Pre-funding a government's future financial obligations – the New Zealand Superannuation case study

Abstract

In 2001, the government established the New Zealand Superannuation Fund. This is intended to partially pre-fund the future costs of New Zealand Superannuation, the universal Tier 1 pension payable to all New Zealanders over age 65. The incoming, National-led government suspended contributions in 2009 and has said it intends to resume those when economic conditions allow. An analysis in a ‘total accounting context’ would probably have precluded the Fund's introduction in 2001 because the Fund is effectively 100% leveraged and taxpayers are unlikely to be compensated for assuming that risk. Over the six years to 30 June 2009, the Fund diminished the net worth of the government by about $2.6 billion and, even if it recovers those losses, is unlikely to make any significant future contribution to the security of payments of New Zealand Superannuation. In fact, it raises financial risks for taxpayers and may increase the long-term cost of New Zealand Superannuation. The Fund should be wound up.