Bernard Hickey 's Opinion

Bernard is an economics columnist for the NZ Herald

Bernard Hickey: Kids will pay for Key's Super choice

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Key might not be so popular if he returned to school in 2040 to say hello to my grandchildren. Photo / Thinkstock
Key might not be so popular if he returned to school in 2040 to say hello to my grandchildren. Photo / Thinkstock

I often wonder what my 11-year-old daughter will think of Prime Minister John Key when she looks back on his decisions in 30 years. I know she sees him as the famous guy on the telly who seems friendly and popular. A school visit would be a big success.

She may not think the same come 2040, when she is in her 40s and paying taxes to fund the pension and healthcare costs of a 79-year-old Key.

The long-term forecasts are that my daughter's generation will have to stump up about 16.3 per cent of gross domestic product every year to pay the healthcare and pension costs of Key's generation - up from 11.3 per cent of GDP which taxpayers pay today.

This is a situation that previous leaders thought they dealt with by setting up the NZ Superannuation Fund. This week it reported earnings of 19.85 per cent over the last year and grew to $22.6 billion by the end of April, thanks to average returns of 8.7 per cent since its creation in 2003.

Taxpayers contributed a net $12 billion from 2003-09, and the rest was earned from investments and by compounding interest. In the depths of the financial crisis, Key decided to suspend contributions, arguing it made no sense for the Government to borrow to invest in volatile stock markets. But in this year's Budget, Key extended the contributions "holiday" by two years to 2020/21, arguing the Government needed to get debt below 20 per cent of GDP.

That decision will cost my daughter's generation dearly.

Figures released by the fund under the Official Information Act show the fund would now be worth $32.7 billion if the government had continued putting money into it.

That includes $6.9 billion of contributions net of tax and an extra $3.2 billion of investment returns and compounding interest.

The irony is that borrowing to invest would have meant the Government's net debt would now be lower than it is, because investment returns of 8.7 per cent are higher than government bond interest rates of 3.3 per cent.

Treasury's own budget forecasts show the fund would be worth $182.3 billion by 2040/41 if contributions resumed next year, rather than the $153.4 billion it would be with the current extra eight years of contributions holiday. This doesn't include the effect of the four years of contributions already missed.

This means Key's decision in 2009 to not borrow $23.3 billion over 12 years will have cost my daughter's generation at least $40 billion in lost investment returns by 2040.

He might argue this is dependent on many long-term variables, but it does demonstrate that Einstein was right about the power of compounding interest.

Key might not be so popular if he returned to school in 2040 to say hello to my grandchildren. He might be comfortably receiving his pension, but will those kids be receiving free schooling, healthcare and will their parents own their own home?

Debate on this article is now closed.

- Herald on Sunday

Bernard Hickey

Bernard is an economics columnist for the NZ Herald

Bernard Hickey is the publisher of Hive News, a Wellington-based political and economic subscription news email service. He also writes for Interest.co.nz and appears regularly on Radio New Zealand, Radio Live, TVNZ and TV3. He has been a financial journalist for 25 years, having worked for Reuters, the Financial Times Group and Fairfax Media.

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