Sort our kids' Financial Future sooner rather than later!

Amidst the ongoing debate surrounding the eligibility age for retirement benefits (NZ Super), a critical question emerges: are we adequately preparing for the financial well-being of future generations?

With life expectancy on the rise and birth rates declining, the sustainability of current retirement systems comes into question. In this article, I delve into some of the challenges posed by an ageing population and propose a proactive solution aimed at securing the financial futures of our children.

While discussions often centre on adjusting retirement ages and managing pension funds, I contend that our focus should extend beyond the twilight years to encompass the formative stages of our children's lives. In an era characterized by rapid technological advancements and evolving workforce dynamics, how can we ensure that the next generation not only survives but thrives financially?

Join me as I explore a bold hypothesis: investing in a dedicated fund for every child born, laying the groundwork for their future prosperity.

But first some background:

Currently, If you're aged 65 and over and meet the qualifying criteria,?you will receive up to $25,811.24 per year after tax.

The 23/24 budget estimates 9.1% spending to Super, which is a decent chunk (around $2.6bn)

https://www.interest.co.nz/public-policy/121282/budget-202324-summary-all-spending-plans

Ok, so let's consider affordability in the future. Not only are Nzer's living longer, but the birth rate was also the lowest in 20 years in 2023 (only 57,000), meaning fewer future taxpayers to fund Super payments. To address the challenge of an ageing population (predictions are 1 in 4 Kiwis will be over 65 by the late 2050's), the NZ Superannuation Fund (informally known as the Cullen Fund) was launched in 2001. The purpose of this article is not to discuss the merits of this decision, nor the management and investment of the Fund, but rather focus on the numbers.

Since its launch, it has grown to $70bn and achieved a 9.79% return. Not too shabby.

The plan is to start dipping into the fund in 2030 and more aggressively from 2050. Assuming there are no further contributions to the fund from Treasury and continued growth at around 10%, this would equate to $136bn by 2030 and $910bn by 2050 (Present Value using 5% inflation$243bn). I'll focus on 2050, assuming the Fund is the only source of payments at that point.

A safe withdrawal rate of 5% equates to $12,15bn which is 5x the current budget. By my rough calculation, given the predictions, this should still be adequate to fund Super payments. So in short, I don't think anyone over the age of 25 has too much to worry about regarding their having enough funds, all going well.

Whilst it should be quite obvious at this stage, that we should be educating the nation on the need to reproduce and reverse this emerging trend of depopulation, let's stick to the numbers instead.

At a bare minimum, let's start investing in our kids' futures now, similar to the Super Fund for future 65-year-olds, but up the ante.

If at birth, $100,000 per child, was invested into a fund, made tax-exempt and locked until age 23, at 10% growth they would have an end balance of around $1m (PV $325,000). At this point, they are provided choices to access a portion of the fund for property, business, education etc. This means they are less likely to be saddled with burdensome student loans, high rentals and business loans.

Where would they get the $100,000 you ask, well that is the average Government spend per child, every 2 years to put them through the schooling system, so start them a year later/ finish a year earlier and apply a sliver of treasury funds. At 57,000 births, this is a drop in the ocean compared to total GDP. A rough calculation shows that it could cost $1m per child in subsidies, salaries, maintaining schools and so forth, from Kindy to Tertiary education. The point here is not necessarily to reallocate a tiny percentage of education funding, this is a possible avenue, but to show that there is enough room within the budget to find the money. Also, bear in mind, similar to the Super Fund afore-mentioned, there should come a point where less is required to invest, depending on growth, number of beneficiaries etc.

I recognize that this hypothesis may incite political and socio-economic discourse, though that is not my primary aim. Instead, I intend to underscore the imperative for a dialogue concerning the financial security of our children's future. Rather than waiting until much later in their lives when they should be expected to navigate financial matters independently, do we have a responsibility to take proactive measures to set them on a path toward success now?