’t be participating in in public.  Whatever one’s view of the NZSF itself, there are simply fewer grounds for it if one thinks the age of NZS eligibility should be increased over time, as life expectancy improves.

What has also interested me is the vocal support Orr has had from various journalists. In the Orr interview I listened to, on Radio New Zealand’s Nine to Noon on Monday, Kathryn Ryan seemed to see her role as being to help Orr get “the truth” across, cheering him on as he went, rather than asking any searching or challenging questions.  And this morning, in the Dominion-Post, Vernon Small is channelling the Orr lines, but in even more strident tones.  He concludes that we’d be “barking mad” not to be putting more money into the NZSF each and every year.

Well, perhaps. But Orr in particular was guilty of downplaying quite a lot of important considerations.

First, for all the breathless excitement about the NZSF’s investment returns (around 10 per cent per annum, pre-tax, over the life of the Fund), there has been no hint from chief executive, or his media supporters, of the rather more disciplined approach official NZSF documents, presumably adopted by the Board, take:

It is our expectation, given our long-term mandate and risk appetite, that we will return at least the Treasury Bill return + 2.7% p.a. over any 20-year moving average period.

By design, it is a highly risky Fund (“high octane” was Orr’s description) and performance can only seriously evaluated over quite long periods of time –  20 year periods in the organisation’s own telling.  But Orr (or Ryan or Small) didn’t make that point.

Kathryn Ryan’s breathless praise of the investment performance included, a couple of times, “even over the global financial crisis”.     That period was certainly pretty dramatic, but for equity markets it just doesn’t look that unusual in the longer sweep of history.  Here is a chart of the S&P500, in real terms and on a log scale.

sp-500-historical-chart-data-2017-03-15-macrotrends (1)

The fall in equity prices over 2008/09 looks like the sort of fall one might expect every 15 or 20 years –  and that one was shorter-lived than most.  If you take lots of risk in equity and bond markets, the last 15 years haven’t been a hard time to make money.  As far as I can see, the NZSF has more or less been compensated for those risks (it has forced us citizens to bear) but no more than that.  (I was however amused by the shameless attempt of the Fund’s head of asset allocation, in response to a recent OIA request, to suggest that returns from January 2009 –  near the trough of global markets –  was a meaningful number to use in evaluating the Fund’s performance.)

So the problem with the Fund isn’t that its investment management choices (both those they would loosely classify as “passive” and those equally loosely classified as “active” –  the distinction is pretty arbitrary) have been particularly bad, or good.  They’ve probably been about what one might reasonably expect over that period.  And if we closed the Fund now, or shifted all the money back to low-risk assets, we could crystallise the gains and be thankful that, despite all the risk run, we made money rather than lost money.     But nothing in the Fund’s investment strategy will protect taxpayers if, and when, markets turn bad again.

Orr continues to misrepresents the NZSF as a “sovereign wealth fund”.  It simply isn’t.  We aren’t Norway or Abu Dhabi, managing for an intergenerational perspective, oil wealth that has been turned into cash.   All the money put into the NZSF has either been raised from taxes or borrowed.     There isn’t a pool of money that naturally needs investing.  Rather, the government has established a high-risk investment management subsidiary to punt on world markets.     That simply isn’t –  and never has been –  a natural business of government.

The Fund itself doesn’t have to worry where its money comes from.  But citizens do.   Who knows what governments would have done with the money if the NZSF had never been established.  I suspect much of it would have been wasted on increased government spending.  But it would have been possible to have cut the most distortionary taxes –  those on business income –  quite heavily, which would probably have given risen to a lot more business investment in New Zealand.  None of the analyses of the returns of the Fund ever seem to take into account, for example, the deadweight costs of taxes.  On mightn’t expect NZSF to do so –  they are just investment managers –  but if they don’t they aren’t really in a legitimate position to be calling for more public money to be steered their way.

Orr cites a number of other advantages for the Fund.   He argues that it has contributed to developing New Zealand capital markets.  I’d be interested to see the evidence for that claim.  Most of the Fund’s assets are invested abroad, by intentional design.   What would New Zealanders have done with money if they’d had it as individuals?   And I don’t quite see how sweetheart inside deals, whereby ACC and NZSF  – neither with any particular expertise in retail banking –  take chunks of Kiwibank from NZ Post, enhance New Zealand capital markets.  No doubt having a hulking behemoth (by New Zealand standards) like NZSF generates more activity –  NZDMO got to issue more bonds than otherwise, and then NZSF buys more (mostly overseas) assets –  but are the capital markets really better –  and by what standards – for the presence of the Fund?

I also heard him argue that the NZSF somehow reduces risk and improves certainty. I wasn’t quite sure what he was referring to, but it seemed to be about the future of NZS itself.    But again, he is really talking beyond his pay grade.  The future of NZS is a political issue that really has little or nothing to do with the NZSF size/performance.   It isn’t like a contractural funded defined benefit pension scheme.  Presumably the overall state of government finances, overall tax burdens, and a community consensus on what is fair and reasonable are more likely to shape the future of NZS than the presence (and investment returns) of NZSF.    And in thinking about the overall government balance sheet –  something Orr doesn’t seem to, and isn’t paid to, think much about –  NZSF is currently only about 10 per cent of total assets.

