A rubbish deal
The NSW Liberal Party, if it wins re-election this year, will create “the most significant financial security investment in NSW history”:
“Under a coalition government, every child aged 10 and under in 2023 in NSW, and every newborn thereafter, will receive a fund with a starting investment of $400.
Parents and carers can make additional payments of up to $1000 into the accounts which the government will match to the tune of up to $400 a year.
If parents pay $400 a year extra, the funds will be worth $28,000 by the time a child turns 18, and if they pay the maximum $1000 a year top up, the funds could be sitting at an estimated $49,000.”
Let’s just crunch the numbers on this. For the sake of argument assume a newborn gets $400 immediately from the government and their parents match that every year for eighteen years. To get to the $28,000 claimed by the government requires a decent return on investment – around 7.25% annually.
That rate of return implies the government is going to let parents invest in shares (the ASX300 has returned an average of 7.83% annually over the past decade). That’s all well and good, although inflation is also running at 7.8% annually, so they’ll just be breaking even in real terms. And very negative after tax.
But say the RBA does its job and by the time this scheme gets going, inflation is back to 3% and stays there. We can now distinguish between nominal – which is what the NSW government is using to make its claim of $28,000 – and real values. For example, with inflation running at 3% annually the final (18th) $400 contribution would only be worth around $230 in today’s dollars. Similarly, $28,000 in eighteen years would only be worth about $16,000 in today’s dollars.
Ah - but what about the opportunity cost for the government? NSW is heavily indebted, so it’ll have to increase its borrowings to pay its $400 contributions. February 2035 NSW government bonds currently sell with a coupon of 4.75%. That means the government’s share is actually earning a real return of -0.5% per year, i.e., the $400 it invests loses money – so after eighteen years, the $5,630 invested (that is, $7,200 in nominal dollars after adjusting for inflation) is only worth $5,370. Assuming the parent isn’t also borrowing for their $400 contribution, their total becomes $8,500 on a total of $5,630 invested over 18 years.
In other words, despite earning an annual nominal return of 7.25% (no guarantee!), the real return of this scheme after accounting for inflation and government debt financing is more like 1.2% per year:
Hardly value for money. Taking part will still make sense for parents – it’s $400 a year ‘free’, after all, and the cost of the government’s debt is shared by everyone across the state – but it’s a rubbish deal for the state’s taxpayers, and is especially bad for kids whose parents don’t have the means to participate. Not only will those kids miss out on the $400 a year, but due to the increase in state debt, they’re also going to have to pay for the $400 received by their wealthier compatriots out of their future earnings.