Reaction to Labour’s monetary policy

April 30th, 2014 at 10:00 am by David Farrar

The Dom Post is supportive:

 Unlike its recent pronouncements on trucks in highway fast lanes, or the flagging national demand for wood, ’s ambitious new has real heft.

The idea is first to make compulsory, with payment levels about 9 per cent of income. That’s not monetary policy per se, but it’s a good idea – our savings are chronically low, which pushes up our interest rates.

Compulsory savings are also necessary for Labour’s next big idea – making KiwiSaver payment rates adjustable. Under the plan, the Reserve Bank could recommend increasing savings rates as a way of slowing the economy – or, conversely, lowering them to heat things up.

They have some reservations:

What about low-wage workers, who don’t have mortgages and can’t afford unpredictable shifts in income? Labour is considering exceptions for them, but that poses its own problems.

What about the wisdom of constantly mucking around with people’s retirement savings? Isn’t that an odd message to send, that they are subject to the whims of the economic cycle?

And will such adjustments be as effective as interest rate hikes in cooling the housing sector, the most inflationary part of the economy?

So Labour has some more explaining to do. But the questions should not puncture the idea – some might be unanswerable until the policy is tried.

The Herald is also supportive:

The Labour Party has done well to come up with a constructive monetary policy for the coming election. Its proposal to make KiwiSaver compulsory and use its contribution rate as an alternative to interest rate rises is imaginative and reasonable.

But also a reservation:

But if the bank can merely recommend that a government increase the KiwiSaver levy, the tool might seldom be used. If Labour leads the next government it might welcome recommendations, at least until the combined contributions of employers and earners rise from the current 6 per cent to 9 per cent.

Even Labour, though, would be reluctant to raise the levy in normal economic times, and would make exemptions for the lower paid. The bank would usually have to resort to the official cash rate.

This is a key point – that the Government would make the decision on changing the contribution rate. It means that political considerations will be placed ahead of monetary considerations. The reality is that changing the level of contributions will not be a tool that will be used often – which means interest rates would by far remain the dominant tool.

The Reserve Bank considers changing the OCR every six weeks or so. One could not cope with having the KiwiSaver contribution rate changing more than once a year. Employer software needs to change. Employees need certainty over their take home pay, and employers need certainty over their costs.

So while the proposed tool is not without some value, it is not a tool that can be used frequently or immediately.

Brian Fallow sums up some reaction:

Labour’s proposal to introduce a variable contribution rate to compulsory KiwiSaver as a counter-cyclical tool has received mixed reviews from bank economists.

Most were tepid: It can’t do any harm, it will probably be less effective than Labour hopes.

Probably a fair summary.

But ANZ chief economist Cameron Bagrie was unimpressed: “It has political bun fight written all over it.

“Will a Government really step up to the plate and alter KiwiSaver contributions [if] asked to by the Reserve Bank? Imagine the bank asked the Government of the day to alter tax rates to help with monetary policy. This would alter public saving as opposed to private saving, but would have similar economic effects. What do you think the response would be?” Bagrie said.

“A change in take-home pay is highly personal. For low-income earners in particular the fact that they will get the money back in several decades’ time will be to all intents and purposes irrelevant.”

Indeed. A low income earner needs the money now – not in 30 years.

And this is one of the problems of universal KiwiSaver – it means the state is making decisions on behalf of each individual family as to how much they need to save – and when. For many New Zealanders it can be more sensible to put surplus funds into a business or paying off a mortgage quicker.

The Herald also looks at winners and losers:

Households struggling to keep on top of their mortgages would be the winners under Labour’s proposed interest rate shake-up, but at the expense of those who can’t afford to get a foot on the property ladder, a budgeting service warns. …

But New Zealand Federation of Family Budgeting Services chief executive Raewyn Fox said the policy to keep interest rates low while forcing everyone to save more raised issues of fairness.

“The people who don’t have mortgages will be in effect subsidising the economy for the people who are obtaining an asset by buying a house.”

Yep – the biggest winners will be those with the biggest mortgages.

Bernard Hickey also looks at the pros and cons:

The Pros

The VSR would allow the Reserve Bank to remain independent and give it another way to slow or speed up the economy. There would, of course, be a Policy Targets Agreement between the Minister of Finance and the Reserve Bank Governor to govern how the VSR could be tweaked, but the decisions on when and how to use it would be made by the Governor.

