Dom Post on Savings

May 12th, 2011 at 11:51 am by David Farrar

The Dom Post editorial:

The $10 billion deficit for the first nine months of this year confirms, if confirmation was needed, that the last government made bad choices. At a time of plenty it chose to buy popularity rather than to save and invest for the future. Worse still, it created an expectation that the bounty would continue to flow in bad times as well as good.

Yep. Labour thought that the economy would never go into recession, ignoring that the tradeable sector had in fact been in recession since 2004/5.

It cannot – a point Prime Minister John Key and his ministers have been trying to get across in advance of next week’s Budget. New Zealand has to get back to living within its means. There are a number of obvious targets for a government looking for what Finance Minister Bill English has quaintly termed the “nice-to-haves”. They include the extension of welfare to families with incomes far in excess of the average wage, interest free student loans and the 65-year age of entitlement for .

I support increasing the age of eligibility for superannuation. It will happen one day also. But any increase would have to be signalled a good decade or so in advance, so don’t think any change to the age will help get the books back into surplus in this decade. Lifting the future age of retirement is important for the long-term sustainability of superannuation, but again that is a different issue to the shorter-term fiscal challenge.

Instead, Mr Key’s Government is taking aim at the scheme introduced by its predecessor to tackle New Zealand’s chronically low savings rate.

Under the scheme, people who agree to set aside a percentage of their income for their retirement receive a one-off Government grant of $1000 and tax credits worth up to $1040 a year. The scheme has proved remarkably attractive. It now has almost 1.7 million members. However, Mr Key has classified it among the “nice-to-haves” and is signalling that the annual Government contribution will be reduced, probably halved.

He and his finance minister appear to believe the public will not be deterred by the change. If so, they are graduates of the same University of Spin and Hope as their Labour predecessors, who believed that scrapping interest on student loans would not increase the take-up rate. New Zealanders are not stupid. The year before loans were made interest free, 53 per cent of eligible students borrowed from the Government. By 2009 – the last year for which figures are available – that figure had increased to 71 per cent.

KiwiSaver membership involves sacrifices. Contributing the amount required to secure the maximum Government contribution means many members have to make choices between other “nice-to-haves” and even some essentials. However, they calculate that, together with employer contributions, the Government top-up makes the sacrifice worthwhile. Reduce the top-up and many will review their participation.

For most employees, they will still be getting a massive subsidy. Someone on $28,000 will still get around $2.50 into their KiwiSaver account for every $1 they put in. That’s a 150% return on investment compared to 10% most funds deliver. I doubt too many people will dump KiwiSaver becuase their return on investment is 150% instead of 200%.

Those who get most hard done by the Government’s changes are self-employed like me. As I pay both my employer and employee contribution, then I’ll personally be quite a bit worse off by the Government’s proposed changes. But I had been saving plenty anyway, prior to KiwiSaver, so to some degree the KiwiSaver subsidies were just a way to maximise my return. And the Government should be focusing its scarce tax dollars on those who most need it, not people like me.

The Government has a choice. It can encourage the current generation of workers to save more, or it can pander to the “grey” vote by maintaining the pretence that superannuation for all at age 65 is affordable when it is patently not. It cannot do both.

It has made the easy choice, not the right one.

The reality is the age does need to increase, but not until around 2025 by my calculations.

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27 Responses to “Dom Post on Savings”

  1. berend (1,715 comments) says:

    Dominion Post: It has made the easy choice, not the right one.

    That sums up non leader John Key very well.

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  2. Brian Harmer (687 comments) says:

    When you say you will be quite a bit worse off, I assume you are referring only to your immediate liquidity rather than to your net worth, since both contributions are going to yourself?

    [DPF: By worse off I mean relative to employees. They will have the compensation of increased employer contributions.

    Actually it is as an employer, I will probably be most hit]

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  3. KH (695 comments) says:

    DPF. I think you missed, or avoided, the point. The Dom Post story was about the lack of Government Vision/Action on this matter. Not about the finer points of % etc.
    By my reading most reaction has been negative to the Goverment view. And people seek Kiwisave to be made stronger, not weaker.

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  4. Nick R (508 comments) says:

    I suspect the cut in tax credits will be the straw that breaks the camel’s back for some savers. If your cost of living is increasing relentlessly and wages aren’t keeping pace, there is a clear incentive to stop contributing to Kiwisaver. Cutting the Government’s contributions will probably make that decision a little bit easier.

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  5. GPT1 (2,122 comments) says:

    The political difficulties aside why wait until 2025 to increase the super age? 65 is not old now and will not be old in 2025. A delay to then just means that the generation that has to pay for the me, er, baby boomers generation gets hit again. A graduated increase over, say, 8 years would be fair and sustainable. Although every year the 3 month increawse in eligibility will cause great wailing and nashing of teeth from opportunists happy to spend other people’s money to obtain power.

