Super Fund: the pros and cons of contributions

A month out from the Budget, the government is facing a legacy-defining choice about the Superannuation Fund. Do you think it should continue its contributions, or suspend them?

Bill English, and the entire National Cabinet, face some decisions in the next few weeks that just five months into their term of government will go some way to determining the legacy of the Key administration. The recession will make some decisions for them, but others will require the wisdom of Solomon.

Any government in power now will later be judged in large part by how it managed the worst recession in more than half a century. I've written about fiscal stimulus and tax cuts, but there's another difficult decision that will have a major impact on us, our children and grandchildren, and the best choice is by no means clear cut.

The Budget – a month today – will reveal what the government has decided to do about its allocations to the New Zealand Superannuation Fund, or Cullen Fund. The Fund began investing in 2003 with $2.4 billion, its intention being to help support New Zealand's retirees as the population ages.

While Super currently costs us about 3.5% of GDP, by 2050 it's expected to cost us 6.6%. In dollar terms, that could be as much as $50 billion per annum. The question is how to prepare for that given the current recession.

It's a tough choice, and the advocates for each position don't just divide along left-right lines. The Greens, for example, have always been against the Fund, joining many on the right. Like Paris picking between the three goddesses on Mt Ida, each option looks pretty good. But choose unwisely, and we could end up with something nearly as bad as the Trojan war.

With the Fund taking some big hits in the past year, losing money on its share portfolio, the voices of the 'stop contributions' crowd have grown louder, urging the government to suspend payments.

Most who take this view ask us to imagine the Super Fund was our own personal savings account. If our investments were losing value and we were spending more than we were bringing in, surely we'd cut our savings so that we could live within our means. You don't save when you haven't got enough to put food on the table now, they say. That makes no sense. You certainly don't borrow to keep saving. That's irrational. And borrow to invest in the most volatile market ever? That's just nuts.

They make a strong case. It's tough enough to get by now, why make it harder? Follow that logic and you'd assume that Bill English will suspend payments to the Fund next month.

But what about the case for continuing payments. For a start, let me make one point I feel strongly about. Comparing the Super Fund to my or your personal savings is plain dumb. It's fuzzy logic. What's good sense for an individual is not necessarily good sense for a country.(For one example, check out Brian Easton on the Paradox of Thrift).

Businesses, for example, do borrow to invest. Earlier in the year I spoke to a clump of CEOs about surviving the recession for a piece in Management.To a man and woman they said the smart thing is to invest in opportunities during a downturn, not just cut costs.

The other point I feel strongly about is that the Fund's recent losses are irrelevant to the government's decision. This is a long-term investment fund. It will rise and it will fall. No serious long-term investor panics and sells as soon as the market dips (or, in this case, dives). The famous analogy is playing with a yoyo as you climb up stairs. Your investment will go up and down like a yoyo, but over time you can expect your investment's value to climb... if you hold your nerve.

The argument made by those who want the government to continue funding is based around the old market adage, 'buy low, sell high'. Well, the market's low so if the Fund wants to recoup its losses and do some nice business for New Zealand come 2050, there are some bargains to be had. The return on every dollar invested now will be much better than usual. Don't forget, when stockmarkets recover they recover quickly and the big money is made early on. To use another old adage, 'you've got to be in to win'.

Interest rates are also low, so if you can borrow long-term at a few percent confident that over the same time you'll make more than that few percent back, it's got to be worth considering, right?

Two points often get missed in this debate. First, the Fund is a great counterweight to the embarrassment that is the individual debt carried by New Zealanders, which is one of the highest in the world. The credit rating agencies are looking at downgrading us in large part because of that debt; those Super Fund payments might be the very things that save us. Second, there's no free lunch here. As English has said on Q+A, "the way it [The Fund] works is if you don’t pay in this year or next year then you have to make higher payments later". Either that or collapse the Fund altogether. And while some see the recession as a great cover for this administration to undermine the Fund to the point where it has to be wound up, I get the impression English doesn't want to be the man history holds responsible for that.

The last major point in favour of continuing payments is that the Fund is not just saving for the sake of saving. It's saving for a massive bill that is coming, like it or not. Someone has to pay that $50 billion in 30-odd years time and I'd rather it wasn't all on my newborn son, who I hope by 2040 will be saving for a mortgage of his own.

As I run through these pros and cons, I'm leaning towards the 'keep paying' side of the argument. But I'm far from certain. So perhaps you can chip in your thoughts and advice and we can think this through as a community...