Politically, the idea of increasing the KiwiSaver contribution rate seems more attractive than raising interest rates, at least for exporters and mortgage borrowers. It means the extra savings are kept by the wage or salary earner, rather than being ‘lost’ to the bank and term depositers.

In theory, raising the VSR would allow the Reserve Bank to avoid putting up interest rates and therefore take pressure off the currency.

The other parts of the policy that didn’t get as much attention may be just as important. Labour is saying the Reserve Bank could use macro-prudential tools such as capital requirements to limit lending growth or pressure on the currency. The Reserve Bank has already partly gone down this path with higher capital requirements for high LVR mortgages and the speed limit.

This wider use of macro-prudential tools could also help reduce the reliance on the OCR.

The Cons

Simply imposing KiwiSaver compulsion and a higher contribution rate may not necessarily improve national savings. The Australian experience has been mixed at best. It turned out Australians felt richer as their superannuation pots got bigger, which encouraged them to borrow even more against the value of their houses.

Compulsion in tandem with Labour’s policy of gradually increasing the retirement age to 67 is controversial within Labour and on the left of politics. There are plenty who argue poorer manual workers are discriminated against. There’ll be some tricky questions around who gets exemptions because of ill health and who can ask to be exempted on the grounds of hardship.

The other risks with compulsion are around the issue of Government guarantees, funds management fees and means testing. If you are forced to save by the Government you could argue your funds should be guaranteed by the Government.

The Australian scheme has become notorious for high fees and compulsion has become something of a subsidy for the funds management industry, and ironically, the banking sector. There would have to be some tough conversations and negotiations around fees. Here’s an excellent Grattan Institute report about Australia’s fees mess.

And finally there is the argument against compulsion that used to be made by the ‘Father’ of KiwiSaver, Michael Cullen, which is that once these funds get very big political pressure will build for means testing, as is the case in Australia. That would rob the current NZ Super scheme of some of the simplicity and fairness behind the universal pension.

I think the policy probably won’t achieve a lot, but it could be a potentially useful extra tool for the Reserve Bank. However to be truly effective you need the Reserve Bank able to decide – not just recommend to the Government.

But one should be aware that monetary policy is ultimately about reducing demand in the economy, and hence inflation. Now increasing KiwiSaver rates could reduce spending by households. But if Government spending is not restrained, then the overall impact on the economy will be insignificant. Fiscal policy and mometary policy need to work together. Just reducing household spending will not work, if government spending is not restrained.

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41 Responses to “Reaction to Labour’s monetary policy”

  1. jp_1983 (200 comments) says:

    Just wait till they tell us what are the ‘approved’ Kiwi Saver funds are.
    What these approved fund managers are allowed to invest in.

    I await Gareth Morgan our new Governor and head of all KiwiSaver funds lead us to the road of salvation.

    On the plus side I would invest in Cat Trapping and Soccer Stadiums if he gets in to a position of power

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  2. kowtow (7,945 comments) says:

    Want to improve savings?

    take the fricken withholding tax off it.

    Coming from labour I wouldn’t call this “monetary” policy.It’s more of a mammary policy. More milking of the taypayers already oversqueezed tits.

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  3. EAD (825 comments) says:

    I’ve got an even more radical idea than the Statist Hacks from Labour. In today’s day and age, why, it would be revolutionary……..sound money

    https://mises.org/daily/2623/The-Principle-of-Sound-Money

    Imagine that, a currency which the banks and governments couldn’t debase, prices would get cheaper through increased productivity, where the poor wouldn’t be constantly stung by the worst tax of the lot – the inflation tax where savers couldn’t be financially repressed to pay for profligate borrowers and the interest rate in savings would be determined not by the high finance priests of the central banks, but by demand from borrowers. Imagine that – supply and demand freely interacting like a free market should.

    Now that would be radical!

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  4. Manolo (13,517 comments) says:

    Yes, that’s what NZ needs: more fucking state intervention.

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  5. KiwiGreg (3,218 comments) says:

    Reducing government spending (as opposed to transfer payments) is the same as saving. It’s actually the fiscal deficit which is a large part of NZ’s savings deficit.

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  6. gazzmaniac (2,319 comments) says:

    If they are making Kiwisaver compulsory are they going to give people an option to self manage?
    If not, why not?

    All I can see with a variable rate policy is a shitload of compliance costs and little to no benefit.

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  7. tvb (4,253 comments) says:

    It is an additional tool which has already been used this year. It may get used once or twice a year and it will involve hardship to low income workers and that pressure will make Governments reluctant to use it.