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  6. camrun (49 comments) says:

    I don’t conceptualise these issues in terms of easy choice vs right choice. Obviously it would be economically beneficial to end interest-free student loans and raise the age of superannuation. However the political reality is if National were to implement all the changes needed to get us back to surplus, stop borrowing and start paying down debt they would lose the election to Labour, which would be even more detrimental to the economy than taking a ‘middle of the road’ approach.

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  7. lastmanstanding (1,300 comments) says:

    Geeez Ive always wished I could break a contract as easy as Gumints do. I mean wouldnt it be great to go to a supplier and say Heh Know that fixed term fixed rate contract we signed. Well Ive decided to break it sport and you cant take me to Court cause you cant sue me.

    Forget about the law ethics morals etc. Just change my mind shrug my shoulders and alls well.

    [DPF: There is no breach of contract. This change is not retrospective. If you don’t like the level of future subsidies, you can stop contributing]

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  8. SPC (5,770 comments) says:

    It’s nonsense to regard the age for super as the problem as our age is above average for the OECD and near average for those signalled as at 2030.

    The only short term response is to means test super for those still working (this does not impact on incentives to save) – Don Brash should not get Super while an MP, nor should judges on the Supreme Court etc.

    As for savings levels – well you cannot increase public debt to subsidise private saving and increase national savings levels by this method.

    The tax credit was always a way to disperse the then surplus and that should have been signalled then – so this decision would have been made as early as 2009.

    As for private savings levels, its obvious establish a dedicated contribution for the Cullen Fund – 2% from employees and 2% from employers. This will more than make up for any slack in Kiwi Saver and also deal with the demographics of the future of tax paid super.

    As for the thrust of the editorial – they called for tax cuts ad nauseum, Cullen said they were not affordable over the economic cycle (and has he been proven right or what) but they got the public to believe that the government was over-taxing and hoarding a surplus and thus a large part of the deficit comes from cutting taxes before we could afford this.

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  9. simonway (387 comments) says:

    At a time of plenty it chose to buy popularity rather than to save and invest for the future.

    If only the previous government had decided to, say, pay down debt (always a wise investment), or set up some sort of investment fund to provide money for Superannuation. But no, in the mid-2000s the National Party said that the surpluses must be used to pay for tax cuts, and Labour foolishly caved.

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  10. krazykiwi (9,186 comments) says:

    A friend of mine runs a small chain of butchery stores. Early this year, one of his capable, competent junior workers arrived in his office an announced that she was resigning and going on the dole. This would require less travel to/from work and more time to devote to her hobbies.

    This and countless others stories of dependency, whether deliberate or resulting from lazy reliance on the benevolence of the state, are evidence of how far we’ve shifted economically to the left.

    For all the moaning about how bad Labour was, there is plenty of evidence the Key & Co and continue to buy voters, notwithstanding a pious prod at the deficit that we’ll no doubt learn about on budget night.

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  11. s.russell (1,646 comments) says:

    Maybe all these reporters, editorial writers and assorted commentators (including DPF) are secretly in the know and have information about the Budget we lack. More likely they are all reasoning in advance of the facts – and possibly getting it all badly wrong.

    For what it is worth here is my speculation (and speculation is ALL it is).

    The Govt will continue to provide the same absolute level of subsidy for KS, but only if individuals save more.

    Instead of the tax credit matching contributions dollar for dollar, it will match them 50c per dollar, but with the same $1024 maximum. That way savers can still get the same subsidy, but only if they save a minimum of $2048 of their own money.

    The employer contribution may change in a similar way. It might even be increased.

    The result is an incentive to save more (for those who don’t already) without increasing Govt liability to fund it. Since some won’t save more the Govt will actually save on it. Overall it will mean a higher proportion of the money going into KS will come from individuals, rather than Govt.

    It seems to me that the above plan is a pretty good match for clues Mr Key has given.

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  12. SPC (5,770 comments) says:

    Well spotted.

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  13. GPT1 (2,122 comments) says:

    SPC – quite right, it is ludicrous that super is not means tested.

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  14. stephen (4,063 comments) says:

    This and countless others stories of dependency, whether deliberate or resulting from lazy reliance on the benevolence of the state, are evidence of how far we’ve shifted economically to the left.

    Also evidence of how little people know about the WINZ experience they’re about to go through. That person mightn’t have heard of the stand-down period as well?

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  15. SPC (5,770 comments) says:

    The Herald is calling for Kiwi Saver to be compulsory.

    This was always possible at the 2% contribution level.

