Bernard Hickey: Oldies' saving plan strangles young NZ

Policymakers have fallen into the trap of seeing New Zealand's finances through the lens of their own generation. Photo / Thinkstock

Opinion

How should New Zealand save for its retirement? This simple question gets more complicated the more you think about it, but we need to ask it again.

First, let's use the framework the Government uses to explain its actions to voters, comparing national finances to that of a household. The Government has argued that, just like a lot of households, it needs to reduce the risks from future global financial crises or physical shocks by cutting its debt load. It is completely focused on dragging net debt below 20 per cent of gross domestic product.

This is superficially appealing, particularly to older households: those in their 40s and 50s naturally focus on debt reduction. It seems to make sense for the Government to do the same thing, particularly as the baby boomers are currently the ones in charge of Government.

Policymakers have fallen into the trap of seeing New Zealand's finances through the lens of their own generation. Their job should be to make policy for all generations, including those yet to vote. The best way to think of the problem is to ask, what would a government do if it was a young household?

The Government and Opposition know the answer - they have been preaching it for the past month to argue against restrictions on first-home buyers borrowing more than 80 per cent of the value of their home.

When you are in your 20s and 30s, it makes sense to borrow to buy an asset like a home. As long as the house price keeps rising, your net debt position is low or non-existent. It's this net debt that is crucial.

Given New Zealand has an ageing population and a "pay as you go" pension and healthcare system, the Government should be looking at how to save for "its" retirement through the lens of the generations who will have to pay for it, those now in their teens, 20s and 30s.

Using a younger version of the household analogy, it makes sense for the Government to borrow to buy or create assets that will produce regular returns and grow in value.

New Zealand already has the perfect vehicle to do this, but it's in storage. The Superannuation Fund was created to be the nation's inter-generational "household" by investing in long-term assets that returned more than the cost of debt, and could be be drawn down from 2030. Yet the Government has switched off the fund, suspending contributions in 2009. It isn't planning to restart them until 2020-21. Strangely, even Treasury did not include restarting contributions as an option in last month's Long Term Fiscal Outlook.

Just as it's a no-brainer for a young household to borrow to buy an asset appreciating faster than the cost of the debt, it makes sense for the Government to do the same. The Super fund proved in its first 10 years it could earn more than the cost of debt. Since 2003, its annual returns of 9 per cent are more than the cost of the debt of 5 per cent, and its own target of that cost plus 2.5 per cent.

Our "household" should start thinking of itself as if it was in its 20s and resume those contributions.