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Working Paper: Golden Years - Understanding the New Zealand Superannuation Fund

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The New Zealand Superannuation Fund (NZSF) is one of New Zealand’s largest publicly-owned financial assets. Established by the government in 2001, its primary purpose is to provide a means of tax smoothing between current and future taxpayers by covering part of the cost of providing the public pension, New Zealand Superannuation (NZS). In an October 2000 Cabinet paper related to establishing the NZSF, then Minister of Finance Dr (now Sir) Michael Cullen proposed that “By setting aside some Crown resources toward retirement income now, while we can afford it, we will be able to smooth out the cost over time”. Sir Michael Cullen realised that over the next few decades New Zealand’s ageing population would significantly increase the proportion of recipients of NZS relative to the size of the taxpayer population, and therefore also considerably lift expenditure on NZS as a percentage of gross domestic product (GDP).

The Treasury has produced a Working Paper titled Golden Years - Understanding the New Zealand Superannuation Fund. This paper covers several topics directly and indirectly connected to the NZSF. A brief history of the NZSF’s nearly two decades of existence to date is provided in this paper. The main demographic and social causes of the ageing population structure are discussed. The legislated contribution rate formula that defines the NZSF’s logic is explained, both in plain English and via mathematical proofs, and descriptions of its main parameters and how they are modelled are covered. Various scenarios of future NZS to GDP paths and their effects on the evolution of the NZSF are examined.

A substantial section of the paper analyses how and why NZSF projections have changed over time, since its inception up until the 2020 Budget. Future outcomes for the NZSF’s size and role in helping to fund NZS, depending on scenarios that vary the evolution of NZS relative to GDP, are illustrated and explained. How and why projections related to the NZSF have changed over time is also analysed and explained, including what factors have had the most influence on these changes.

A goal of the Working Paper is to increase understanding of the NZSF, not just in regard to its mathematical logic, but also with respect to its role in helping to fund NZS in the future. Retirement income and public pensions are often topics of intense debate in many developed nations, including New Zealand, and are likely to continue to be so. This paper is aimed at helping to inform such debates by discussing:

  • why the NZSF was established
  • its history and milestones
  • how the logic driving it works, and the reasons why it is done in this manner
  • how and why the projections of its parameters have changed over the years, and
  • how it is likely to progress assuming no changes to the policy settings around NZS.

New Zealand’s “65 years and above” age group is the demographic driver of NZS. This group is growing at a faster rate than the labour force, and this is a trend that is projected to continue over at least the next century and likely beyond this, unless changes are made to the eligibility criteria, payment rate growth, and/or abatement conditions of NZS. This trend is significant because our labour force is GDP’s demographic driver.

The New Zealand Superannuation and Retirement Income Act 2001 established the NZSF and set in legislation the formula to define how capital contributions to, and in later years withdrawals from, the NZSF are calculated each year. It assigned the responsibility for making these calculations to the Treasury, and this formula is at the core of the logic of the Treasury’s NZSF model. Contributions from tax revenue into the NZSF have been made for about half of the years since 2002 and are expected to continue for most of the next three decades. These are invested in order to grow, so that at some future date withdrawals can be taken from the NZSF on an ongoing basis to assist with funding NZS long-term.

The logic of the NZSF’s projected outcomes is determined by its contribution rate formula. The contribution rate formula sets, as a percentage of GDP, the timing and size of taxpayer contributions to and withdrawals from the NZSF in order to fund the cost of aggregate net (of tax) NZS. While the NZSF’s level of assets, expected future return and tax rates, and its 40-year time horizon consistently used for tax smoothing are all important factors, the future path of aggregate net NZS expenses relative to nominal GDP is the most significant factor influencing the contribution rate formula.

Unless the cost of NZS relative to GDP consistently falls for an extended period, the logic of the formula means that the contribution rate will, over time, move towards the level of net NZS to GDP in an asymptotic manner. This means that it will continue to play a tax smoothing role, although the withdrawals from the Fund will get consistently smaller, as a percentage of GDP, over time. Under these conditions the assets of the NZSF will also decline as a percentage of GDP (although not in nominal dollar terms).