He is on similarly shaky ground when he talks about save as you go approaches beating out pay as you go approaches.  I’m sure we can all agree that saving for the future typically makes sense –  the power of compound interest and all that  –  but that insight doesn’t help at all in deciding what, if any, role NZSF should have.   After all, we could wind NZSF up today, use the proceeds to repay government debt, and nothing would change about accumulated public sector savings.  Higher public sector savings is mostly a choice between taxing more and spending less.   As it is, I’d probably be happier if overall government net debt (including NZSF assets) was quite a bit lower than it is (ie build up government savings a bit more), but at least until all the gross government debt is repaid the government simply doesn’t have to be in the financial investment management business –  it is a pure discretionary choice.    We haven’t been there so far in the 14 year life of the Fund, and it doesn’t look likely that we will be in the next few decades either.  And Orr gives no weight at all to the failures of government, which often see additional Crown revenues wasted rather than saved.

Orr, and his defenders, have also been keen to scoff at any analogies with how a household might approach decisions.  I heard him say something along the lines of “if governments could act like households, we wouldn’t need governments”, which is true, but irrelevant in this context.  One role governments play, on behalf of households collectively, is to absorb collectively some of residual risks that individuals aren’t well-placed to handle.  That might tell you that often governments can’t, or won’t or shouldn’t cut spending in severe downturns, because some of their obligations increase then (and they are willing to let automatic stabilisers work).  For that reason, governments should be wary of revenue sources, or investment returns, that are very highly positively correlated with the economic cycle.  For example, one reason to be wary of capital gains taxes is that they tend to flatter government finances in good times, only for the revenue to dry up just when governments need it most (see Ireland last decade for a classic case study).    The same might well be said of highly risky asset portfolios –  even if they do quite well over the very long haul, they will look particularly poorly at just the times when government finances are under most pressure for other reasons.  In fact, if the pressures get serious enough, governments might come under pressure to liquidate those risky holdings right at the bottom of the cycle.  Those aren’t issues Orr has worry about –  he is simply paid to maximise returns on his little chunk of government resources, subject to acceptable risk –  but citizens, and people worry about overall government finances through time should do.

After all, it is not as if governments don’t already have other income and investment returns that are quite tied to the economic cycle.  Even on the investment front, for good or ill the government has quite large commercial holdings (those SOE stakes), and on the revenue front the tax system effectively makes the government an equity stakeholder in every business in New Zealand.

Orr and his defenders also scoff at household comparisons because, so they note, the government can borrow more cheaply than households.  More flamboyantly, here is Vernon Small’s take

As a comparison it may be politically effective but it is about as useful as a chocolate teapot.

Show me the household that can tax, has a central bank to set interest rates and biff around the exchange rate paid at the corner dairy, can borrow more cheaply than any business at rates below any mortgage offered by banks – and can live on for decades past the final days of its family members – and I’ll show you the household that has much to learn from a central government or vice versa.

Actually, the typical government (as distinct from the idealised one no one has ever seen) has operated with a horizon considerably shorter than that of most households.  And that is understandable:  I care about my kids and potential future grandchildren, who will still be there in decades to come.  Politicians –  who run governments –  face elections quite frequently, and in the course of a single lifetime successions of them run policy all over the show.

And quite how do people think that governments borrow so cheaply?  Because they have the power to tax, and that power is mostly exercised not over random stateless aliens, but over New Zealand households.  Every debt the New Zealand government takes on involves risks for New Zealand households – risks that at times of stress, governments will disrupt household and business plans by unexpectedly making a grab for a larger share of our incomes/wealth.  That risk limits the other risks households can afford to take, and is why I keep stressing that an accountable government can’t think of the cost of funds as simply the government bond rate; it has to price the implicit equity, bearing in mind that the coercion involved in the power to tax is more costly and distortionary than (say) a large company having to issue new debt if times get tough.    People like to say that governments can’t (usually) go bust, and so are subject to fewer “bankruptcy constraints” in thinking about undertaking possible long-term activities –  but that is typically true only to the extent that they ignore the perspectives and finances or their citizens, who ultimately bear the risks.  Ignoring citizens isn’t what governments are supposed to do.

My bottom line remains that NZSF hasn’t done badly what it has been asked to do (if you want a high risk fund that is).  Equally, it hasn’t really been put to the test.  They probably made some quite good calls at times, but the risks they assume for the taxpayer are very considerable.  In that OIA response I referred to earlier, they attempt to rebut some of my arguments, by suggesting that the appropriate hurdle rate of return should depend on the riskiness of the project.  I read that and thought: “yes, and that is really to concede my point”.    Over the life of the Fund, the standard deviation of annual returns has been almost 13 per cent.  Those are really large fluctuations –  by design –  and in considering establishing (or retaining) a government leveraged investment fund –  effectively a business subsidiary of the government – taxpayers need a lot of compensation for that risk.    Especially as that risk –  in the extremes, which are what matter –  is pretty correlated with other risks to government finances directly, and those of household sector finances indirectly, so there isn’t much –  if any –  overall risk reduction taking place.   When typical Australian companies uses hurdle rates in excess of 10 per cent, we shouldn’t be that comfortable  in our government running such a risky investment management operation for returns that, over a good 14 years, have only just matched 10 per cent.  I’m not suggesting anyone could have done much better than NZSF managers have, just that it wasn’t worth doing at all, evaluated by the sort of standards firms and households apply to their own finances.     And all that on a Fund that at present is only around 13 per cent of GDP.   The risk dimensions of the Fund become even more important if contributions are resumed and we envisage a Fund that could become a much larger component in the overall Crown balance sheet.

