In Treasury working paper published four years ago (“Saving for Retirement: New Evidence for New Zealand”), economists Grant Scobie, John Gibson and Trinh Le addressed fundamental question about savings levels in this country. Are we saving enough? The question arises at two levels: for the economy as whole and for individual households.
The paper tackled the second issue. There is no apparent gross under-saving for retirement was the tentative conclusion. At the macro-economic level, on the other hand, the country’s lack of savings becomes evident each time balance of payments statistics are published. The whopping deficit in the current account is being funded with the savings of people overseas.
Treasury secretary John Whitehead last year became concerned at how some of his department’s work was, at times, being misunderstood, perhaps misrepresented. Media coverage of Grant Scobie’s work especially, he said, did not paint the full picture of the saving issue and the Treasury’s collective view on it. Accordingly, he set out Treasury position. After considering recent data, evidence and analysis, “on balance we [the Treasury] think that further or stronger pro-saving action is now justified. We have therefore advised the Government to encourage more private saving.”
The Treasury’s judgement for further or stronger action rested on “a least-regrets” approach in light of data uncertainties, macroeconomic imbalances, and the possibility that individuals were basing savings decisions on long-run expectations that could turn out to be mistaken. In nutshell, the stance was “better saved than sorry”.
KiwiSaver had recently been launched, dripping with tax incentives. It has been hugely popular. By the end of January this year, 414,144 people had signed-up (compared with the Treasury’s initial projection of 276,000 by 1 July).
Finance Minister Michael Cullen was chuffed. “KiwiSavers are focusing on the long-term and that is good news for the long-term economic and social wellbeing of the whole country,” he declared.
This would be heartening for those who link household savings with current account deficit running at more than nine percent of GDP. Cullen has said the deficit is unsustainably high. “This reinforces why we made saving the top priority in the Budget by enhancing the KiwiSaver scheme, rather than putting pressure on inflation and interest rates through fiscally reckless tax cuts,” he explained last September.
But whoa there. Some economists are bringing fresh evidence to bear on the debate about savings in general and KiwiSaver in particular.
First, research at Waikato University’s School of Management was based on mail survey in December (about 1600 survey forms were sent out and 598 completed and returned). The responses suggest KiwiSaver will increase inequality and benefit the wealthy. Those who sign up are taking advantage of tax breaks and the $1000 kick-start payment.
New Zealand Super helped to “equalise lifetime incomes’’, John Gibson, School of Management professor, told news media. KiwiSaver did the opposite. Higher earners received the greater benefit. Non-earners and the self-employed received no benefit. Oh, and KiwiSaver had not encouraged new saving. Rather, there has been “reshuffling’’ of existing savings.
More questions are raised by discussion paper from the Institute of Economic Research (“Is poor household saving the cause of New Zealand’s high current account deficit?”). It notes how the current account deficit in the balance of payments has frequently surfaced in public policy debate, and how many commentators blame low household saving as major cause of the deficits. But in standard macroeconomic theory, it points out, both the current account balance and household saving are endogenous. One cannot “cause” the other. Moreover, the current account balance is identical to the difference between national saving and investment. There is no general reason to expect it to move “in lock step” with the level of household saving. Without proper analysis, the paper warns, “unsubstantiated assertions about the role of household saving mislead public debate and invite the adoption of welfare-reducing policies, which may not even ‘improve’ the balance of payments”.
More trenchantly, the Treasury paper’s authors – Bryce Wilkinson and Trinh Le – wrote in National Business Review that almost everyone agrees about the need to remove impediments to economic growth to close the gap between living standards here and in other countries, particularly Australia. Obvious obstacles to growth arise from excessive taxation to fund wasteful spending, excess bureaucracy and stifling regulations. Measured productivity growth in New Zealand has slumped in recent years while these problems mount. Policies like KiwiSaver add to taxes and bureaucracy while distracting attention from things that could really make New Zealand prosper.
Bob Edlin is regular contributor to Management.