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  8. RRM (9,661 comments) says:

    So my mortgage will cost me about the same, but suddenly I’ll have to up my Kiwisaver contributions from 4% to 9% of my pay whether I like it or not?

    Gee, thanks Labour!

    I can’t believe the only problem talking heads can see with this scheme, is some theoretical notion that renters will somehow be ‘subsidising’ everyone else…

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  9. Colville (2,186 comments) says:

    This is an awesome policy.
    I have massive bank debt (as i am a property speculator) and I do not “do” Kiwisaver.
    Rob the poor to make my loans cheaper.
    Win win win.

    Cun*liffe for President!

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  10. edhunter (520 comments) says:

    If the Reserve Bank were to alter the OCD by .25% or .5%, what would the VSR need to move by to have the same effect? If it were of the same proportion it wouldn’t cause too much strife or anxiety. But I imagine that’s not the case & it would need to be much more. Does anyone know the figures? Are we talking 2% VSR to equate a .25% OCD movement?
    Help Please.

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  11. Alan (1,082 comments) says:

    In theory a VSR change would be much smaller than a interest rate change to have the same macro impact

    0.25% increase in VSR would equate to about 1% OCR.

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  12. ROJ (104 comments) says:

    DPF makes the right point in his final comment. The whole point of an independent Reserve Bank is to look after money while the Govt looks after the economy through fiscal settings.

    Exchange rates and current account are pretty much set by the strenfth of the economy – the more we produce & sell, the higher both go (the latter because of opportunity, just like a bank growing its deposits due to higher savings rates).

    Lets have infrastructure for efficiency. Motorways only pay for themselves when goods move on them – they are degraded when clogged with commuters. When people pay for a home and not a view with mansion attached, there’ll be a lot more balance.

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  13. big bruv (13,559 comments) says:

    The Nat’s can win the election on this policy alone. They have to ask one simple question.

    Would you trust Russel Norman or Winston Peters with your pension funds?

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  14. NoCash (256 comments) says:

    As I have 3 mortgaged properties, already putting 8% in KiwiSaver (4% myself, 4% employer), and also putting aside another 20% of my take home pay into savings and investments, I’m switching my vote to Labour in September!

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  15. wikiriwhis business (3,883 comments) says:

    In reality no govt can dictate Reserve Bank policy. The Reserve Bank is the real powerhouse that runs the country. That’s why there’s only three nations without a Reserve Bank…..cuba, Iran and Nth Korea. Used to be Tripoli but no more. Gadaffi was taken out and a Reserve bank installed.

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  16. Lipo (229 comments) says:

    Can someone help me as I do not understand the money flow.

    At a certain time on the year we have inflation to high caused by too much spare money in circulation?
    Reaction is to remove some of this spare money out of the system by forcing people to save in Kiwisaver instead of spending it on what ever they feel like.

    Kiwisaver institutions now have more money from their clients
    Kiwisaver institutions now need to generate a return on the money they have in hand
    Kiwisaver institutions now invest this money in the economy either in NZ or overseas

    Question – How does this reduce inflation? Money is still being spent, just by a different entity

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  17. Viking2 (11,275 comments) says:

    The Reserve Bank considers changing the OCR every six weeks or so.

    And therein lies the problem. All the money gamblers sit with baited breath waiting for the next pronouncement having meanwhile taken positions that favour their gains.
    Stop this stupid behavoir and act like an adult with a long term view.

    Review the rates 6 monthly.

    Won’t make the slightest bit of difference to the result but will take the focus by banks and others off the OCR and shift their focus to where it should be. i.e. being productive, and making longer term decisions rather than decisions based on beating their customers over the head for the banks gain.

    But then the Gov. wouldn’t get press time and these ego wasters must have that.

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  18. minus (159 comments) says:

    Just how often would the rate need to change? So how stable would incomes and mortgages be?
    Would it change in an Election year – just to emphasize it is at the whim of politicians.

    Where are any figures on any aspect of all this, since that is what it naturally involves?

    PS: NO, I wouldn’t trust Russel Norman or Winston Peters with my pension funds.

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  19. RightNow (6,841 comments) says:

    So low income earners who currently are not in KS will have to put at least 4.5% of their income into a KS scheme. They’ll be about $25/week worse off in their take home pay (based on 40hrs @ $14.25/hour).

    Guess what comes next – a promise to raise the minimum wage by at least $0.65/hour.