There is a political debate that should be had about NZSF.  There is a debate to be had about the future parameters of NZS.  But the two aren’t really very logically connected –  despite the words in the legislation.  If speculative investment management is a natural function of government, it is so regardless of baby boomers ageing, life expectancy or the parameters of any element of the welfare system.  Short of New Zealand discovering Norwegian quantities of oil and gas, I suspect it is no appropriate business of government.






New Zealand Superannuation Fund: does it pass commercial tests?

There has been a great deal of coverage in the last few days of the New Zealand Superannuation Fund, all prompted by the news that the chief executive, Adrian Orr, had been given a substantial pay increase by the Fund’s Board, over the objections of the State Services Commission and the then Minister of Finance.

I don’t have a strong view as to how much the chief executive should be paid.  In general, I also don’t have a particular problem with that amount being determined by the Board, without ministerial involvement.  Then again, this is simply a body managing a large pool of (borrowed) government money, and I couldn’t see a particular problem if the relevant Act was to be amended to make the terms and conditions of the chief executive a matter determined by the Minister of Finance, or the State Services Commission, perhaps taking advice from the Board.   After all, that is exactly the model that applies for the Governor of the Reserve Bank.

Amid the recent media coverage, there has been a lot of hyper-ventilation about the performance of the Fund, and of Orr himself.  In his Dominion-Post article, Hamish Rutherford reports that

One commentator suggested if Orr had achieved such a return in New York he might have made a billion dollars.

That seems unlikely frankly.   Orr simply isn’t –  and I wouldn’t have thought he’d claim otherwise –  some investment guru, blessed with extraordinary insights into markets, prospective returns etc etc.  He was a capable economist, and a good communicator (at least when he doesn’t lapse into vulgarity), who turned himself into a manager and seems to have done quite well at that.   He always seeemed skilled at managing upwards, and his management style (in my observation at the Reserve Bank) seemed to err towards the polarising (“are you with us, or against us”), attracting and retaining loyalists, but not exactly encouraging diversity of perspectives or styles.  He isn’t exactly a self-effacing character. (That is one reason I’m not convinced he is quite the right person to be the next Governor of the Reserve Bank.)

The New Zealand Superannuation Fund has made money, both before and since Orr took over a decade ago.  Of course, amid a trend increase in global asset markets it has been hard not to.   The NZSE50 gross index, for example, has increased at an annualised average rate of about 9.8 per cent per annum since 1 September 2003 (when the NZSF opened its doors).

As for how good the NZSF have been, it is probably too early to tell.  Don’t take my word for it: here is how they themselves put it

It is our expectation, given our long-term mandate and risk appetite, that we will return at least the Treasury Bill return + 2.7% p.a. over any 20-year moving average period.

The Fund has now been operating for only about 13.5 years.  In some respects, the returns to date look quite good –  they’ve averaged 5.6 percentage points per annum above the Treasury bill return –  but for a Fund with the sort of risk parameters they have adopted one can only really evaluate performance over very long periods.  And global asset returns have been pretty attractive over much of the last 15 years.  Will that be repeated?  Will there be a big sustained correction?  The only honest answer is that no one knows.  (And the 20 year time horizon is probably a reason why the institution’s CEO shouldn’t be remunerated to any significant extent on some investment performance formula –  unless there are clawbacks built in for the next 20 years).

But even on the returns to date, it might be reasonable to pose some questions.    The Fund puts a lot of emphasis on expected returns, and not a lot (at least in the published material) on the risk they are running.    In some respects, that is in line with Parliament’s mandate for them to be

maximising return without undue risk to the Fund as a whole;

What, we might wonder, is “undue”?   Who decides, and under what constraints?

A common measure of risk, especially on assets that are frequently marked to market, is the variability of returns.    One tool for relating returns to risk is the so-called Sharpe ratio, which compares the incremental returns obtained through the fund manager’s investment management choices (ie the margin above a risk-free rate) with the standard deviation of those returns.  If the resulting number is very low, the incremental gains might often be prudently best treated as “noise” –  good luck, perhaps, rather than the result of a consistently superior investment strategy.  On the other hand, all else equal a high Sharpe ratio, over a reasonable period of time, provides greater reassurance that the fund manager is adding value.   When I ran the Reserve Bank’s financial markets operations, we had able staff proposing all sorts of clever active management schemes to add value to our foreign reserves operation.  Sharpe ratios were one of the tools we used to evaluate prospective and actual results.

How has the NZSF done on that metric?  Since it opened the doors, the average annualised return has been 9.9 per cent (recall that NZSE50 return of 9.8 per cent).  Treasury bills –  the Fund’s risk-free benchmark –  provided an average return of 4.3 per cent, so the average margin over the Treasury bill return was 5.6 per cent.

But the standard deviation of those annual excess returns over the full period since September 2003 is around 13.5 per cent, for a Sharpe ratio of just over 0.4 per cent (and these are all pre-tax numbers).  That is pretty low.  In other words, while the headline returns –  through a period of strong asset price growth –  may have looked impressive, the risks they have been running have been (deliberately and consciously) high.   I checked, by way of comparison, the returns on the low-risk (low return) superannuation fund I’m a member (and trustee) of: since 2003 the standard deviation of the annual returns on that fund since 2003 have been around 4.5 per cent.

