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New Report Suggests NZ’s ‘rainy Day Fund’ Could Help Solve Economic Pain Of Covid-19

Wellington, 19 June 2020 - To plug the fiscal gap created by Covid-19, the Government must rethink its retirement income policies, according to a new report by The New Zealand Initiative.

So far, the Government’s primary responses to the challenges of Covid-19 appear to have focused on spending more money to help New Zealand’s lagging economy. Alarmingly, this means public debt is expected to skyrocket from 19% of GDP in 2019 to nearly 54% by 2024.

Author and research fellow Dr David Law said there are more options available to avoid this.

He warns that borrowing from the future to pay for a recovery today is a big risk if another crisis hits – and there are plenty of natural disaster possibilities.

One solution is to rethink the country’s retirement income policies and put to use its “rainy day” funds set aside for precisely such a scenario.

“How many folk know that the Government still spends about $1 billion a year on KiwiSaver subsidies even though rigorous evaluations of the scheme’s performance found it to be a complete flop?

“At the very least, KiwiSaver subsidies are a luxury we can’t afford right now and they should cease,” Dr Law said.

His report, Borrowing to Save: Retirement Income Policy after Covid-19, also suggests that the NZ Superannuation scheme and its related Fund should be rethought.

The eye-watering costs to the taxpayer of New Zealand Superannuation (NZS) – about $14.6 billion in 2019 – are only expected to rise as the population ages.

Lifting the age of eligibility by just two years (or the equivalent rise in average life expectancy since NZS settings were last changed) would reduce that spending by 0.75% of GDP per year to help dial back the ballooning public debt.

Just as with KiwiSaver, the report urges that contributions to the NZ Superannuation Fund (NZSF) should be suspended. To put the NZSF into perspective, it currently holds about $44 billion for a rainy day. Yet the Government still plans to borrow an additional $10.4 billion over the next five years for the NZSF.

“The rain is here and thunder and lightning are flashing on the horizon. The Government should consider winding up the fund early.

“Ending subsidies to KiwiSaver, increasing the age of eligibility for NZS soon by two years and slightly slowing the growth of individual NZS payments would drop government debt to only 25% of GDP in 2034 instead of 42% as currently projected,” Dr Law said.

“The Government is responsible for keeping its public debt level under control, not only for all Kiwis, but also for its future generations.”

Read more:
David Law's report Borrowing to Save: Retirement Income Policy after Covid-19 is available here.

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