Robert MacCulloch
Robert MacCulloch is a native of New Zealand and worked at the Reserve Bank of NZ before he travelled to the UK to complete a PhD in Economics at Oxford University.
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 and everyone else to take anti-depressants. Though NZ won the Americas Cup with a boat called Black Magic and we’ve a radio station called Magic FM, Treasury’s having none of it. Instead, it patronizingly tries explaining to you and 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 it’s not true. Want the evidence? It’s 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 and healthcare 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 KiwiSaver except also include accounts for healthcare – which means everyone can have health insurance and 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 per cent, or $560,000, comes from compound interest and only 30 per cent from contributions. We’ve done the sums. So have journal editors and referees.
What that means is you can enjoy a high standard of living, both in terms of retirement income and high class healthcare, 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 NZers have in their KiwiSaver 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 NZers with fake options that both look awful, when other options exist that could create a stunningly bright future for this country.
Source:
https://www.treasury.govt.nz/sites/default/files/2024-09/an24-08.pdf
This article was originally published by Down to Earth Kiwi.