Adrian Orr has now been CEO of the NZSF for almost a decade.  In that decade, annual returns (above Treasury bill) look to have averaged just over 5 per cent, but the standard deviation of those annual returns has been higher at around 17 per cent.  In other words, the Sharpe ratio for the Orr years, is even lower than that for the full period of operation.  But, as a reminder, the Fund itself reckons one needs a 20 year run of data to evaluate their investment management performance.

Based on the NZSF’s own data the monthly returns are also pretty volatile.  The standard deviation of monthly returns (over the risk-free rate) over the life of the Fund has been around 3.3 per cent.    Given that many of the Fund’s holdings are quite illiquid, one probably shouldn’t put too much weight on the monthly return numbers, but it is a reminder of just how much risk the NZSF is incurring –  not for itself, but for the taxpayers of New Zealand.  At best, they might just have been getting compensation for the risk they’ve taken, but there doesn’t seem to be anything exceptional about their performance given that level of risk.    That, in itself, isn’t intended as a criticism: why would we expect a public agency in New Zealand to be able to add much (risk-adjusted) value, whether through asset allocation, or tactical departures from their own internal benchmarks?  But it is a bit of a reality check.  And as Hamish Rutherford noted, on deals like Kiwibank, the super fund’s returns are, over time, likely to be flattered by the privileged position NZSF had going into negotiations –  there were very very few buyers acceptable to the government, and ACC and NZSF will have known that, and reflected it in the price they offered NZ Post.

My own unease about NZSF is rather more fundamental, and doesn’t reflect on any of the individuals involved in managing the funds or the organisation.   The NZSF is often loosely described as a sovereign wealth fund.  In fact, it is nothing of the sort.    Norway and Abu Dhabi have sovereign wealth funds –  accumulated from the proceeds of the sale of state-owned natural resources (oil and gas).   It is real wealth, and needs to be managed somehow.  Of course, it could all be passed on to citizens to do with as they please, but there are plausible –  not necessarily 100 per cent compelling –  reasons for managing the flow of the proceeds of the sale of a large non-renewable natural resource over time.    If so, the money is there and has to be managed somehow.

By contrast, the New Zealand Superannuation Fund arose because successive governments took more in taxation from New Zealanders than they needed to fund their operations.  At one stage at looked as though the New Zealand government would manage to build up a large financial asset position.  But, except briefly just prior to the 2008/09 recession, they didn’t even manage to do that.  Instead, we now have a quite large stock of government debt outstanding, $33 billion of which is used to run a state-sponsored and managed quite-risky hedge fund.   It is a discretionary commercial operation, and it should be evaluated on the same sorts of grounds Treasury and the government lay down for other investment projects.  And given that risk imposed on us by the government is risk (capacity) we could ourselves otherwise choose to utilise elsewhere, it should also be evaluated by looking at the sorts of returns private sector businesses require in analysing possible uses of capital.

Treasury has recently revised downwards the pre-tax discount rates it recommends government agencies use in evaluating projects.  Their default recommended rate is now 6 per cent real (or around 8 per cent nominal), but over most of the period of the life of the NZSF they were recommending a real discount rate of nearer 8 per cent.  They continue to assume an equity risk premium of 7 per cent.  Against those sorts of asssumptions, average annual nominal returns of 9.9 per cent just don’t look that attractive, especially when subject to huge variability (that 13.5 per cent annual standard deviation).    I don’t know what assumptions NZSF are making about expected absolute returns over the next decade, but it would be a bit surprising if they were forecasting/assuming returns as high as those on offer for the last 14 years.

Another way of looking at whether the NZSF is a good business for the Crown to be in, on behalf of taxpayers, is to look at the returns private sector businesses require.  I’ve linked previously to a nice article from the Reserve Bank of Australia, drawing on a survey of private sector businesses asked about what hurdle rates they used in approving/declining investment decisions.  I summarised it previously thus:

They report survey results suggesting that most firms in Australia use pre-tax nominal hurdle rates of return in a range of 10-16 per cent (the largest group fell in the range10-13 per cent, and the second largest in a 13-16 per cent band). Recall that nominal interest rates in Australia are typically a little lower than those in New Zealand, and their inflation target is a little higher than ours.   In other words, it would surprising if New Zealand firms didn’t use hurdle rates at least as high in nominal terms as those used by their Australia peers.     The RBA reports a standard finding that required rates of return were typically a little above the firms’ estimated weighted average cost of capital. The literature suggests a variety of reasons why firms might adopt that approach, including as a buffer against potential biases in the estimated benefits used in evaluating projects.

And here is one of their charts


Bottom line: private citizens shouldn’t want governments getting into businesses –  especially not relatively risky businesses –  where the returns are less than 10 per cent.

