Eco-Economy: Super Scheme is Political Suicide

Labour’s Super Fund is quickly becoming a financial and political disaster. Moreover, the scheme is insulting to young New Zealanders. It would be better for the Labour government to quietly let it drop.

Instead it seems that Michael Cullen has made this grandiose scheme the centerpiece of his term as Treasurer. Why is he pushing such a diabolically silly idea? By continuing to support the Super Fund scheme he is risking taking himself, and the whole Labour government, into political oblivion.

Furthermore the proposal, as it has emerged in the budget, exposes just how frighteningly muddled thinking has become in treasury. It does not answer the political and financial needs of an ageing population, and it does not have the wide inter-partisan support necessary for a scheme of this scale. What does Cullen hope to gain?

But worst of all it is offensive to young people who will ultimately have to support the baby boomers in 20 years time.

There is but one small mercy. Thankfully the government will probably need the support of the Green Party to implement its scheme, and the Green Party needs the support of young people.

So what is wrong with the Treasurer’s Super Fund?

Financial Problem

The scheme exposes the government, and the New Zealand public, to high risks and low returns.

The government proposes to borrow the money it needs to start the fund from the capital markets. The Super Fund will then go and invest the borrowed money on behalf of the government.

What! The banks get to create and invest new money in risk free government bonds that pay 6% per annum. Meanwhile the Super Fund uses these (newly created) funds to play the risky investment business, overseas. If the fund is successful it may return between 8 and 10%. The net result is that the government takes away between 2 and 4% of the returns, but only if every thing goes according to plan.

With such low returns the government should expect very low risk. Instead the risk has been increased.

Usually a big fund like that being proposed would expect to take some losses, especially over the long term. For example, if the fund had been created five years ago I bet it would have lost money in the South East Asian financial crisis of 1998.

Usually a big fund can carry those kinds of losses in the average. But when the margin is only 2% it does not take much for a few significant losses to push the government into an overall net loss situation. Because of the initial borrowing the fund is multiplying already considerable risks.

Meanwhile the banks will keep getting their 6% because the government gets that money out of taxes. The banks are not carrying any risk at all! All they need to do is sit back and watch the money role in.

The government is proposing to put the public finances into high-risk position, with a low expected return. Great fund, eh.

Political Problem

The political problem is even worse! By putting so much importance on this hare-brained scheme, the Treasurer is exposing the government to huge political risks.

The scheme cannot win the support of either the left or the right. Perhaps that reflects on how bad the whole idea actually is.

The National Party has already launched their offensive. (see Bill English’s speech - The Economy & The Superfund: Weighing The Evidence). English doesn’t like the scheme for much the same reasons this columnist doesn’t, he also doesn’t like it because it locks the government into an enormous financial project that stretches over the next 100 years (gulp) and the National Party has not been involved in its formulation. They are going to fight it tooth and nail.

Meanwhile, the New Right (ACT and the Libertarianz) hates the scheme because it represents a return to big government and takes away from their right to choose their own super-annuation fund. In fact they have point there: if we all had the funds, and the choice, would we put our money into this risky government fund?

But what about the left?

The Super Fund being proposed will make investments on the global financial markets. Essentially the government will be playing the role of the big capitalist bastard, investing money in multinational companies that steal from the poor and give to the rich. How can the Alliance Party support that?

Moreover, it seems that New Zealand has been deemed a “low grade” investment destination, and so Our Super Fund will not be investing much of its funds in New Zealand! So much for regional development.

It is very hard to see how the Labour Party itself can support a scheme that chooses to invest money abroad instead of at home? What does Annette King think about that? How about Helen Clark?

From the Green perspective the fund is a non-starter. Apart from the obvious problem of supporting unsustainable multinational companies, the Super Fund explicitly trusts our future to the long-term sustainability of the global financial system. The Green party has pointed out for years that the financial system cannot keep growing at the expense of environment and community. If they support the Fund then it represents a major comprise on core green principles.

So why is Cullen pushing this?

Perhaps this is the only way he can make his mark? Maybe he wants to do something “big” and this is the only idea that Treasury officials have agreed to support? In the relative isolation of treasury offices Michael Cullen has been led up a blind ally. The only beneficiaries of the scheme will be treasury bureaucrats and finance sector fat cats.

The Insult

The thinking behind this scheme is deeply insulting to young people. Is that the intention?

I am not a Baby Boomer, the architects of the fund are. If they want to us to look out for them in their old age they should look out for us now. How can we, New Zealand’s young people, support our parents and grandparents when they cannot place any trust in us?

If we are to provide for them, we will need to have a functioning health system. We will need to have job security and homes. We will need schools for our children. But most of all we will need to have the will to support them.

The Fund proposed explicitly entrusts the future of all those baby boomers into the hands of the global financial industry. Meanwhile the same baby boomers have reduced financial support for hospitals, schools etc. Meanwhile we, the youth, have been saddled with an enormous amount of debt while the previous generation preaches the virtues of thrift. Did Michael Cullen pay for his university education?

New Zealand needs basic investment in its essential social and physical infrastructure. If the government wants to provide for the elderly of the future they should support the young of the present. New Zealand’s social capital has been steadily eroding for the last 16 years.

As Bill English points out, even if the Fund was being fed from a fiscal surplus, the Super Fund removes the possibility of future governments actually reinvesting in New Zealand.

And so the Super Fund proposal could well be the last straw methinks for the dry-side of this Labour Government. As it stands it will cause considerable damage to the present Labour government, and with a bit of luck the political failure of this ridiculous proposal will hasten the professional end of those treasury thinkers who came up with the stupid idea in the first place!

Finlay Thompson
New Zealand Banking Reform
021 1179 149

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