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Technically Speaking: Black hole opens up as state pension fund starts

Friday 23rd June 2000

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National Mutual



The government's social justice Budget has foreshadowed a great black hole about to open up in the form of Treasurer Michael Cullen's proposed state pension fund.

Thanks to Dr Retrospective, New Zealanders are to have their income requisitioned into a slush fund to the benefit of foreign banks and insurance companies, with many contributors not likely to live long enough to enjoy any significant payoff.

As dumb ideas go - and this coalition government so far has achieved a near-monopoly on stupidity, with any shortfall more than made up for by the pothead Greens party - the Cullen cash cow has got to take the bun. Does Dr Cullen really know better than the rest of New Zealand how citizens should allocate their capital to the point where he imposes coercion?

What is wrong with his plan? Just about everything. For a start, it is to be financed by public surpluses under a government bent on increasing taxes. Higher taxes lead to lower surpluses.

As Ireland's attorney general, Michael McDowell, told The National Business Review in March this year, tax cuts such as he presided over while in government there led to higher government income. Wisconsin's tax-cutting governor Tommy Thompson said the same thing when out here on a trade delegation last year. Mr Thompson stated then he had cut state taxes 83 times since becoming governor in 1986 and every time he did so the state's tax take went up.

Mr McDowell said, in words that should be tattooed on the foreheads of socialist politicians, "While some politicians argued that this could not be, the tax yield every year continues to grow. When I was in Parliament I argued that if we cut tax rates we would get more money. The left persuasion argued that if tax rates were kept up we would achieve social justice. While Ireland's top tax rate is still well above New Zealand's we have found that cutting tax rates actually worked" (NBR, Mar 24).

Indeed, cutting taxes works so well for government finances Ireland is on track to cut the top personal tax rate to 20%, with the poorest 10% of the population paying no income tax. Business will be taxed at a flat 12.5%.

Contrast that with New Zealand, where the Labour-led government has already shattered its solemn, aptly named "credit card" pre-election pledge to raise tax only once in this parliamentary term. Indeed, it has done this three times in less than eight months, through higher fringe benefit tax, addiction tax on tobacco products and children's tax on family trusts.

As for the 39% marginal tax rate slapped on rapidly emigrating earners of $60,000-plus per annum, that is merely a success levy imposed on the saving class who do not need the Cullen cashcow anyway.

The $400 million generated by the success tax will not go far toward the state pension fund's needs, especially if we take into account the $940 million danegeld to be paid to social failures who allege Maori descent and prefer state handouts paid for by confiscative redistribution to teaching their children to value education and respect private property. Fiscal envelope? What is that when there are bludgers with grudges to placate?

We have the time span of the state pension fund to consider. It is supposed to start payouts in 2025 or some eight parliamentary terms hence. In New Zealand, Parliament is sovereign under Dicey's principles and a key feature of parliamentary sovereignty is that no parliament - as defined in duration by general elections - is bound by any previous parliament.

Witness the impunity with which the present Parliament trashed both sustainable logging on the West Coast of the South Island and privatised ACC, with no legal remedy for the victims. There is no recourse save through the uncertain vicissitudes of the ballot box.

There are at least eight electoral opportunities to trash the state pension fund between inception and 2025, assuming Comrade Helen does not abolish democracy in the interests of the public good and the welfare class, which she seems to think the same thing - meaning the fund is unstable for intractable constitutional reasons. The government takes on a special moral hazard when it legislates for markets it also forces citizens to invest in but there is no comeback under parliamentary sovereignty. In other words, "All care, no responsibility" defines the ethics of the state pension fund proposal.

Then we have the insider trading scandal, with the government reviewing applicable laws while not addressing the definition of insider trading.

We do not know what the NZSE is going to do by way of merger. It would be sensible to wait to see who its partner is and which country's laws apply before changing our securities laws.

If the partner is to be the Australian Stock Exchange, we have the transtasman dividend tax credit problem to overcome, wherein our imputation credits and their franks are not mutually recognised, a position the Australians are conspicuously in no hurry to change.

If the state pension fund is restricted to investing its projected $50 billion into New Zealand companies, all it will do is inflate the price of shares in outfits that maybe should not be in business on an economic value-added analysis. Kiwis will be forced to buy assets foreigners do not want a bar of and condemned to investing at high risk for low reward.

The British Society of Actuaries recently issued a report that warned of much lower future returns from capital gains assets in the permanent low-inflation environment we now live in - and the society was talking about British shares, not our local rubbish.

What's more, the current capitalisation of our incredible vanishing sharemarket, which under the present government will not be augmented by state asset sales, is about $49 billion, so at $50 billion the state pension fund is presumably going to buy every share on it - to nationalise our sharemarket. The state pension fund represents the ultimate takeover bid.

Then we have the question of who will look after the state pension fund. Into whose bucket will the fulsome stream flow? We can pick foreign-owned, mainly Australian, banks and insurers, whose shareholders, mostly not New Zealanders, will be enriched by the fund's nationalised savings industry. As the charts show, possible candidates in expert companies have mixed fortunes and, in the case of AMP with its GIO disaster, are not immune to colossal investment mistakes to the prejudice of their investors.

It is immoral to destroy freedom of choice and compel citizens to invest with some companies rather than others, particularly when a $50 billion captive kitty carries the moral hazard of slackening effort by its privileged corporate minders who themselves not infrequently achieve indifferent returns for their voluntary investors.

These companies, needless to say, will not be protesting against the state pension fund, which for them represents restoration of the good old days of state sector/private sector incest that characterised pre-1984 New Zealand.

The state pension fund will hand a blank cheque to foreigners who could as easily lose the money as generate a return to taxpayers, while all the while they will be charging their own fat fees, payable independently of success.

If you thought statism, socialism and redistributionism were brain-dead, now you can know it conclusively. The state pension fund is irrefutable evidence. If the good doctor-treasurer were a medical man, you would shun his prescription for fear for your life.

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