There are other reasons to be concerned about the economics of the NZSF:

  • putting money into NZSF required tax rates to be higher than otherwise (as would the shared commitment to resume contributions at some point).  Higher tax rates discourage some economic activity that would otherwise occur here, and New Zealand tax rates are not now unusually low by international standards (our company tax rate is quite high),
  • the scheme involves all New Zealanders in direct financial exposures to companies/industries they may disapprove of. NZSF attempts to get round that with their ‘socially responsible’ investment policy, but your view of “socially responsible” companies/activities may well differ from that of your neighbour.  Personally, I’d be quite happy to have money invested in whale fishing companies.  Many others might not.    Making those choices simply isn’t a natural or necessary business of government.
  • large pools of government financial assets encourage the misuse of those funds in the event that the country/government comes under financial stress at some point in the future.  Those sorts of tail risks aren’t captured in the monthly or annual standard deviation numbers.
  • NZSF, being a quite high risk fund, tends to perform well in periods when the government’s finances are not under stress, and to perform badly (very badly in 2008/09) when government finances come under most stress. Because the assets are quite widely held, it provides some protection against some sorts of shocks, but in any severe global economic and asset market downturn –  the sort of event New Zealand is never immune to – the NZSF investment strategy simply ensures that when problems hit they are compounded by investment losses.  As the government is already, in effect, an equity holder in all New Zealand business (through the tax system), it isn’t obvious quite why it should be attractive for New Zealanders to have the government further compound their exposures.  To take those risks might be reasonable for the prospect of exceptional returns, but the NZSF strategies look to do little more than cover a bare minimum cost of capital –  while aggravating our problems when things turn bad.

The NZSF may have been a sensible practical political option back at the start of the 2000s.  Governments were running large surpluses, positive net financial assets were in prospect, and the retirement of the babyboomers was still a decade away.   It makes little sense now, and if anything is a distraction from the necessary discussion about adjusting the NZS eligibility age in line with the longer-term trend improvements in life expectancy.  Rather than debate how to remunerate the CEO, or whether Board members should be replaced, we’d be better to look seriously at winding up the Fund now,  reducing the risks taxpayers ar exposed to and using the proceeds to repay government debt.




Labour on New Zealand Superannuation

Sometimes I wonder where Andrew Little gets his advice/ideas.

Yesterday, the Dominion-Post ran an article by Vernon Small reporting an interview with the Labour leader and his finance spokesperson Grant Robertson.   In it

Little reaffirmed his opposition to raising the retirement age – a policy he scrapped as leader – but he wants to resume payments to the “Cullen” fund that pre-funds some of the cost of the universal pension.

“Do we need to resume contributions to the Cullen Fund? Too darn right we do, (because) $14.5 billion of contributions not made in the last eight years would have been worth $20b to the fund.”

Other changes to superannuation were not being contemplated, although Little did not rule out other options such as changes to the current indexing, which is linked wage rates.

“Those are things you can have a look at. They are not big money-savers necessarily – over time they might be – but (I am) not certainly averse to looking at those sort of things.”

But New Zealand could be proud of its low level of elder poverty. “So why would you want to change that?”

I agree that the low level of poverty among the elderly is something New Zealand can be proud of.  So why would Labour want to put it in jeopardy?   Because that is exactly what changing the indexing basis would mean over time.   By contrast, raising the age of eligibility gradually –  the policy Labour previously campaigned on but has now abandoned – would be one of the best ways of securing the admirable record of keeping from poverty those unable to work because of advanced age.

At present, NZS payments are indexed to changes in average nominal wages.  That means that, over time, those on NZS share in the overall gains that wage earners achieve.  When productivity growth is low, neither wages nor NZS tend to rise very much in real terms, and when productivity growth is strong the elderly get to share in the gains.  It is easy enough to run an economist’s argument for an alternative approach:  index to the CPI instead (as some favour) and NZS is kept at a constant real level, regardless of what happens in the real economy.  If the current real level of NZS is enough to keep poverty at bay, that same level should keep poverty at bay in future –  at least if “poverty” is defined the same way.

Changing the indexing basis makes a huge difference over time.    In their recent Long-Term Fiscal Statement, looking ahead of 40 years, Treasury (perhaps optimistically) assumed annual labour productivity growth of 1.5 per cent per annum.  Only a couple of days ago, they tweeted the chart from the report highlighting just how much would be saved by indexing to the CPI instead of to wages.  But the flip side of moving to CPI indexing is that NZS payments received by individuals in the future would be much lower than they would be under the current rules.  In fact, on the Treasury productivity assumptions, NZS weekly payments 40 years hence would be only around 55 per cent of what they would be on the current, well-established, formula.   Adopting such a rule would almost certainly see a big increase in the number of elderly people measured as living in poverty –  and since community expectations, and regulatory minimum standards in a whole range of areas, tend to rise with economic growth it is almost certain that there would be an increase in real hardship.  Imagine if real NZS weekly payments had been held constant for the last 50 years.

There is nothing inherently right about the current real (absolute or relative) level of NZS.  It is the outcome of a series of political (com)promises.  Sure some money could be saved by moving to CPI indexing for a while, but CPI indexing would almost certainly be untenable and unsustainable in the long run, reopening intense debates every few years as to just what level of income superannuitants should receive.  Avoiding the bitter fights around NZS that characterised New Zealand politics from the mid 80s to the late 90s seems highly desirable.

