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Comments on: Bleg: Nearing time to restart contributions to the “Cullen Fund”? http://www.tvhe.co.nz/2014/02/26/bleg-nearing-time-to-restart-contributions-to-the-cullen-fund/ The Visible Hand in Economics Thu, 27 Feb 2014 20:41:00 +0000 hourly 1 https://wordpress.org/?v=6.9.4 By: Seamus Hogan http://www.tvhe.co.nz/2014/02/26/bleg-nearing-time-to-restart-contributions-to-the-cullen-fund/#comment-42785 Thu, 27 Feb 2014 20:41:00 +0000 http://www.tvhe.co.nz/?p=10997#comment-42785 The history of the Cullen fund to date is based on the following beliefs:
1. We should be pre-funding some of the future costs of superannuation in order to balance current assets with the implicit liability of future superannuation payments in a world without steady-state demographics.
2. Either because we believe the observed equity premium is a paradox and not a compensation for risk, or because we believe the government can have a smaller risk premium than private investors, or because an international stock portfolio is a hedge against possible shocks, the pre-funding should take the form of a balanced investment portfolio rather than consisting of government bonds.
3. Somehow there is a discontinuity in our belief in the risk premium or optimal hedging so that while it made sense to invest fiscal surpluses in a stock portfolio rather than simply retiring government debt, it does not make sense to increase borrowing in a time of deficit in order to invest in a stock portfolio.

If one agrees with all three propositions, then we should be restarting contributions sometime soon. My guess is that most people disagree with one or more of these propositions, however. Those who didn’t want to pre-fund super or who would have preferred the asset base to be government stocks will not want contributions resumed, independent of the shift back to surpluses. Those who didn’t agree with suspending contributions will want them to resume, again independent of the fiscal situation. The bleg question is most interesting for those who agree with all three propositions above, but that may be an empty set of people!

For me, the best argument for the Cullen fund is that it is an accounting mechanism for bringing the implicit liability of future superannuation payment on-budget in a way that simply reducing public debt would not do. For that reason alone, I would like to see payments resume.

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