How To Treat NZ Super Applicants Like Other Beneficiaries

Old people in New Zealand are a funny bunch. On the one hand, they’re deeply critical of beneficiaries. They’re the first to support crackdowns on benefit fraud (a literal rounding error in terms of Vote MSD) and would likely agree that if a beneficiary starts earning more money they should have their benefit reduced.

They are much less willing to consider themselves beneficiaries, when they are nothing but beneficiaries. There is no material difference between a retiree couple who failed to save enough money for retirement in liquid assets, whilst living in a $700,000 villa in Auckland, and a person who continues to receive an unemployment benefit whilst they move into work.

NZ Super beneficiaries should be treated like other beneficiaries. If they were subjected to the same level of asset testing that any other class of person was, NZ Super applications would plummet because many NZ Super eligible people know deep down that they don’t really need state assistance, they’re just taking the free $15,000 a year with no questions asked.

How many older voters would have wholeheartedly supported the crackdown on other types of beneficiaries while happily spending their fortnightly super payment? They actually rationalise that because they paid taxes (which have already been spent) they are somehow entitled to NZ Super from their 65th birthday until their death.

The funny thing is that some NZ Super recipients will get more from NZ Super than they ever paid in taxes. Some NZ Super recipients never actually worked a day in their lives – but they’ll happily bank their super and vote for Winston First.

If you have a look at Work and Income’s website, you’ll be able to find the application form for NZ Superannuation. It’s 13 pages and doesn’t require much besides confirming the fact you worked in New Zealand and your bank account details.

If you move across to the unemployment benefit application form – you will find that it is 36 pages. You must declare if you’re still working, the financial situation of your partner and any assets you have. This means most Kiwis can’t actually get the unemployment benefit because someone else can support them or they can sell down assets to survive.

My solution to the NZ Super cost blowout because of changing demographics and a sense of entitlement is to simply replace the superannuation application form with the unemployment benefit application form.

This is a far simpler solution because many NZ Super applicants who don’t really need the money will be deterred by the level of disclosure they must make to Work and Income around their employment status and level of assets.

When they have to admit on paper that they are taking the mickey out of the safety net, many will not go through with the application. I would guess thousands of fewer applications a year would be processed, saving billions over dollars over the next few decades.

A lot of old people are really secretive about their financial affairs, so with one easy form change, the marginal applicant who doesn’t really need NZ Super to survive, will find that it’s not worth their time to gather details of their asset base in order to avoid getting done by Work and Income for failing to disclose details of their financial situation.

People who do need NZ Super to survive won’t be harmed by the form change – and the system will be able to continue functioning as a support net for people who actually need it instead of cynical asset rich cash poor older people getting more money than a struggling student gets from StudyLink.

Bernard Hickey Is Wrong About Market Reaction

In the Herald over the weekend, Bernard Hickey argued that because Labour, NZ First and the Greens have realised the importance of monetary policy and its relationship to key macroeconomic variables, they will undermine how the Reserve Bank conducts monetary policy.

The problem with our system is that we think that all opinions are equal. The intellectual deficits present in Labour, NZ First and the Greens have been truly exposed with their calls for kooky ideas that are completely unjustified and have been proven in the real world to cause terrible side effects. Arguing for exchange rate intervention is an example of the stupidity we could expect if politicians had more influence on how monetary policy operates.

I am pleased that Graeme Wheeler has made it clear what job goals as Reserve Bank governor is – using inflation targeting as the monetary policy tool of the day and eschewing calls to intervene in the exchange rate and monetise government debt. Complaining that the Reserve Bank doesn’t make decisions by committee is childish in the extreme. Almost every other central bank in the world is worse than the RBNZ. They are extremely credible and a central reason for that is their strict adherence to their statutory mandate in the Reserve Bank Act.

There is no doubt that monetary policy is linked to our housing bubble in the 2000’s and a resurgent housing market. But to adjust monetary policy now by adding slippery targets on unemployment numbers, what the exchange rate should be and how much house prices should be defeats the entire purpose of having a reasonably independent central bank. Gareth Morgan’s comments that they should all be fired for incompetence are so far off the mark it’s not even funny.

With respect to housing, while increased M3 has enabled banks to lend more on housing, that’s them simply responding to incentives. There is an enormous demand for housing loans, there are severe supply restrictions on housing and loan-to-value ratios are not regulated so poor people who have no business buying a house easily qualify for 95% mortgages.

Did we not learn anything from the sub-prime debacle in the United States? One of the key drivers behind lax regulation around new mortgage lending was the “housing affordability” and “owning a home makes you a real American” nonsense. Just because many people can’t afford to buy a house doesn’t mean that the OCR should be lowered to stimulate more investment in housing. A lot of that extra credit will sit on bank balance sheets for their own risk-free carry trades.

If the markets really were spooked about the possibility of Graeme Wheeler having the Policy Targets Agreement rewritten by a troika of populist politicians, they would be pricing that risk in now. The 3 year bond rate would have spiked some time after October 26 and the drama-filled select committee meeting. Using the data at Interest.co.nz we see that since the 26 October speech by Graeme Wheeler the change in bond rates has been negligible. And here’s a nicer chart from Westpac that fits out time frame just nicely:

The risk premium for New Zealand debt has barely changed either. So what gives? If there was any likelihood of economic kooks coming to power, that risk premium would have shot up. So would the price of NZ government debt CDS swaps. If expectations were that the exchange rate would be lower then that would be reflected in the March 2014 NZD/USD futures. They’ve barely dropped a cent over the past month.

Non-residents own about $28 billion of the $72 billion of government debt on issue. If what Bernard Hickey is saying was credible – the risk of lower yields in future – why was there no rapid capital flight? We have extremely free movement of capital these days and if overseas institutions wanted to they could drop billions of dollars in NZ government debt in an afternoon.

The truth is that if market participants were thinking like Bernard Hickey, there are about 4-5 different things they would have done to lower the risk of any changes in monetary policy impacting on the capital they have invested in New Zealand.

Bernard’s column is sadly unique in that no one actually thinks Labour, NZ First and the Greens will get anywhere near destroying the independence of the Reserve Bank. In not arguing that the policy changes Labour, NZ First and Greens are proposing fall into the category of kooky economics, he is ignoring the reality that quantitative easing reinforces inequality, makes housing affordability even worse and lowers real money balances.

If the market starts pricing in the possibility of kook monetary policy being implemented, I’ll revise my opinion. Needless to say I’ll be watching the yield curve and forward exchange rate numbers with interest.