What I found really puzzling about Little’s reported remarks is that changes in the indexing arrangements would affect everyone who receives NZS –  and would potentially adversely affect them for the rest of their lives.  By contrast, changing the eligibility age doesn’t affect those (a large number of voters) now receiving NZS at all.   And changing the eligibility age slowly, as New Zealand can still afford to do, is a very slight dislocation for most people.   Increase the age of eligibility by, say, two months a year until the age gets to, say, 68, and then index any future increases to future increases in life expectancy.  On that rule, someone who was 60 when the policy change took affect might have to work until almost 66, instead of until 65, to receive NZS.  From their perspective, of course it is a loss and unwelcome, but it isn’t a huge dislocation.  And it is a much slower pace of adjustment than we adopted in the 1990s and early 2000s, when the age of eligibility was raised from 60 to 65 at a rate of six months a year –  and governments managed to get re-elected nonetheless.  I don’t imagine there are many 50 year olds now who expect to collect NZS at 65.

Yes, there are some people who are physically unable to work by the time they are 65.  There always have been, and no doubt always will be.  We have working age people now who are physically unable to work.    And any compassionate society needs to make provision for those people.  But that needn’t mean a universal entitlement at age 65 indefinitely.

The other overdue change to the NZS system is to alter the rules of eligibility.  A residency requirement of only 10 years to claim a full NZS payment seems generous to the point of irresponsibility, prioritising those with a weaker natural claim on our support, over those with a greater claim.  That is especially  so as I pointed out again recently the rules mean that for many people (especially New Zealanders in Australia) they don’t need to have lived in New Zealand –  or paid New Zealand taxes – at all.    The Retirement Commissioner proposes a 25 year residency requirement.  One other possibility might be phased residency tests: perhaps after 10 years, a person might be eligible for 20 per cent of the standard NZS payment, and after 30 years might be eligible for 100 per cent.   But that residency test should involve actual physical residence in New Zealand.

I’ve long been meaning to write a sceptical post about the New Zealand Superannuation Fund.  It was a worthy wheeze in the days when Michael Cullen set it up –  discouraging his colleagues from spending all of the large surpluses –  but it has no natural place.  There is no good moral or economic ground for keeping a universal pension at 65, even as life expectancy continues to increase,  the ageing of the population is a permanent (welcome) feature not a temporary blip, and we don’t have large surpluses any more –  and haven’t had surpluses at all for the last decade.  Labour is quoted citing the investment gains that could have been had if only contributions had been continued for the last eight years –  but (a) the scale of those gains was inherently unknowable in advance, (b) if, as many believe, global asset markets are overvalued the gains may not even be permanent (the NZSF portfolio is structured in such a way that mean that returns will be highly volatile) and (c) the flip side to putting more into the NZSF would have been even larger increases in government gross debt than we have already incurred in the last few years.  Paying public servants to take big leveraged investment risks doesn’t seem a natural role for government (although I know some of my readers/commenters disagree).

I wonder what Labour’s private attitude is?  After all, Labour governments elsewhere in the world –  notably Australia –  have put in place policies to raise the eligibility age for the state pension.  Perhaps they really hope that in next year’s Budget Bill English and Steven Joyce will take the brave but responsible step of raising the eligibility age slowly.  If they did, it is hard to envisage responsible members of the Labour Party’s leadership opposing such a stance with any conviction.

Superannuation choices

Economics is sometimes known as “the dismal science” – thanks to the 19th century writer and historian Thomas Carlyle.  I’m not sure that either word in that phrase is generally fair or accurate, but sometimes economists don’t help themselves.

A good example is around “the ageing population”, something that economists have been worrying about for at least as long as I can remember.  In fact, of course, the ageing population is one of the very greatest achievements of mankind in the last couple of hundred years.   In the UK –  at the leading edge of the Industrial Revolution –  average life expectancy at birth in 1840 was just over 40.  Now it is over 80.  In the first half of the 20th century, many of the gains were  in reductions in infant and childhood mortality.  In recent decades, the gains have been concentrated among adults.  The typical adult is living longer, and that is  –  typically –  something to celebrate.   Here is the New Zealand data on the increase in remaining life expectancy at age 65 over recent decades.


An ageing population isn’t something to try to “remedy”, whether by encouraging more births, (or more wars?) or targeting more migrants.   If there is an ageing population “problem”, it is largely an artefact of the rules we’ve set up for paying state pensions.  There are no doubt some issues around health  –  amid that debate as to whether people living longer means more health spending, or just means that the health spending (usually concentrated around the last few years of life) happens at an older age.  But my focus today is on the state pension system –  New Zealand Superannuation.

When The Treasury recently released their Long-Term Fiscal Statement, I saw criticism of them in some quarters for not making more of the “need” to change the New Zealand Superannuation settings, often with a subtext that reform was urgently needed. I’m critical of Treasury on a variety of scores, but that isn’t one of them.

Treasury included this chart in the report.


As I noted then, one could reasonably run this under a headline “no urgent need for any big fiscal changes for 20 years”.  On these projections, in 2035 the spending share of GDP would be around where it was five years ago.  Actual fiscal policy changes happen all the time, and the base on which revenue is raised changes too.  It wouldn’t take much for spending as a share of GDP in 2035 to be not much different from where it has been on average over the last decade.  One can’t reasonably generate “fiscal crisis” headlines –  or urgent official advice to ministers – out of that sort of scenario.

In saying that, I’m not expressing even the slightest sympathy with the Prime Minister’s dismissal of the Treasury projections as, to put it mildly, not worth the paper they are written on.  If he genuinely believed that there is an easy solution: amend the Public Finance Act and save us the not-inconsiderable amount of resources that goes into producing these statements every few years.   As he has done since he was first elected, the Prime Minister simply wants to make the issues around NZS someone else’s problem –  he knows the parameters should change, and will change, but just not while he is PM.  As someone who is 54, I’ve always assumed that the NZS eligibility age would have increased somewhat by the time I reached 65.  That now seems increasingly doubtful.

