So what’s the formula – and why does it mean we’re allowed to start taking money out of the fund?
When the fund was established, the Government realised it was enjoying a golden period of economic prosperity.
New Zealand had favourable demographics, with the baby boomer generation in the workforce, earning, and paying tax, but not yet putting considerable strain on public services including superannuation.
New Zealand’s public superannuation payment, thanks to former Prime Minister Sir Robert Muldoon, is not really pre-funded.
Despite many people thinking they have been paying for their superannuation because they have been paying taxes for their entire lives, the truth is actually murkier.
Superannuation is not like a large KiwiSaver fund in which one day you’re able to get out what you’ve put in. In fact, it’s more like a Ponzi scheme.
The taxpayers of today pay for the superannuitants of today. You don’t pay for your own future superannuation, you actually pay for your parents and grandparents’.
This leads to problems, when you have a particularly large superannuitant generation relative to the generation of taxpayers, which is what we have currently — and will have for many years to come.
Twenty-four years ago, this now-partly retired generation was working, and paying taxes.
Cullen’s clever idea was to set aside some of this money and invest it in an enormous sovereign wealth fund to ensure that some of the future superannuation liability was pre-funded by the generation that would need it.
That would creat a bit of breathing space for future taxpayers, who otherwise would have very little funding to spend on healthcare for themselves or education for their children because they would be so burdened by funding their parents and grandparent’s superannuation.
But how to make that work? What formula could fairly define the right rate of contribution — and, when the time came, the fair rate of withdrawal.
Well, the contribution formula is written into the fund’s legislation. It goes something like this:
a ÷ 100 × that year’s GDP − b
Pretty simple, but for the fact that it requires 200 words of subsequent explanation to define “a” and “b”.
The Cullen fund was created by the Fifth Labour Government during its first term. Here, Prime Minister Helen Clark is pictured announcing her Cabinet in 1999. Photo / Mark Mitchell
In all honesty, very few people understand what it means (just ask Paul Goldsmith, whose failure to understand the contribution rate was dynamic led to the first of many of his 2020 “fiscal holes”).
Even a surprising number of people who work at the Super Fund are honest about the fact the contribution fund is a bit of a head scratcher.
One person who does understand it, is Matthew Bell, a senior analyst at Treasury.
Bell helpfully explained things to the Herald.
He said there were “three factors [that] chiefly determine the contribution rate calculated by the legislated formula, and hence the profile of contributions and withdrawals”.
“These are the forecast and projected tracks of nominal GDP and aggregate net (of tax) New Zealand Superannuation expenses over the ensuing 40 years from the year for which the contribution is calculated, and the closing balance of assets held by the NZSF in the year preceding that for which the calculation is made,” Bell said.
In other words, the most important things are how much the economy is expected to grow, and the size of superannuation expenses relative to the size of the economy, and the size of the fund itself.
“Over its entire existence, and particularly in the last few years, other than the Covid-affected 2021/22, the NZSF [NZ Super Fund] has performed strongly. It was recently named the world’s best performing sovereign wealth fund by international sovereign wealth fund experts GlobalSWF.
“As a consequence of this high performance, its asset holdings have increased by more than expected in earlier forecasts and projections for these years, and the more assets that the NZSF has the lower the contribution rate calculated for it will be.
“This is because it will need less in the way of contributions, or in later years be able to afford more in the way of withdrawals, while still being able to meet the funding requirement of aggregate net NZS [NZ Superannuation] as a percentage of GDP.”
In other words then, the fund’s strong performance means it is able to meet its obligation to pay for a certain part of our superannuation expenses with a smaller contribution.
“Variations in both the forecasts of GDP and aggregate NZS, and their ensuing projections, are harder to predict in terms of whether the NZS to GDP track will rise or fall compared to the last time it was calculated. However, if it does fall this will also reduce the contribution rate and vice-versa if it lifts,” Bell said.
He said that the timing for withdrawals “has not changed significantly over the years, because ultimately New Zealand’s ageing population and its effect of driving NZS expenses faster than GDP growth has always set the overall profile of the contribution rate and when it will shift from taxpayers contributing more than the cost of NZS in the NZSF’s beginning years to when withdrawals will begin on a consistent and increasing basis to help future taxpayers with the growing costs of funding the public pension.”
Another quirk of the fund is that even though the Government will begin withdrawing from it, the fund is still expected to grow for some years thanks to the performance of its investments.
Thomas Coughlan, Political Editor at the New Zealand Herald, loves applying a political lens to people’s stories and explaining the way things like transport and finance touch our lives.
