Last Rites for the Cullen Fund?

Roger Kerr has a piece in the Business Forum column that appeared in the Dominion Post, 10 June 2009 in which he asks, Last Rites for the Cullen Fund?

He writes,

Commentators have suggested that the government’s decision to suspend automatic contributions to the New Zealand Superannuation Fund (the socalled Cullen Fund) may spell its eventual demise.

and then asks,

Should we mourn that outcome? Would it have any implications for future superannuation benefits, as some have suggested?

His answer to both these questions is no.

An important point that Kerr makes later in the article is a version of a problem that appears with many cases of government provision of goods or services: politicisation of provision,

Moreover, there was never any chance that the Guardians of the Fund would remain free from political interference in their job of maximising its returns (for a given level of risk). Predictably, in a few short years we have seen political parties variously proposing to bias the Fund’s investments towards infrastructure, green projects, venture capital and investment in New Zealand.

All moves which will not maximize the return to the fund.

Kerr goes on to note that instead of putting money into a ‘jam jar’, a more prudent policy to provide for the future would be to continue to repay debt and focus on boosting productivity and growth.

It also has to be asked if borrowing to grow the Super Fund is a sound investment strategy? Kerr writes

But returns above risk-free rates can only be achieved by taking on more risk. Sharemarkets could easily fall by 30-50% again when the Fund is at its peak. If it made sense to fund future pensions by risky investments it would make sense to do the same for future health costs and other government programmes.

There is the additional problem that by contributing to a high tax burden in the build-up period, the Super Fund impedes economic growth and risks discouraging private savings. Kerr goes on to say that an additional reason for Cullen Fund to be wound up,

[...] is to ‘deleverage’ the Crown balance sheet. Finance minister Bill English has argued that assets should be managed as actively as liabilities. Facing growing debt, a household or a company looks to realise assets to reduce its exposure, and the same principle applies to the Crown.

It is also worth noting that at its best the Super Fund amounted to a tax-smoothing scheme which was estimated at its inception to cover only 14% of NZS, with the balance coming from current taxation at the time. With the suspension of contributions for a decade, the Treasury estimates that the amount of NZS covered will drop to only 8%.

The budget decision to suspend contributions should be taken as an opportunity to open the debate on how we should deal with superannuation. What role is there for government and what role for private savings? And how best are we to achieve whatever role we assign to the public and private sectors?