Our Treasury is at it again. Telling Kiwis a bleak future awaits them, especially in retirement. Its latest report about how NZ Demographic Change will affect the Country's Finances is enough make the PM's eyes glaze over, Finance Minister Willis fall asleep, NZ First leader Peters to press Delete on his laptop & everyone else to take anti-depressants. Though NZ won the Americas Cup with a boat called Black Magic & we've a radio station called Magic FM, Treasury's having none of it.
Instead, it patronizingly tries explaining to you & me, who it takes to be financial dumb dumbs, how high finance works: "Government revenues are not magicked from thin air, but are obtained through taxes", it says. "If superannuation transfers increase because of demographic ageing then the government must increase taxation, or decrease expenditure on other services. Alternatively, it could change super policy settings, to reduce the associated fiscal cost of transfers to super-annuitants".
Except its not true. Want the evidence? Its contained in my article, joint with a former NZ Finance Minister who did the budgets, called Welfare: Savings not Taxation that has now been published around the world. It shows how NZ can lower taxes and increase spending on Super & health-care in the decades ahead, a feat which Treasury tells you, in writing, is impossible. Where's the magic? What makes our calculations work? Compound Interest. In 1976 the Wall Street Journal published an opinion article ascribing to Einstein the belief that “compound interest” was “man’s greatest invention”.
Except its not true. Want the evidence? Its contained in my article, joint with a former NZ Finance Minister who did the budgets, called Welfare: Savings not Taxation that has now been published around the world. It shows how NZ can lower taxes and increase spending on Super & health-care in the decades ahead, a feat which Treasury tells you, in writing, is impossible. Where's the magic? What makes our calculations work? Compound Interest. In 1976 the Wall Street Journal published an opinion article ascribing to Einstein the belief that “compound interest” was “man’s greatest invention”.
The crux to making our paper work is savings accounts which are set up for every working-age New Zealander. They're like Kiwi Saver except also include accounts for health-care - which mean everyone can have health insurance & go private if they wish, not just the wealthy. People's savings accounts receive contributions from their employers, the government and individual. Here's the thing: by the time of retirement, average earners will have a balance of about $800,000. Where does most of the money come from? Nearly 70%, or $560,000 comes from compound interest, and only 30% from contributions. We've done the sums. So have journal editors & referees.
What that means is you can enjoy a high standard of living, both in terms of retirement income & high class health-care, whereby the vast majority is funded not by higher taxes, nor by cuts in government spending on services, but instead by the miracle of compound interest. But Treasury doesn't believe in miracles. It doesn't have the imagination to see how you can get a high rate of return on your savings by tapping into the world's equity markets and earning the high rates of productivity growth that are being achieved in other countries. It wants us all to be stuck in low productivity NZ and wants to make that problem worse.
Do Aussies get truck-loads of compound interest? The average balance for a person in its Super savings scheme is now about $A 350,000 for retirees, or $A 700,000 for a couple - nearly 10 times the average balance NZ'ers have in their Kiwi Saver accounts. Compound interest is now driving the spending of Aussies in retirement. Not higher taxes. Nor cuts in public services. The NZ Treasury's lack of imagination threatens our future. Its message of doom is based on incorrect economics. It is presenting NZ'ers with fake options that both look awful, when other options exist that could create a stunningly bright future for this country.
Sources:
https://www.treasury.govt.nz/sites/default/files/2024-09/an24-08.pdf
Sources:
https://www.treasury.govt.nz/sites/default/files/2024-09/an24-08.pdf
Professor Robert MacCulloch holds the Matthew S. Abel Chair of Macroeconomics at Auckland University. He has previously worked at the Reserve Bank, Oxford University, and the London School of Economics. He runs the blog Down to Earth Kiwi from where this article was sourced.
2 comments:
In finance and economics there are only TWO fundamental truths, and these are:
1. To have a strong economy you need a strong currency, and
2. To have a strong currency, you need a corresponding rate of interest as to allow the currency to remain strong.
To put this into perspective, artificially suppressed rates and a weak currency are key stock market drivers-to the upside. For the economy, artificially suppressed rates and a weak currency have the opposite effect.
World Central/Reserve banks have begun an expansive and massive new easy money cycle. The effect of this will, for the short run, push more cash into the stock market while at the same time weaken the economy.
What will be sold to an unknowing public by politicians is this, “we need lower rates,” (which also means a weaker currency). However, the opposite will happen, and the economy will suffer. Conversely, the ILLUSION of a higher stock market, on the back of easy money policy, will allow these same politicians to sell the Central Banks Plan to the public, and expanding HYPER-debt will be the result.
Our learned Professor is neglecting to say that compound interest helps to offset inflation which would otherwise reduce the value of those savings. There is no knowing how much health care is going to increase above the rate of inflation, so compound interest may help, it may still not be enough to see us through our final years by itself.
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