    Though I would prefer the first 2% employee/2% employer of any compulsory contribution be used as a dedicated source of funding for the Cullen Fund. That and means testing those over 65 yet to retire before they can get super deals with that issue until we decide on the 10 year increase in age programme – we have till about 2015-2020 to start this (though signalling that we would expect the age to be 70 around 2030 could be done now).

    Then having a 2% voluntary contribution for Kiwi Saver with the $1000 start-up incentive – though as s.russel suggests keeping a 50 cents in the dollar up to $1000 is the governments cautious approach style

    The prime budget deficit moves need to be

    a 1% levy to help fund the earthquake rebuild costs
    a 1% surcharge on mortgages (this put in place insterad of an increase in OCR from 2.5 to 3.5%) allows revenue to government and help to business sector side of the economy (holds down the dollar value and business borrowing cost) in one go.
    a CGT
    a FTT

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  16. Mr Nobody NZ (391 comments) says:

    Stephen, if a person quits their job then the stand down period is a maximum of 16 weeks. My experience when working at WINZ people planning such a lifestyle choice (and I saw plenty) usual did so with this fully in mind and had planned things accordingly by either saving a bit before hand or being prepared to take the employer to court on for a employment matter which would also bypass the stand down period.

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  17. unaha-closp (1,179 comments) says:

    How is a tax credit a subsidy?

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  18. Mikey (13 comments) says:

    David said “There is no breach of contract. This change is not retrospective. If you don’t like the level of future subsidies, you can stop contributing”

    – The terms of the scheme will be changed and Kiwisavers still appear to be locked in until they are 65. So unless we are able to withdraw our Kiwisaver savings and invest them somewhere else (after all, the terms of our investments have suddenly become much less favourable) then it seems like a breach of contract to me.

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  19. Manolo (14,029 comments) says:

    If English and Key are leaders, I can call myself Napoleon!

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  20. stephen (4,063 comments) says:

    Mr Nobody NZ, ta. When I was on the dole while Labour was in govt, it really didn’t seem like it’d be that easy to muck them around. Of course, maybe I was lacking in imagination…

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  21. TomYum (23 comments) says:

    The real danger is a decline in trust – twice this term the Govt has changed the terms of Kiwi Saver. If successive governments do likewise, people will quickly lose faith. It’s the same principle that brings about a run on the banks. What will *they* do, embolded by a win in November? And if not the Nats, what would any other undoubtedly unholy coalition do, given the precedent to tinker? Uncertainty abounds.

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  22. JiveKitty (778 comments) says:

    How do people feel about non-qualified spouses piggybacking on their partner’s superannuation?

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  23. bhudson (4,740 comments) says:

    This particular editorial seems to have missed the very clear analogy reported after the ‘pre-announcement’ on govt contributions to KiwiSaver.

    (Based on current stats that show something like 50% of KiwiSaver ‘savings’ being funded by govt.) Paraphrased:

    If you go to Westpac and take out a loan for $1,000, then walk down the road and deposit that money in an ANZ savings account, that is not real savings.

    Hence a need to tweak KiwiSaver…

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  24. Viking2 (11,550 comments) says:

    Yep plenty signed up, got their $1000 of other peoples money and are now on a Kiwisaver holiday

    No doubt from what Key said employers are going to be forced to part with more of their shareholders money which in turn means higher prices for consumers.

    Seems that most of you don’t get that yet. The money to subsidize all these nice to have things that are someone else’s responsibilities comes from customers. The most forgotten people in this land of handouts and prop ups.

    Australia has that issue. Their cost of producing anything is now far higher than the world market so the purchasers are buying offshore to sell to those that are being overpaid. Qantas is a good example of the change in use of labour. And aren’t the unions moaning. That’s all about to get worse.
    Happened to America with the unions and their retirement demands and look where USA industry and commerce is now. Made in china.

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  25. James (1,338 comments) says:

    Oh for Douglas’s scheme…..everyone has a private account,untouchable by pollies and the person themselves and your tax goes in and earns basic interest over 40 plus years.On retirement day you are a millionaire….simple….and its a massive incentive to live a long, healthy and reasoned lifestyle too with the associated savings to society in general….win/win.

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  26. SPC (5,770 comments) says:

    It’s interesting that since coming back into government in 84 Douglas has never revisited compulsory super for private accounts or pre-funding tax paid super with dedicated contributions. It was an idea he supported only while on the left.

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  27. garethw (205 comments) says:

    “I doubt too many people will dump KiwiSaver becuase their return on investment is 150% instead of 200%.”
    People will respond immediately to a 5% incentive reduction in top tax rates by suddenly working more productively, but don’t respond to a 50% change in ROI? Incentives only work when you politically support them huh…

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