By Bernard Hickey
This week the Government made yet another decision that makes political sense in the short term for today's voters, but makes no financial sense in the long term for tomorrow's voters.
It is a decision that is likely to cost voters in their 20s and 30s billions of dollars in lost potential savings over the decades to come, but it didn't make the front pages and will probably cost National few votes at next year's election.
That's because the Government's decision on Thursday to keep default KiwiSaver funds conservatively managed until 2021 seems to be an arcane one born out of a debate about investment theory.
That's a pity because it's a debate that every saver, young and old, should understand when they make decisions about their KiwiSaver funds and their votes.
The stakes are high.
Nearly half a million New Zealanders are in default KiwiSaver funds that manage at least NZ$3.5 billion. They were put there when they started a new job and were auto-enrolled by the Inland Revenue Department and allocated to one of the six default funds.
More than 60% of them have never moved, either through laziness, ignorance or a deliberate decision to stay in the conservatively managed funds.
These funds are at least 75% invested in bonds and cash that pay interest regularly and are less volatile than growth-oriented funds that invest relatively more in stocks.
When KiwiSaver was set up in 2006 by then Labour Finance Minister Michael Cullen he chose to make the default funds conservative and give them a seven year term starting in 2007.
Cullen was understandably nervous about KiwiSaver's future. Government subsidies were being put into these funds and many relatively ignorant savers were being put into something they didn't understand and without formal financial advice.
He was worried they might lose money if their were any slumps on stock markets early in the life of KiwiSaver and they would lose confidence in the scheme and stop saving.
It was an accidental masterstroke because shortly after KiwiSaver started the Global Financial Crisis hammered riskier funds invested in stocks.
The default funds invested in bonds coped much better through 2008 and 2009. They went on to outperform in the following two years because interest rates fell sharply, which increase the capital value of bonds. But that outperformance by conservative funds ended in the last year as stock markets boomed globally.
Investment theorists say markets are now reverting to their long term trends, which are that long term savers are better off investing in funds more heavily weighted to stocks.
The conservative option was the right one in KiwiSaver's early days, but now its training wheels are off and it should be allowed to fly.
The theory says savers should invest according to where they are in their lifecycle.
Young savers should invest in growth funds, while savers nearing retirement should be in conservative funds.
The power of compounding interest means those higher returns early in a savers' working life turn into a much healthier final fund when they retire.
The OECD, the Government's own Savings Working Group and its Capital Markets Development Taskforce all recommended the Government adopt a 'lifecycle' approach to allocating KiwiSavers into default funds.
The Government went against that advice this week and took the conservative option, arguing it wanted to keep public confidence in KiwiSaver and let savers make their own decisions about going into the fund appropriate to their age.
It did recommend the default funds show how they would educate KiwiSavers about making an active choice, but decided against making them provide expensive impartial financial advice on that decision.
That's all fine for financially informed and time-rich investors able and willing to make that decision. But the global evidence is that most savers in default funds never move and that it is extremely costly for them in the long run because they miss out on billions of dollars of returns from growth funds.
KiwiSaver has won its stripes and now it can be trusted to invest for the long term in riskier assets.
Yet again the government has decided to view the world through the prism of older, conservative voters and reduce its short term political risks at the expense of the long term financial future of the young.
The government's decision to suspend contributions to the NZ Super Fund between 2009 and 2020 has already cost the taxpayers of 2030 and 2040 more than NZ$3 billion in lost returns. That number will multiples of that by the time we hit 2040.
To illustrate the difference between long term growth funds and conservative funds, the growth-oriented NZ Super Fund returned 26% in the last year, while the KiwiSaver default funds returned an average of 6.6%.
That's not going to happen every year but over a 40-50 year working life that mounts up billions of dollars less to retire on.
Yet few young voters will notice or care and the government was safe to make that decision in political terms, but sometimes the conservative decision in the short term is the wrong one in the long run.
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A shorter version of this piece appeared in the Herald on Sunday.
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