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  20. kiwi in america (2,477 comments) says:

    Whilst this policy shows marginally more thought than most of Labour’s other policies, it is not the game changer they are hoping for. It will however shift reporting of Labour’s antics from the awful to something more positive likely staunching the polling freefall that the Nats have picked up (alluded to in latest The Letter by Prebble).

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  21. alloytoo (463 comments) says:

    So, if I understand this correctly.

    Rather than have your mortgage go up you have your level of compulsory savings go up.

    Note the level, as a percentage of income, not the return.

    If the return on your compulsory saving return is less than your mortgage rate you lose money.

    Also if your cashflow cannot extend to the additional compulsory saving then you’re no better position than if you couldn’t service a higher mortgage you still have to sell your property and probably in a declining market.

    Add in the huge administrative nightmare and associated costs and this doesn’t look to flash.

    Basically a clumsy over complicated mechanism which has not guarantee to effect the exchange rate, and poorly simulates the current tools in the reserve bank’s arsenal.

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  22. minus (159 comments) says:

    Mr Parker said Labour would allow those on low incomes who entered the scheme to gradually increase their contributions so they were not forced to contribute 6 per cent immediately.

    http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11246479

    Will it take into account how many are receiving $60 a week for a bonus baby?

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  23. Pete George (23,326 comments) says:

    For someone earning $50,000 would have $4,500 per year ($86.54 per week) contribution with Labour’s compulsory Kiwisaver and increase to 9% total contribution (that’s a total of employee plus employer contribution).

    “Now Labour just needs to provide a really good policy to make sure low-income and renters don’t get punished by this.”

    That’s Labour’s biggest challenge.

    How can they “not punish” people earning those amounts? If they have children their effective PAYE less WFF credit means they are pay little or no income tax.

    And how can they ‘not punish’ them without being unfair to those who already contribute to Kiwisaver?

    Making Kiwisaver compulsory, an up front $50-$100 per week less in the hand and rising petrol prices versus tweaks that might affect the OCR, Forex and Fonterra payouts. Selling the benefits of Labour’s policy will be a big challenge for Labour.

    Labour’s big Kiwisaver challenge

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  24. Colville (2,186 comments) says:

    PS: NO, I wouldn’t trust Russel Norman or Winston Peters with my pension funds.

    I would not trust either of those two cunts to go to the shop with $5 to buy milk!

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  25. big bruv (13,559 comments) says:

    Colville.

    “I would not trust either of those two cunts to go to the shop with $5 to buy milk!”

    Then that is how the Nat’s can nullify this policy.

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  26. RRM (9,661 comments) says:

    Then that is how the Nat’s can nullify this policy.

    How about:

    John Key started with nothing and made about $10mil with investments and currency trading.

    Cunliffe mumbled something about how his Herne Bay property is ‘just a doer-upper’ and then it turns out it’s a mansion.

    Whose ideas about interest rates, investments and the economy do you trust more?

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  27. backster (2,123 comments) says:

    Well if you can’t trust Norman or Peters with your pension funds do you trust a failed property developer who drove his investor bankrupt apparently Labour does.

    The goal is stated to be to drive the Kiwi dollar down by 15% but that will be achieved by the simple election of a Labour/ Winston First government with supplu guaranteed by the Greens, as overseas investors withdraw their funds from NZ.

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  28. wreck1080 (3,807 comments) says:

    It was disappointing to listen to stephen joyce on newstalk zb about this earlier today.

    Joyce was making factual inaccuracies in order to totally dump on labours idea. Joyce is taking the line that anything labour says must be a bad idea which I thought was more of a labour than national trait. Disappointing.

    I think it is rather interesting myself and worthy of further discussion.

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  29. Albert_Ross (270 comments) says:

    Gazzmaniac, I don’t know the details any more than you do, but I have seen nothing to suggest that the policy will require you to put /all/ of your savings into KiwiSaver. Thus, you would be able to manage any savings that you have outside KS as you wish, just as is the case now. And within KiwiSaver there is (and presumably will continue to be) a wide range of options that you can choose between and switch whenever you wish.

    If a person is so low-income that they cannot afford to save any more than the minimum requirement, yes they will have all of their savings in KS. Is it really likely that they are so financially switched-on that they will be able to deliver a better return for themselves than a KS manager + the Government’s contribution?

    None of which is to say that I’m a fan of this policy, on the contrary. But I do not think this is the strongest angle of attack.

