Gareth Morgan, Director of Gareth Morgan Investments
The decision by Prime Minister Bolger to change his mind on the efficacy of compulsory superannuation is apparently based upon the coalition compromise which will see the superannuation surtax removed. From Mr Bolger's perspective this makes the current scheme "unaffordable" without either raising the age of entitlement or dropping the standard rate of payment. He must be congratulated at least for being consistent – by changing the rules to deny the targeting by surtax, he feels free to take his ball home, and now oppose the private provision option. Whether in fact the surtax was ever enough to make the difference between being affordable or not, is debatable. The two well-known studies on affordability (one commissioned by the Retirement Commissioner and the other by the Todd Taskforce) concluded national superannuation was still affordable given reasonable economic growth assumptions.
But then consider Deputy Prime Minister Peters' rationale for compulsion. It is to raise household savings and lessen dependence on foreign capital – quite a separate set of arguments than the budget cost-accounting concerns of Mr Bolger. There is no evidence anyway that compulsory savings raise national savings rates. Indeed one of the most obvious outcomes of such a paternalistic scheme is that income earners feel that they need no longer worry too much about retirement as the government has it under control – a very similar mood to that which pervaded with Muldoon's promise that national superannuation would similarly look after the elderly's needs. The most likely outcome then is that private household sector savings fall as a result of what will be unrealistic expectations of the Bolger-Peters compulsory safety blanket.
Of the two leaders' reasoning then, which is worth the most consideration? Probably the Bolger affordability concerns have the most credibility. It implies that if we don't switch to private provision then government will have to impose a higher rate of tax and this impost will crowd out private sector investment and employment creation decisions. But using the same reasoning it is inefficient for government to require those with adequate resources for their own retirement to have to accumulate more via compulsion. This too is an impost on private funds available for investment and employment creation and therefore at very least they should be exempt.
If Mr Bolger's rationale for change of heart is as stated (and not just more pragmatic politicking to shore up appeal to coalition suitors ACT and NZ First), then it can only be credible if the compulsion is subject to a wealth test. Compelling those of adequate means to direct income via the government to the managed funds industry would be a market-distorting intervention equal to any of the regulatory decree's his erstwhile mentor Muldoon dreamed up. Compulsory superannuation targeted for the inadequately-provided will be quickly seen as a tax on the poor.
Finally, it is not clever for the government to steer the moneys to "approved" fund management industry. It is overwhelmingly evident that when the participants in this industry try to be active managers they do not even proximate the average investment returns from a passive direct investment in cash, bonds and shares.
More despairingly, to conclude as is the current fashion in this industry, that the market average can be approximated by forcing large sums into index funds is equally deficient. Such reasoning ignores how the market average comes about – through the myriad of competing investments, some winning some losing. If this is avoided by substantial proportion of household savings being forced to be average through indexing, then the average which the diversity of investment flows is the result of, is undermined.
For example lets assume the country's compulsory funds are forced to approved managers and the latest fashion with these managers is indexed funds. Most of the money therefore is invested in Telecom, the largest company pushing its price up the furthest relative to its earnings, until such time that the PE is seen as crazy and the free money (non-index) that there is, abandons it in sufficient droves to drive its market cap down so the index funds have to also drop their exposure. Sounds like a recipe for investment concentration and all the instability that this engenders.
Government will make a huge error if it rides roughshod over the diversity of investment flows of which a free market is composed, by steering large volumes of investment monies away from the owners of those funds to the "approved" manager industry. It will create a financial concentration and fund herd-like investment managers to an extent that their behaviour undermines market stability.
Apart from political populism, compulsion offers little that is compelling and threatens plenty to undermine economic growth, and investment market stability.
About the Author
