Superannuation Really Is Affordable
Superannuation Really Is Affordable
Comment contributed by: Chris Leitch, Democrats for Social Credit Deputy Leader; Finance Spokesperson
Ten minutes of talkback radio is enough to convince one that there are a myriad of points of view on every subject, and even a discussion with mates over the All Blacks elicits a wide range of opinions.
So one of the things I find very disconcerting is the penchant of commentators on critically important economic and social subjects, to continue parroting the opinion of each other rather than looking at other angles.
One such case is the debate over the wave of retiring “baby boomers”, whose keep, we are continually told, will be “a massive drain on our resources”, “an impossible burden on a smaller workforce”, and “unaffordable”.
I find myself at odds with Prime Minister John Key on almost everything, but his refusal to increase the age of eligibility for the pension gets a big tick.
If you think that as a product of the 1950s I have a vested interest, you are right ! Like most people my age I want to be able to stop working soon and enjoy some leisure time in retirement.
The reality is that a decent pension, from age 65 really is affordable.
Getting you head around that statement rather than writing if off as ridiculous and not reading any further will require some open minded thinking and may challenge some long held views, so here goes.
Government debt is projected to reach $70 billion in 3 years by which time $4 billion of our taxes will be going to pay interest on that borrowing every year. That debt has risen from $10 billion in 2008 – an increase of $60 billion over 9 years.
What that really means is that the government will have borrowed an average of $6.5 billion annually.
The International Monetary Fund paper of August 2012 titled the “Chicago Plan Revisited” analysed a proposal by eminent economists Henry Simons, and Irving Fisher, for the separation of the monetary and credit functions of the banking system.
They claimed that “Allowing the Government to issue money directly at zero interest, rather than borrowing that same money from banks at interest, would lead to a reduction in the interest burden on government finances and to a dramatic reduction of (net) government debt, given that irredeemable government-issued money represents equity in the common wealth rather than debt”.
The paper’s authors stated “We take it as self-evident that if these claims can be verified (there were other claimed benefits), the Chicago Plan would indeed represent a highly desirable policy”.
What that means is that if the government could fund its borrowing requirements from the government owned Reserve Bank rather than borrowing from overseas owned financial institutions, government debt would reduce to zero and $4 billion in tax revenue, rather than being wasted on interest payments every year, would become available for things like superannuation payments.
Under the Chicago Plan, “what would cease to exist however is the proliferation of credit created, at the almost exclusive initiative of private institutions, for the sole purpose of creating an adequate money supply that can easily be created debt-free.”
But, hang on a moment, you’re thinking, banks don’t create money, I thought they just lent out money that people deposited with them……don’t they ??
No they don’t.
Here’s what the Bank of England in its quarterly bulletin issued just last month has to say “One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them.”
“…..rather than banks lending out deposits that are placed with them, the act of lending creates deposits. Commercial banks create money.”
“Of the two types of broad money, bank deposits make up the vast majority - 97% of the amount currently in circulation. And in the modern economy, those bank deposits are mostly created by commercial banks themselves.”
So every loan, made to you for your mortgage, to every business to buy new equipment, or to the government for it to spend, is created out of thin air.
If you didn't know this already, I’ll bet that challenges your thinking.
If the government was to adopt a process like the Chicago Plan, and create its own money instead of borrowing for the banks it could save $4 billion per year in interest payments, plus it wouldn’t have to pay back the $6.5 billion per year it has been borrowing.
That’s a total saving of $10.5 billion per year – about what superannuation currently costs.
As our population ages, superannuation payments are increasing by about $700,000 per year so we could fund superannuation for at least another 15 years without any other factors coming in to play, like a growing economy, or a higher level of government created money.
Right now, there’s another thinking moment - but, but……government creating that amount of money would be inflationary, wouldn’t’ it ??
Not according to the IMF report - “We find that the advantages of the Chicago Plan go even beyond those claimed by Fisher”.
“Another advantage is the ability to drive steady state ination to zero…”
“The ability to live with significantly lower steady state inflation also answers the somewhat confused claim of opponents of an exclusive government monopoly on money issuance, namely that such a system, and especially the initial injection of new government-issued money, would be highly inflationary.
There is nothing in our theory that supports this claim. And there is also virtually nothing in the monetary history of ancient societies and of Western nations that supports this claim.”
And remember the government is already spending $6.5 billion of bank created money into the economy each year – without any disastrous consequences (apart from increased interest payments).
Then why isn’t the government using the Reserve Bank for its funding right now instead of borrowing from overseas banks.
Well, according to the Minister of Health Tony Ryall in a letter dated September 2012 “Because doing so would not align with the Government’s fiscal policy”.
So even though the government could make superannuation affordable, reduce inflation to zero, have no debt, and save taxpayers $4 billion per year in interest payments, it doesn’t do so because “it doesn’t align with the Government’s fiscal policy”.
The Opposition also subscribe to this crazy “fiscal policy”.
There is no need for additional legislation to allow this proposal to proceed.
The Public Finance Act (1989) already permits the borrowing of funds from the Reserve Bank of NZ “on terms favourable to the public interest”.
I stand by my earlier claim - the reality is that a decent pension from age 65 really is affordable - and I’ve demonstrated how it can be funded.
If you’ve managed to get this far, and it hasn’t got you thinking and more than a bit angry that the debate over the “un-affordability” of superannuation is totally unnecessary, then enjoy your retirement at age 70 on half the current rate.