But these really aren’t primarily economic issues, and despite Treasury’s enthrallment with their Living Standards framework, they don’t have a mandate for using taxpayer resources to push strongly for the sort of society they –  a few hundred bureaucrats –  happen to favour.  It isn’t even their role to try to work out what choices the public would prefer – that is the stuff of politics.    I read the evidence as suggesting that lower average tax rates would tend to lift New Zealand’s productivity and GDP per capita, but the effects seem to be small and uncertain, and New Zealand’s government spending as a share of GDP isn’t extraordinarily large by modern advanced country standards.

To my mind, issues around New Zealand Superannuation are substantially moral in nature, and the debate would be better if centred on those dimensions, rather than on fiscal policy.  Our level of government debt isn’t that low, but by international standards it isn’t high either, and if anything looks likely to drop as a share of GDP over the next few years.  So the issue shouldn’t be “can we afford to pay a universal welfare benefit to an ever-increasing share of the population?” –  ever-increasing, on the assumption that adult life expectancy continues to increase.  We probably could.  But rather “should we?”, or “is it right to do so?”.   Economists quickly get uncomfortable with “is it right” type questions, sidelining them as “political choices”, but almost all the important political choices are about conceptions of what sort of society or government we want –  competing visions of what is “right”.   Of course, there are practical dimensions, and areas where experts can offer technical perspectives  –  eg the implications of particular choices for other things we care about (eg labour force participation, incentives to save etc) –  but the key choices shouldn’t really be seen as technocratic in nature.

For me, there is simply something wrong about offering a universal income to an ever-increasing share of the population.   Governments don’t exist to support us all, but on the other hand they probably do exist, in part, as a vehicle through which society can support those genuinely unable to support themselves.

I’m often struck by the contrast between the situation now and that in 1898 when the first (asset and income-tested) age pension was introduced in New Zealand.  The age of eligibility then was 65.  Life expectancy at birth then, even in a rich colony like New Zealand, was less than 65, and for the minority who made it that far, average  remaining life expectancy was perhaps another 10 years.   But the people who were turning 65 in 1898 will have typically entered the workforce very young –  even for those with a reasonable base of schooling, full-time work would have started by 12 or 14.  That meant fifty years in the workforce –  whether paid directly, or managing a household –  before the question of eligibility for a state pension even arose.  And there weren’t working-age benefits available either.

These days, by contrast, a typical young adult won’t enter the fulltime workforce until perhaps around age 20.  A few leave school and go straight into fulltime work at 16.  Many of the mass who now do university study will be 21 or older before they start fulltime work.    And around 10 per cent of the working age population is on a welfare benefit at any one time.  And when people do finally get to 65 –  as most do – their average life expectancy is now another 20 years.

So we’ve gone from a situation where most adults would support themselves (or within families etc) for their entire adult lives, and a small proportion might have perhaps a decade of state support in old age, to a situation where on average a typical adult will be receiving a state pension or benefit for perhaps a third of their adult life.  That is too much of a change, a shift towards state dependence, for me (as citizen/voter) to regard with equanimity.

This isn’t an argument for abolition of all welfare, or even for harshly treating those permanently unable to support themselves.  For the latter group –  a small minority – I worry that our system has already become unreasonably harsh and burdensome.    It is really simply a view that our conversations and debates should be around what sort of society we want, and what the appropriate role of the state vs self (and family) reliance is.    Shifting towards making NZS available at, say, 67, and then legislating to index that age of eligibility to future increases in adult life expectancy, just isn’t a terribly radical reconception of the role of the state in the face of such large (and welcome) increases in life expectancy, and in the ability of most people in, say, the 65-70 age group to maintain paid employment.

There also needs to be more public debate about the residence requirements for NZS.  When the age pension was first introduced in 1898, there was a requirement of 25 years continuous residence in New Zealand to be eligible.  A recipient had to have spent at least half their adult life in New Zealand –  whether as taxpayer or other contributor to the society/community.  Consider, by contrast, the rules today, under which one can be eligible for (a much higher rate of) NZS having lived in New Zealand for only 10 years, including five years after the age of 50.   That is extraordinary enough, but then there is the oft-overlooked provisions under which, in MSD’s words

We can also count periods of residence spent in countries that New Zealand has social security agreements with.

  • New Zealand has social security agreements with the United Kingdom, the Netherlands, Ireland, Jersey, Guernsey, Australia, Greece, Canada and Denmark
  • These agreements allow you to use residence in these countries to qualify for periods of residence (or contributions) and presence and the ordinary residence criteria.


Australia is, of course, the big issue there.  Not only have huge numbers of New Zealanders gone to Australia and spent the bulk of their adult lives there, but these provisions also apparently cover Australians who have never lived in New Zealand.

Fortunately for us, perhaps, people tend not to migrate towards colder climates in their old age, but the rules still seem quite extraordinary.  What obligation should New Zealanders have towards people who left for Australia at, say, 20, never paid any material amount of taxes in New Zealand, and then late in life decide that a universal pension in New Zealand seems an attractive fallback.  Even the fiscal risks aren’t small.