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  30. wikiriwhis business (3,883 comments) says:

    “Kiwisaver institutions now have more money from their clients
    Kiwisaver institutions now need to generate a return on the money they have in hand
    Kiwisaver institutions now invest this money in the economy either in NZ or overseas”

    I guess the competition in Kiwisaver institutions was spose to help minimalise inflation and give the govt kudo’s
    for something they don’t do as usual. Another Kiwisaver initiative from Gareth Morgan probably makes the govt happy.

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  31. Paulus (2,562 comments) says:

    Am concerned that the Governor of the Reserve Bank will have to get Cabinet approval to increase or “reduce” Kiwisaver rates.
    Yea – I can see that. Can never see a rate reduction – so who is kidding who.
    Imagine going to a Cunliffe/Wussel Cabinet – any answer will come our of both sides of their mouths as they will never agree on anything.
    Other than will it be enough to save the snails.

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  32. RightNow (6,841 comments) says:

    In case anyone didn’t already know, Gareth Morgan sold his Kiwisaver scheme to Kiwibank.

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  33. KiwiGreg (3,218 comments) says:

    Don’t forget the employer contribution is effectively a “tax” on employment as well. This is ultimately paid by lower cash wages (as future increases are reduced to offset the increased costs of employment).

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  34. Southern Raider (1,747 comments) says:

    Annette King talked about a living wage on NewsTalk ZB this morning.

    My view is this is only part of a much broader strategy to screw us. My predictions of full picture
    - low income workers will be exempt
    - compulsory saving will increase to 9%
    - tax increases will occur on top of this compulsory savings for high income earners
    - RWT will increase for higher wage earners so us rich pricks don’t profit from our savings
    - retirement age will increase and as this is tied to when you can access kiwisaver you will have to be 70 before you access the money you weren’t allowed to spend in the previous 50 years of working

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  35. Southern Raider (1,747 comments) says:

    What are the investment opportunities available for all this extra savings?

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  36. NX (603 comments) says:

    On first glance this policy actually seems reasonable & backed up with some logic. I’m shocked Labour have a policy that isn’t ‘tax & spend’.

    With regards to keeping interests rate under control, I read once that if all mortgages were floating rather than fixed, then interest rate changes would have more effect. I dunno how accurate that is.

    So while I agree with the aim of Labour’s policy, it doesn’t seem fair to force all workers to save more to keep interest rates under control for those with a mortgage.

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  37. Chuck Bird (4,765 comments) says:

    “- retirement age will increase and as this is tied to when you can access kiwisaver you will have to be 70 before you access the money you weren’t allowed to spend in the previous 50 years of working”

    The retirement age increase will not apply to manual workers or teachers.

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  38. Chuck Bird (4,765 comments) says:

    I do not think National has handled as well as they could have. Parker claims this is not taking away the independence of the Reserve Bank but giving them another tool – bullshit. Imagine if the Reserve Bank recommends increasing the KiwiSaver compulsory payments a few months out from an election can anyone think the government would take any notice of their advise?

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  39. leftyliberal (642 comments) says:

    Chuck Bird: Surely if the RB recommends a change and the Gov of the day doesn’t take it due to politics, that’s a superb attack line for the opposition, and something they should campaign on for the election.

    i.e. perhaps politics will somewhat ameliorate any political interference?

    NX: The policy is not about controlling interest rates – it’s about controlling inflation without having to use only the interest rate tool to do it. i.e. in some cases the best bet may be to fiddle interest rates which already happens. In other cases it may be to fiddle the variable savings rate (which National has done already I might add). This gives the RB the ability to do either or both to best get the results. The VFR will likely need smaller moves than interest rates due to the broader impact.

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  40. Albert_Ross (270 comments) says:

    Chuck Bird, does Labour really say that about a different retirement age for manual workers and teachers? How do they propose to define a manual worker? What about people who have spent some time in manual and some time in non-manual occupations – will the Government look at each individual’s entire employment history (presumably requiring the individual to provide evidence?), work out how much time they spent as a manual worker and calculate an individualised retirement age? How will periods spent in unemployment count?

    In short – seriously?

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  41. Prince (92 comments) says:

    This is the Labour Party.

    1) Any increase to Kiwisaver will exempt ‘The Poor’ – ie people who in majority could vote Labour if incented.

    2) Over time a Labour Govt will look at Kiwisaver accounts of ‘The Rich’, and decide that ‘universal’ Super is unfair, and should only go to ‘The Poor’ (ie people who in majority could vote Labour if incented).

    3) So The Rich will save for their retirement, and The Poor will not. Job done. Votes counted. Move on.

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