I’ve written about some of these issues before.  As I noted then

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.

Of course, among the political questions societies need to face is the extent to which income support in (relatively) old age is universal or dependent on circumstances.  New Zealand has gravitated towards a structure where the state pension is paid to everyone, regardless of income or assets, and subject to a very undemanding residence requirement.

Is there a case for income and/or asset testing?    We tried such a model between the mid 1980s and the late 1990s, and it proved politically unsustainable.  Personally, I don’t think it is an issue worth trying to fight again.  It is easy to say “why pay NZS to people earning more than $100000 per annum”, but there aren’t many of them, and even those still earning high incomes at around age 65 will typically see labour income drop away quite quickly.  So there isn’t much money to be saved from instituting a means-test that cuts in at a high income.  There is quite a lot of money at stake if, say, an abatement regime could cut in at, say, the current NZS payment rate (any private income above that threshold would progressively reduce NZS payments).  But if we tried that sort of regime again, there would be huge resistance (on “fairness” grounds –  “I saved all my life, and that person who saved little gets the full NZS payment”), huge incentives to mask or transform the nature of income/assets, and a pretty serious disincentives effect on lower or midde income people to remain in the workforce past age 65.   Would it make much difference to private savings behaviour?  It is hard to tell: very low income people don’t have the capacity to save much anyway, and for seriously wealthy people it would make no difference.  For those in the middle, it might well deter private savings for some and raise it for others  –  the net effect just depends on whether the income or substitution effects are more dominant.  As it is, it is unlikely that the current NZS system materially adversely affects private saving – although the pension is universal, it doesn’t offer a comfortable standard of living for those from the income cohorts who had much capacity to save during their working lives.  For those people, our system discourages private savings less than, say, many of the other advanced country systems (offering an individual-income related unfunded state pension) do.

Frankly, I think any serious means or asset testing regime is largely futile, and probably unsustainable over time, unless or until society could recreate some sense of “shame” in being reliant on the state.  If NZS is seen as an entitlement, that no one should be embarrassed to take, people will do whatever it takes to maximise their claim to the entitlement.  Behavioural responses will be quite different than in a system in which people are ashamed to be dependent on the state, and will do everything possible to avoid themselves (or their parents/relatives) being dependent on the state for income support.

A few years ago, I came across an account of the New Zealand age pension system published just a few years after it was introduced.  William Pember Reeves had been a reforming minister in the Liberal government of the 1890s, and in 1902 published his two volume State Experiments in Australia and New Zealand. Included in that book is a fascinating and lengthy discussion as to how the new age pension system was working.  At the time around 4 per cent of New Zealand’s population was over 65 (compared to 14 per cent now).

I reread the relevant section this morning, and it was a reminder of a different age (different in some good ways and some not so good ones).  Applicants for the age pension had to appear in open court to present the evidence that they met the statutory tests.  Applicants were subject to good character tests, including being disqualified if they had had a recent period of imprisonment (by contrast, today on the MSD website it isn’t actually clear whether even current prisoners are disqualified).   And the income and assets tests were very demanding –  the marginal abatement rate was 100 per cent for private income above 34 pounds a year in private income.  Reeves was generally a supporter of the reforms he was writing about, but he also notes that even in those early days of the regime, there were opportunities to game the system, some legal, some not.

Our current NZS system has a number of good features. It does prevent the extremes of elderly poverty sometimes seen in other countries or in other times.  And it does nothing to directly discouraging older people from remaining in the workforce.  It is also administratively straightforward. And it probably does relatively little to deter private savings.   But –  and whatever the state of the government’s finances – with an age of eligibility that is the same now as it was 100 years ago, in the face of dramatic and continuing gains in life expectancy, it seems simply wrong – and expensive –  to keep paying a universal pension to an over-increasing share of the population.  And I can see no compelling reason for why full NZS should be available to anyone who has not spent at least 30 adult years physically resident in New Zealand –  be they immigrants, or New Zealanders who have spent much of their lives abroad.

Of course, others will have different conceptions of the role of the state.  No doubt, for those who favour a Universal Basic Income, NZS appears as a precursor to their vision for how the whole of society should be organised.  A related group –  those who worry as to whether there will be enough jobs to go round in future –  no doubt share that sort of view.  To date, a shortage of jobs just hasn’t been an issue in New Zealand and for me –  and these are ultimately moral debates –  the UBI proposals are deeply corrosive of the way in which I think society should operate.

To close, for those interested in the numbers, Treasury estimates that NZS spending will rise from around 4.8 per cent of GDP now to around 7.9 per cent by 2060.   Neither immigration nor productivity assumptions really make much difference to those numbers.  In their scenarios, raising the age of eligibility for NZS to 67 cuts that share by around one percentage point.    They don’t quote the numbers in this statement, but indexing the eligibility age to future gains in life expectancy offers materially larger savings than that, over time (eg over four decades, life expectancy could increase by perhaps another 7 years).  I don’t have a good sense of the savings a more binding residence requirement might offer, but it seems quite plausible that with these three changes, the public finances would be under no great pressure at all in continuing to offer something like the current wage-indexed level of NZS to the genuinely elderly who have spent most of their lives in New Zealand, in a minimally distortionary way.  But they are reforms that should happen –  should already happen –  regardless of what the 20 or 40 year ahead fiscal projections look like.